Head of Commodity Strategy
Summary: Weekly commodity update focusing on the strong start to 2021 but also emerging signs that the strong momentum may soon yield to a period of consolidation, especially across energy and industrial metals. The grain market remains bid as the fundamental outlook continues to strengthen.
The strong momentum seen across most commodities in recent months continued into the second week of January, albeit at a slowing pace. The main exception being the grain sector which spiked higher after a government report lowered supply while raising demand by more than expected. Overall, however, the sector continues to focus on multiple tailwinds from tightening supply, a global market flushed with cash driving speculation across markets and increased demand for inflation hedges, and not least the prospect for a vaccine-led recovery in global demand as well as ongoing weather worries.
All of this during a time when the pandemic is still raging across many countries, especially in winter-hit regions across the northern hemisphere where the prospect for improvement - vaccine or not – is unlikely to occur until warmer weather arrives in March and April. While the rally may pause until the vaccine rollout gathers momentum, the market will have to rely on continued investment demand being strong enough to keep markets supported during the coming months when the negative impact of lockdowns and reduced mobility will be the greatest.
Absent from the list of supportive drivers this past week has been the dollar and bond yields which have both risen ahead of President-elect Joe Biden’s announcement of a $1.9 trillion Covid-19 relief package. It was rising yields and dollar short covering that helped drive the latest correction in gold and silver. The plan received a muted response given the prospect for a dwindled down package due to the potential lack of support from key individual Democrat and independent Senators.
U.S. long-end bond yields have risen sharply after the Democrats secured a Senate majority and together with the current vaccine rollout it temporarily raised concerns that the Federal Reserve would raise rates sooner than expected. These worries, however, were shot down in flames after Fed Chair Powell said the FOMC will not raise interest rates unless they see troubling signs of inflation. Another hint that central banks around the world are prepared to let inflation run higher before acting in order to support growth and job creation.
This is a catch-22 for precious metals as mounting inflation expectations are inadvertently driving the dollar higher in response to rising yields. Despite this, we remain bullish and based on our forecast for gold to reach $2200/oz, silver’s high beta should encourage continued outperformance with the gold-silver ratio heading towards the low 60’s during 2021, thereby driving the price of silver towards $35/oz.
With these developments in mind, gold may spend some time calibrating to recent movements in dollar and yields before eventually start climbing again. Following early January weakness, gold has settled into a relatively tight range around $1850/oz and mostly above its 200-day moving average, currently at $1843/oz. In order to clear the path for a recovery, gold now needs to break above $1865/oz while trendline support can be found at $1820/oz.
Grains: The six-month long bull market in crops received a fresh boost this week after the World Agriculture Supply and Demand (WASDE) report from the U.S. Government lowered the outlook from already-reduced expectations. The combination of cuts to U.S. corn and soybean production, and estimates for more exports helped support prices with both crops surging to fresh seven-year highs.
The US Department of Agriculture (USDA) pegged the 2020/21 domestic soybean ending stocks outlook at 140 million bushels, down 77% from the 610 million bushels projected in August, and corn ending stocks at 1.552 billion bushels, the lowest since 2013 and down more than 50% since the June projection. The USDA also lowered its forecast for upcoming harvests in key export countries Brazil and Argentina.
In addition to this, we have seen wheat prices jump after Russia said its new wheat export tax that, together with export curbs, shall be introduced on February 15 will rise even further in efforts to cool domestic food prices. This combination helped drive Chicago wheat prices to a fresh six-year high.
The rally in agriculture commodities led by grains and oil seeds has to a certain extent occurred while the market focus has been elsewhere. But the continued surge, which has seen the Bloomberg Agriculture Index rise by more than 40% during the past six months, has started to bring back worries about the impact on economies and inflation.
Crude oil’s impressive rally since the first vaccine announcements in early November is showing signs of running out of a steam. After reaching $57.5/b on the back of Saudi Arabia’s unilateral and surprising 1 million barrel/day production cuts in February and March, the attention has once again returned to the pandemic and its continued negative impact on mobility and with that, the demand for fuel products. Somewhat offsetting this disruption has been the frigid cold weather situation in Asia which has seen the price for spot LNG cargoes temporarily surge off the chart, thereby boosting replacement demand for distillate products such as diesel.
Adding fuel to the latest run up in prices was the confirmation last week of Joe Biden as the next president. The prospect for an inflationary stimulus package to support the recovery has given the price of oil a non-quantifiable boost from investors and speculators seeking protection against reflation and with that the prospect for a weaker dollar. Crude oil, together with gold and copper, are three of the most liquid commodity markets and with this in mind, the reflation demand often tends to be concentrated in these markets.
From a current fundamental perspective, we remain skeptical about crude oil’s ability to forge much higher at this stage. Given how far the price has travelled since early November, a correction back to $49/b would only be considered as a weak correction within a strong uptrend. We see Brent crude oil trading steady in the low-to-mid-50’s during the coming months until the point where fundamentals are strong enough to support an extension, initially towards $60/b and later in the year towards $65/b.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
