WCU: Commodities outgun stocks ahead of US election WCU: Commodities outgun stocks ahead of US election WCU: Commodities outgun stocks ahead of US election

WCU: Commodities outgun stocks ahead of US election

Ole Hansen

Head of Commodity Strategy

Summary:  Commodity prices have generally seen a strong October so far with the Bloomberg Commodity Index trading higher by 4%, thereby outperforming stocks. From a macroeconomic perspective, the U.S. presidential election on November 3 has increasingly been pointing toward a win for Joe Biden. In response to this, the market has adopted a more reflationary approach with long-end bond yields rising while the dollar has softened. We take a closer look at the potential impact on commodities should Biden become the next U.S. president.


Commodity prices have generally seen a strong October so far with the Bloomberg Commodity Index trading higher by 4%, thereby outperforming stocks with the S&P 500 up by around 1%. The two main sectors driving these gains has been grains, on a combination of weather concerns and strong demand and industrial metals, such as copper which reached a two-year high as the Chinese yuan surged higher and supply disruptions occurred in Chile.

From a macroeconomic perspective, it has been a month where the countdown to the U.S. presidential election on November 3 has increasingly been pointing toward a win for Joe Biden. In response to this, the market has adopted a more reflationary approach with long-end bond yields rising while the dollar has softened. Both of these developments providing some additional tailwind to commodities in general, despite a renewed surge in coronavirus cases threatening the fragile economic recovery and with that the short-term demand outlook.

We see the potential for higher commodity prices in 2021, no matter who win the keys to the White House on November 3. Supply constraints of key commodities from metals and energy to key crops together with macroeconomic tailwinds from a weaker dollar and reflation are likely to drive commercial and speculative buying of the sector.

On that basis, we maintain a bullish outlook for crude oil, copper and key crops. The same outlook for precious metals with silver potentially receiving an additional boost through its use in industrial applications. Not least solar panels where strong and potentially accelerated growth rates can be expected over the coming years as the green electrification agenda gathers pace, especially if we should witness a “blue wave” on November 3.

Source: https://projects.fivethirtyeight.com/polls/

The collapse in the price of and demand for crude oil during the pandemic combined with capital markets increasingly refusing to fund shale drilling - as they lose interest in the “old” economy - has and will drive a sharp drop in capex which will impact non-OPEC production decline rates. On that basis, we see oil and fuel prices recovering in 2021 as a rapid rebalancing of the market and higher prices may not result in rising non-OPEC production as seen during previous cycles.

The key moment in terms of a rally in crude oil will be the availability of a vaccine which should drive a recovery in global travel and commuting activities. Staying with energy, it is widely expected that a Biden win would see the U.S. join global efforts to reduce emissions through investments in greener energy solutions while at the same time curbing the rise in shale oil production through increased regulations.

These developments should see crude oil prices – through lower supply growth – supported more by a Biden win than what would otherwise be seen with Trump staying in the White House. In the short-term, however, crude oil and fuel products remain troubled by too much supply at a time when global coronavirus cases are surging again, thereby raising concerns about the direction of global fuel demand.

The OPEC+ group will meet on December 1 and decide whether to implement or postpone the previously agreed 1.9 million barrels/day production increase from January. With a vaccine still months away from being rolled out globally, the current slow recovery in fuel demand together with rising production from Libya has left the group with a tough decision to make.

The U.S. election result, OPEC+ meeting and Covid-19’s impact on demand are likely to be the main factors determining where Brent crude oil will finish the year within the $38/b to $48/b range we mentioned in our recently published Q4 2020 outlook. For now, both Brent and WTI crude oil remain stuck in ranges in the low 40’s with limited possibility of a breakout before November 3.

Gold has settled into wait-and-see mode while trading close to $1900/oz. It’s current struggle to find fresh momentum saw funds in the week to October 13 reduce their futures and options net-long to 12 million ounces, the lowest since June 2019 which was just before gold began its 50% rally to the current level.

 

    Source: Saxo Group

    Longer-term investors, meanwhile, who predominantly express their bullish views through exchange-traded products, have reduced total holdings by a mere 330,000 ounces during the past week. Apart from the fact the market has gone stale, the small reduction may reflect an emerging hesitancy ahead of the U.S. election. With a Biden win increasingly being priced in, some may have decided to step aside until after November 3. Not least considering the memory of 2016 when the Trump win helped trigger a 15% correction in the weeks following the election.

    In our view, however, the overall bullish narrative has not changed. Fiscal and monetary support will continue to increase with the second coronavirus wave hurting the already fragile economic recovery. Bond yields are rising with investors hedging against a Biden win, while challenging in the short-term, it also highlights the inflationary focus which, combined with a weaker dollar, should send precious metal prices higher into 2021.

    The Bloomberg Grains Index reached a 15-month high this week and has now rallied more than 25% from the August low. While the wheat market paused following its recent surge, the rally in corn and soybeans extended further on concerns about global production at a time of strong demand. Dryness blamed on La Nina is fueling South American production concerns at a time when China has undertaken a massive restocking program.

    Potential South American and Black Sea rainfalls hold the short-term key with a very extended hedge fund long posing a correction risk. In the week to October 13, the combined net-long across six soy, corn and wheat contracts reached 627,000 lots, the highest since April 2014.

     

    Source: Saxo Group

    HG Copper: Following a short-lived correction in early October, HG copper resumed its ascent to reach the highest level in more than two years at $3.22/lb. It was a sharp drop in stocks held at exchange-monitored warehouses that drove the September rally. The latest leg higher, meanwhile, has occurred at a time when stock levels have started to recover. Instead, the latest extension was driven by a rally in the Chinese Yuan to the highest level against the dollar since July 2018, the risk of strike-related supply disruptions in Chile and not least the latest stimulus talks in Washington.

    With all three drivers potentially only having a short-term positive impact on the market, the longer-term direction is more likely to be dictated by the following:

    • China’s next five-year plan which the CCP meet next week to agree on
    • The timing of a Covid-19 vaccine which may fuel a Western demand recovery
    • A potential deficit next year as the green electrification agenda gathers momentum
    • Macroeconomic tailwind from a weaker dollar and rising demand for reflation hedges.
    Source: Saxo Group
    Disclaimer

    Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

    The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

    Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

    To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

    None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

    Please read our disclaimers:
    - Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
    - Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
    - Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

    Saxo Capital Markets (Australia) Limited
    Suite 1, Level 14, 9 Castlereagh St
    Sydney NSW 2000
    Australia

    Contact Saxo

    Select region

    Australia
    Australia

    The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

    Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

    Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

    Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

    The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

    Please click here to view our full disclaimer.