gold silver commodities trading

What the Fed hike means for commodities

Commodities 6 minutes to read
Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  Gold, crude oil and copper put in different responses to last night's US rate hike, but given the Fed's unexpectedly hawkish tone, what's the outlook like for these three bellwether commodities in the months ahead?


The Federal Open Market Committee and Chairman Powell stood their ground yesterday as they unanimously decided to hike the Fed funds rate by another 0.25% to 2.5%. While the rate hike was dovish given the lowering of their forecast for hikes next year, the market had clearly been looking for a stronger dovish shift. The subsequent press conference turned out to be far less dovish than anticipated as Powell touted the strength of the US economy, robustly defending the Fed’s independence when asked about Trump’s tweets. He even went out of the way to praise the Fed’s Quantitative Tightening (QT) schedule. 

Judging from the reaction in stocks and not least US Treasuries, the market seems to be telling us that the Fed is making a policy mistake that it will eventually be forced to reverse. The yield on US 10-year notes dropped to 2.75%, the lowest since April, while the 2-10-year spread flattened further to reach 10 basis points.

While the FOMC was busy looking at incoming data, the market has been looking forward and is clearly seeing much bigger clouds on the horizon. Commodities reacted differently with growth  dependent commodities such as crude oil and industrial metals falling while safe-haven assets such as gold remained firm despite some initial dollar-related weakness.  

Gold, which reached a five-month high ahead of the announcement, ran into some initial profit taking as it reacted to the initial dollar strength following the rate hike. But the subsequent sell-off in stocks and drop in bond yields soon attracted renewed buying interest and given the troubled economic outlook into 2019 we see the upside potentially for gold as strengthened further by the Fed’s decision.

201218ole4
Source: Saxo Bank
Crude oil continues to get hammered as rising growth and demand concerns are currently not being met by a strong enough reaction from the supply side. The Opec+ decision to cut production over the coming months by 1.2 million barrels/day has clearly not done enough to ease the uncertainty in the market. Brent crude oil, the global benchmark, fell below $55/b for the first time since 2017 this morning and the chart is looking increasingly ugly with the next target being $50/b.  

However, the best cure for a low price is a low price and once again we are likely to see this mechanism kick in as supply may suffer, not least in the very price sensitive US shale oil market. But just like the during the sell-off between 2014 and 2016 the full impact on US shale oil producers' ability to grow their business due to falling prices may not be visible for several months. In the short term the market will worry more about the global growth outlook, especially in emerging markets where a smaller (dollar) credit cake and the rising cost of funding will continue to create uncertainty about demand despite the potential boost from lower prices.
oil chart
Source: Saxo Bank
Copper has been challenged this week. First by China’s president Xi Jinping who in a speech stopped short of announcing any new initiatives to stimulate his country's economy and then yesterday by the FOMC rate hike. HG copper has so far managed to stay within the range that was established following the June to July sell-off when the US-China trade escalated. Headline risks related to growth remain a key driver but the potential for additional Chinese stimulus being announced following the annual Central Economic Work Conference this week and the outlook for tighter supply into 2019 may keep the market supported. 
copper chart
Source: Saxo Bank

Quarterly Outlook

01 /

  • Investor Outlook: Beyond American shores – why diversification is your strongest ally

    Quarterly Outlook

    Investor Outlook: Beyond American shores – why diversification is your strongest ally

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Q3 Macro Outlook: Less chaos, and hopefully a bit more clarity

    Quarterly Outlook

    Q3 Macro Outlook: Less chaos, and hopefully a bit more clarity

    John J. Hardy

    Global Head of Macro Strategy

    After the chaos of Q2, the quarter ahead should get a bit more clarity on how Trump 2.0 is impacting...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

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.