WCU: Commodity market heats up

Commodities 5 minutes to read

Ole Hansen

Head of Commodity Strategy

Summary:  Commodities, with a few exceptions, failed to hold onto the gains that were seen following the G-20 meeting in Osaka.


Commodities, with a few exceptions, failed to hold onto the gains that were seen following the G-20 meeting in Osaka. During a holiday-shortened week the market first reacted positively to renewed hopes that the US and China would return to the negotiation table. A relief that was soon overtaken by a return to reality when weak economic data from Asia to Europe and the US continued to highlight the risks to the global economy and with that demand for key commodities from oil to industrial metals. 

To finish off a volatile week the US job report for June ended up topping all estimates with stronger than expected job growth potentially easing calls for a 50bp Federal Reserve rate cut on July 31.   

Gold traded in a 56-dollar range around $1400/oz as conflicting market news added to nervous trading from recent buyers still seeking assurance that gold has established a new low and not just another high. Crude oil jumped only to slump as demand growth concerns overshadowed a nine months extension of the Opec+ agreement to curb supply. Corn and wheat both recovered after slumping in response to the June 28 stocks and acreage report. Improved growing conditions may not be enough to revive the prospects for corn as late planting will lead to late harvest and with that the risk of early frost impacting the final yield. 

HG Copper traded lower on weak economic data but held above the recent lows after top copper producer Codelco in Chile once again delayed the return to normal operations at a major smelter.
Source: Saxo Bank, Bloomberg
Iron ore, the best performing commodity this year, reached a five-year high before dropping back. The near 70% year-to-date rally to $117/MT was been driven by tightening supply at ports in China due to Brazil dam disaster and bad weather in Australia, the world’s two major shippers. It was only halted when China’s top steel group stepped in and urged the government to maintain order and to investigate the rally which they believed had increasingly disconnected the price from current fundamentals. 

During the past week we, the Strategy Team at Saxo Bank, released our Q3 Outlook called “The global fiscal panic”. I began the commodity section by writing the following: The global fiscal panic that we expect to unfold over the coming quarters will drive additional gains across several key commodities. Gold seems best positioned to benefit from a renewed race to the bottom in central bank rates and bond yields, while the risk of a renewed currency war could weaken the US dollar, another positive factor for commodities.

Steen Jakobsen, our CIO, highlighted the risks that renewed monetary policy easing might be unable to move the needle and deliver the sought-after boost to global growth. As a result, we are likely to see a shift towards global fiscal expansion with a focus on infrastructure, environment and inequality. One of the sectors standing to benefit the most from the increased spending of money that governments don’t have is commodities, not least gold as inflation is likely to come roaring back just a couple of quarters after it had been pronounced dead. Link to the outlook, click here.

Two key events this past week related to the US Federal Reserve and the European Central Bank supported our view that a potential race to the bottom in rates is coming. In Europe, the political appointment of Lagarde to replace Draghi saw bond yields in southern European countries tumble in the belief that further support will be provided. In the US meanwhile, President Trump tapped a long-time dove and a onetime gold bug to fill the vacant slots at the Federal Reserve. Both if appointed could speed up the pace of incoming rate cuts, potentially weakening the dollar while giving gold a boost. 

Two long tails and a double top on the weekly candle chart point towards additional short-term consolidation. The key area of support can be found at $1380/oz (38.2% retracement of the 2011 to 2015 sell-off) followed by the 2016 high at $1375/oz and 2018 high at $1366/oz.  
Source: Saxo Bank
The renewed drop in bond yields helped drive the value of the global negative-yielding debt market to a new record of $13.3 trillion. Investors in Europe are increasingly struggling to find bonds that pay a positive yield with the alternatives being property, high-risk corporate bonds and not least equities. Global stocks, however, continue to defy gravity and are currently showing the biggest disconnect from global leading indicators since 2007. This as investors bet on the Fed put, low inflation, stable growth, continued company buy-backs of their own stocks and the avoidance of another major crisis. For these reasons we viewed the latest correction as healthy and needed to attract additional investors. 

Crude oil came under some renewed pressure after the Opec and Opec+ meetings, as expected delivered an extension to the current deal to keep production capped. Faced with growing demand concerns highlighted by the latest round of lower than expected PMI from around the world Opec had no other option than to maintain the supply curbs until the end of Q1 2020.

The nine months extension into 2020 was driven by necessity as the Northern Hemisphere winter tend to be a weak period for crude oil demand. Extending production cuts for another nine months the group has also resigned to the fact that further market share will be lost to non-Opec producers, especially in Brazil, Canada and not least the US.

While sending a strong signal of support to the oil market it may not support a recovery until later this year. Opec together with Russia can control supply but not demand and, on that basis, while prices may still recover further the short-term outlook may prove challenging. Post-Opec the major price movements are likely to be driven by weekly US stock data on Wednesday’s together with macro-economic data.

The short-term outlook for Brent crude oil has deteriorated following the failure to move above $66.8/b to challenge the traffic jam of resistance at $67.50/b. The selling pressure from disappointed longs took the price down to $62.25/b support before pausing. 
Source: Saxo Bank
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd 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 Combined 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.

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)

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) Pty Ltd 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 and Product Disclosure Statement 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. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. 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.

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.