WCU: Trade deal lifts commodities

Ole Hansen

Head of Commodity Strategy

Summary:  Commodities, not least industrial metals, received a boost this week from news that a phase-one trade deal had been reached. The Bloomberg Commodity Index was 2.2% higher on the week with all sectors recording gains.


Commodities, not least industrial metals, received a boost this week from news that a phase-one trade deal had been reached. The Bloomberg Commodity Index was 2.2% higher on the week with all sectors recording gains. Once signed by both countries it holds a Chinese promise to buy more U.S. agricultural goods while the U.S. would lower some of the existing tariffs. Apart from metals, softs stood out with coffee extending its two-month surge to 45%.

However, several major obstacles remain before all tariffs are removed and a phase-two deal is now unlikely to be agreed until after the 2020 U.S. elections. A phase-one deal may also attract a lot of scrutiny given U.S. expectations that China will buy up towards $50 billion of U.S. agricultural goods, equalling a sum bigger than what China bought in total from the U.S. during the past three years.

Chinese total demand for soybeans, the biggest of these items, is already down on previous years due to the sharp reduction in its flu-hit pig herd. On that basis the market needs to see more details about which products and what timeframe the two sides have agreed upon. The trade agreement helped drive a soybean futures towards a weekly gain of 3%.

Overall commodities received a boost from OECD’s newest update on global leading indicators. They hinted that the global economy turned a corner back in October, moving from contraction phase into the recovery phase. October was also the month when crude oil and copper, both pro-cyclical commodities, began their current recovery. The uncertainty however is still high and adjustments over the coming months could wash away what, on the surface, appears to be a turning point in the global economy.

Source: Bloomberg, Saxo Bank

Industrial metals, led by a recovering nickel, and (surprisingly given the circumstances) precious metals all traded higher on the week. A perfect storm of fundamental and technical news helped palladium race towards $2000/oz thereby supporting platinum which saw its discount to gold narrow to $530/oz, a six month low.

HG Copper’s recent rally through several key technical levels of resistance extended further following the trade news. This has been driven by reports siting a pickup in Chinese demand combined with a drop in inventories monitored by the three major exchanges in NY, London and Shanghai falling to the lowest level since January. Hedge funds covering short positions held since January helped provide the additional momentum driving the market higher.

Source: Saxo Bank

Crude oil continued to grind higher with support being provided by the trade deal news and the OPEC+ group’s decision to cut its production ceiling by an additional 500,000 barrels/day through to next March. The additional and voluntary 400,000 barrel/day cut announced by the Saudi oil minister at last week’s meeting in Vienna was mostly viewed as the Kingdom’s attempt to drive a $2tn valuation of Aramco. Supported by strong demand and one of the world’s smallest free floats of just 1.5%, that level was reached on the second day of trading. Whether such elevated evaluation can be maintained when the next and much bigger tranche eventually hits the market remains to be seen.

Monthly oil market reports from OPEC, IEA and EIA found a small improvement in the outlook for global oil demand. However, the gap between world demand and rise in non-OPEC supply remains and it highlights the need for OPEC+ to keep production tight, especially during H1’20. Over the coming months the market will be focusing on Iraq and Nigeria to see whether they implement the cuts needed to keep Saudi Arabia content with carrying the main burden of keeping prices supported.

WTI crude oil reached $60/b as the uptrend from the October low extended further. We maintain the view that the oversupplied market situation should keep the upside limited while keeping the price within the range highlighted in the chart below.

Source: Saxo Bank

Gold continues to defy gravity with the price holding firm despite the loss of support from surging stocks, a trade deal in the making, a reduction in future US rate cut expectations and rising bond yields. The latter has driven a drop in the total amount of global negative yielding debt to $11.5tn, a six-month low. It was the surge to a record $17tn between June and September which helped gold break out of its yearlong range.

Despite these end of year developments gold has stayed firm above its line of support at $1450/oz. While looking a bit tired and potentially in need of a deeper correction to rekindle demand, we maintain a positive outlook for gold into 2020. This belief is based on a continued low yield environment, very compressed equity return expectations and multiple tail risks.

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)

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
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) 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.