The commodity sector stabilised during a US holiday-shortened week, with the Bloomberg Commodity Index trading broadly flat after six consecutive weekly declines that had knocked around 12% off the index. While hardly a decisive rebound, the pause marked an important change in tone after a prolonged period of selling driven by dollar strength, higher funding-cost expectations, easing geopolitical risk and, in energy, renewed concerns about ample supply. Two developments helped improve sentiment across rate- and growth-sensitive commodities. First, Federal Reserve Chair Kevin Warsh signalled that inflation pressures had moderated alongside falling energy prices, helping calm fears that the Fed might need to tighten policy more aggressively. That message was reinforced by a weaker-than-expected US jobs report, which triggered a softer dollar and a modest decline in short-dated Treasury yields. The combination reduced one of the strongest headwinds facing commodities in recent months: the prospect of higher funding costs amid an energy-driven inflation shock. The one-year US inflation swap, a real-time gauge of expected inflation one year ahead, has dropped from 3.5% in May to around 2.1%, signalling a sharp shift away from inflation anxiety. Still, the week’s stabilisation should not be confused with a broad-based return to bullish conditions. Two-year Treasury yields remain well above the Fed funds target rate, suggesting markets still - incorrectly in our opinion - see a meaningful risk of another rate hike, most likely in December. Performance also remained uneven, with strength in softs, precious metals and selected refined products offset by weakness in industrial metals, led by aluminium as Gulf production ramps back up.
Brent traded near unchanged on the week after returning to pre-war levels, with support emerging ahead of USD 70. The stabilisation potentially signals that the ongoing recovery in supply flows through the Strait of Hormuz is now largely priced in after weeks of sharp declines. However, the underlying picture remains challenging. The recovery in Middle Eastern supply has outpaced expectations, with both the UAE and Saudi Arabia rapidly lifting exports towards pre-war levels. At the same time, depressed Chinese import demand has limited the market’s ability to absorb returning barrels. The resulting mini-glut helps explain both the collapse in flat crude prices and the re-emergence of prompt contango across major crude benchmarks.
That curve structure matters. Contango, where future prices trade above nearby contracts, signals reduced urgency to secure prompt barrels and improves the economics of storing crude for later sale. Its return underlines the speed with which the market has shifted from fears of immediate scarcity to concerns about near-term oversupply.
US-Iran talks continue with several issues unresolved, meaning geopolitical risk has not disappeared. Nevertheless, the immediate focus has shifted from disruption towards absorption: how quickly can the market digest returning Gulf barrels, and where will incremental demand come from?
One potential answer is inventory rebuilding. Following the initial wall of supply, attention may turn towards replenishing strategic and commercial reserves drawn down during the conflict. Such buying could lift demand beyond immediate consumption needs. However, its impact will depend heavily on China, where a sustained acceleration in imports would be needed to absorb excess barrels and support a more durable tightening of the crude market.
The weakness in crude contrasts sharply with refined products. Peak summer demand for driving, flying and cooling has kept product markets relatively tight, supporting refinery margins and limiting the pass-through from lower crude prices to consumers. Ahead of the US holiday, London gas oil and US ULSD diesel posted solid gains, while gasoline also advanced even as Brent and WTI remained subdued.
The northern hemisphere summer combines peak road travel with increased aviation activity and higher electricity demand for cooling at a time when product inventories in several regions remain relatively tight. So, while crude producers are dealing with returning supply and weak prompt pricing, refiners continue to benefit from elevated margins. For consumers, it means the sharp decline in crude has yet to translate fully into equivalent relief at the pump or across transport-intensive sectors.
Precious metals were among the stronger sectors during the week, with gold extending its rebound towards USD 4,200 after the weaker-than-expected US jobs report reinforced Warsh’s earlier message that inflation pressures were easing. Softer payrolls triggered a weaker dollar and a modest decline in bond yields, easing some of the pressure that had weighed heavily on bullion during its prolonged correction, potentially supporting gold in attempts to establish a foothold above USD 4,000.
The recovery began after Warsh highlighted moderating inflation risks alongside falling energy prices. A 1.4% decline since May in the one-year US inflation swap, a highly watched financial derivative that acts as a real-time gauge of where the markets thinks inflation will be exactly one year from now, has reinforced expectations that inflation concerns may continue to fade, potentially helping establish a floor under precious metals. This matters because the recent correction since January and strengthened during the Middle East war was driven by a particularly difficult combination of a stronger dollar, elevated real yields, renewed Fed tightening expectations amid an energy-related jump in inflation, and softer near-term demand conditions.
However, the technical damage remains significant. Some investors are still using rallies to reduce exposure, and gold faces several important resistance levels before a clearer path towards higher prices can emerge. The 200-day moving average near USD 4,485 represents the first major hurdle, followed by the 38.2% retracement of the 1,650 dollar January to June correction near USD 4,574. For those levels to be challenged, incoming macroeconomic data will likely need to support a more decisive bearish turn in rates, weighing on the dollar and bond yields. Until then, gold’s recovery is best viewed as an attempt to build a base rather than confirmation that a new uptrend has begun.
While gold found support below USD 4,000, silver’s latest slide was arrested ahead of key support in the mid-USD 50s, with the subsequent rebound taking it back above USD 60. Like gold, silver still has considerable work to do to repair the technical and psychological damage inflicted on charts and investor sentiment during the past few months. Soft commodities were the strongest sector on the week, led by a sharp rally in Arabica coffee following an equally strong rebound in cocoa during previous weeks. The move extends a broader recovery as weather risks, supply concerns and nervous positioning re-emerged. Arabica coffee and cocoa both gained around one-third from last month’s lows at their recent peaks, while sugar has rebounded by around 10% from the lows reached during an ethanol-linked slump as fuel prices eased ahead of the Middle East peace deal.
The common theme is renewed supply uncertainty. In coffee, adverse weather in Brazil has disrupted harvest progress and raised quality concerns. Cocoa remains highly sensitive to fragile West African supply conditions, while sugar has been supported by shifting expectations around the allocation of Brazilian cane between sugar and ethanol production. The sharp reversals also highlight the role of positioning. After prolonged declines, bearish sentiment had become well established across parts of the sector, leaving markets vulnerable to short-covering when weather or supply concerns returned.
The United Nations’ index of food-commodity prices fell 0.3% in June from the previous month, led by grains and sugar. The FAO index which tracks a basket of internationally traded food commodities has only gained 1.7% in the last year, and remains around 19% below the record reached in the wake of Russia’s invasion of Ukraine in March 2022.
Industrial metals remained the weakest major sector, highlighting that easing rate pressure alone is not enough to trigger a broad recovery. Before Friday’s rebound, copper traded lower on the week, weighed down by the lack of a tariff update that Commerce Secretary Howard Lutnick had been due to deliver to President Donald Trump last Tuesday.
The recent decline appears far more technical than fundamentally driven. A break below key support levels forced commodity trading advisers and hedge funds to reduce long exposure, accelerating weakness even as exchange inventories continued to decline and physical demand remained relatively resilient.
In our view, there has been little meaningful change to the long-term investment case. Electrification, grid expansion, artificial intelligence infrastructure, data centres, electric vehicles and renewable energy continue to require significantly more copper than current levels of mine investment are likely to deliver over the coming decade.
Aluminium was among the weakest individual commodities, falling to its lowest level since February amid the return of supply from Persian Gulf producers, which account for nearly 10% of global output. Overall, the sector continues to face short-term concerns about global growth and Chinese demand. Lower yields and a softer dollar may provide support at the margin, but a sustained recovery will likely require clearer evidence of improving physical demand or stronger manufacturing activity.
Grains posted a modest recovery led by wheat, while corn also edged higher after the latest USDA planting and grain stocks reports delivered a supportive surprise. US farmers planted more corn than expected following the late-spring rally in prices, but the bearish acreage increase was offset by June 1 corn stocks coming in 2% below market estimates, reflecting stronger-than-expected demand.
Wheat found support after farmers planted fewer acres than anticipated, while soybean futures followed corn higher despite planted acreage matching trade expectations. Overall, the sector remains challenged by ample supply and forward curves in contango, a structure that benefits funds holding short positions while making long exposure more expensive to maintain through repeated futures rolls.
Looking ahead, as harvests begin across the Northern Hemisphere, attention is shifting towards yield and weather risks following a record-breaking heatwave across Europe. A developing El Niño - capable of triggering floods in one region and drought in another -threatens to add further uncertainty by damaging crops in key producing regions and potentially destabilising global food supply.
Finally, with the Tour de France underway, there is a timely reminder that even the world’s lightest, fastest and most technologically advanced products remain rooted in the physical world.
A modern racing bike may appear to be a triumph of aerodynamics, engineering and marginal gains, but almost every component begins with commodities. Before there can be carbon fibre, there must be energy and petrochemical feedstocks. Electronic shifting requires lithium, copper and other battery materials. Hydraulic braking systems rely on aluminium and steel. Tyres depend on rubber, silica and petrochemicals, while high-performance bolts, bearings and drivetrain components can involve titanium, molybdenum and specialist alloys.
Every July, millions watch riders disappear into the mountains. Most see elite athletes chasing yellow jerseys. Commodity investors might instead see an elegant demonstration that almost every technological breakthrough still begins with raw materials. Or, put another way, every pedal stroke starts somewhere between a mine, a refinery and a chemical plant.
| More from the author |
|---|
|
Outrageous Predictions
Head of Investment Content Switzerland
Outrageous Predictions
Senior Relationship Manager
Outrageous Predictions
Saxo Group
Outrageous Predictions
Chief Investment Strategist
Outrageous Predictions
Chief Investment Strategist
Outrageous Predictions
Global Head of Investment Strategy
Outrageous Predictions
Investor Content Strategist
Outrageous Predictions
Global Head of Macro Strategy
Outrageous Predictions
Global Head of Macro Strategy
Outrageous Predictions
Global Head of Macro Strategy