Head of Commodity Strategy
Summary: Following the U.S. election, the focus as expected, quickly returned to the Covid-19 pandemic and the promising news on the vaccine front which saw precious metals and energy react strongly in opposite directions. As the week wore on, the continued surge in coronavirus cases in Europe and not least the U.S. reduced the excitement somewhat. The Bloomberg Commodity Index traded up by 1.3% on the week with a 3.8% drop in precious metals being more than offset by gains across the agricultural sector and not least energy which jumped by 6%.
Following the U.S. election, the focus as expected, quickly returned to the Covid-19 pandemic and the promising news on the vaccine front. Precious metals and energy reacted strongly in opposite directions after Pfizer and BioNTech said their coronavirus vaccine was more than 90% effective in preventing Covid-19. Gold slumped by more than 100 dollars while crude oil jumped by close to 10%.
As the week wore on, the continued surge in coronavirus cases in Europe and not least the U.S. reduced the excitement somewhat. This in the realization that the economic pain will likely increase further in the short term before eventually improving as scientists deliver a number of vaccines that will support a move towards normality during the second half of 2021. In one of our daily podcasts we touched upon the market impact of the short-term Covid gloom versus long-term hopes that science will get the world back on its feet.
From a commodity perspective, this is interesting given the potential for another short-term policy response to the resurgence potentially leading to a policy mistake through excessive stimulus. A development that in our opinion will drive a renewed, and for metals supportive, focus on reflation sometime in early 2021.
The Bloomberg Commodity Index traded up by 1.3% with a 3.8% drop in precious metals being more than offset by gains across the agricultural sector and not least energy which jumped by 6%.
The grains sector as seen through the Bloomberg Grains Index (ETF ticker example: AIGG:arcx) reached a fresh 17-month high, thereby continuing the strong rally that started back in August. The latest jolt higher was provided by the U.S. Department of Agriculture after it in a report said that U.S. corn and soybean stockpiles at the end of the 2020-21 marketing year will fall to their smallest in seven years.
Normally, the November World Agriculture Supply and Demand report (WASDE) tends be a non-event given the amount of established clarity with regard to production and stocks. This year, however, has been anything but normal due to adverse weather and accelerated buying from China. Soybeans reached a four-year high and corn a 15-month high before profit taking emerged with bullish news drying up.
The WisdomTree Grains ETF which is UCITS eligible tracks the Bloomberg Grains Subindex with a 37.5% exposure in soybeans, 34.8% in corn and a combined 27.6% in CBOT soft and KCBT Hard Red Winter Wheat.
Crude oil surged higher on the vaccine news only to deflate somewhat following downgrades in world demand from the Energy Information Administration, OPEC and the International Energy Agency. The IEA in its monthly Oil Market Report cut forecasts for global oil demand amid new lockdown measures and rising oil production from countries such as Libya. It further raised the pressure on OPEC+ to postpone its planned January production hike. The group meet to discuss their next move on December 1.
With this meeting in mind, the IEA wrote “With a Covid-19 vaccine unlikely to ride to the rescue of the global oil market for some time, the combination of weaker demand and rising oil supply provide a difficult backdrop”. “Unless the fundamentals change, the task of rebalancing the market will make slow progress.” The group lowered its oil demand forecast for both this year and 2021 with a meaningful recovery not envisaged before H2 2021.
While we believe that the energy sector eventually will see a strong revival, patience is currently required. The energy sector has been the hardest hit as fuel demand has suffered amid lockdowns and reduced mobility. While a vaccine eventually will drive a normalization in demand, we should not forget that crude oil and commodities in general do not, like equities, have the luxury of being able to roll forward expectations as supply and demand need to balance every day. Too much supply and the price will suffer in order to force a reduction in supply while attracting demand, as an example through storage plays.
Brent crude is likely to remain range-bound close to $40/b with supporting OPEC+ headlines ahead of the meeting potentially offsetting a continued surge in coronavirus cases.
Precious metals’ post-U.S. election rally proved short-lived as the Pfizer vaccine news helped alter the short-term outlook. The dollar reversed higher and bond yields jumped while “safe-haven” technology stocks took a hit with the market instead buying the Russell 200 grouping of small-cap stocks, seen as a barometer of the U.S. economy and its potential recovery. Gold got caught up in this large rotation towards value from defensive assets as it forced a recovery in U.S. real rates, a key driver for gold.
We believe that the vaccine will help improve to outlook for 2021 but in the short term politicians and central bankers are likely to panic as the coronavirus case count continues to rise. Something that was highlighted by three of the world’s top central bankers after warning that the prospect of a Covid-19 vaccine isn’t enough to put an end to the economic challenges created by the pandemic.
Additional stimulus when the world is on the cusp of a scientific breakthrough on the vaccine front will likely drive inflation expectations higher next year. Not only due to an over easy liquidity situation but equally important a rise in input cost from increasing food and energy prices. With this in mind, we expect a rise in longer-dated bond yields will primarily be driven by rising inflation expectations which should leave real yields anchored deep in negative territory.
In addition to this, we still see the prospect for the dollar to weaken. Such an event will not only reduce the appetite for “safe-haven” technology stocks priced in dollars, it may also support higher EM growth and with that a pickup in demand for jewellery which suffered a 29% YoY decline in Q3 according to the World Gold Council.
In conclusion, we maintain our bullish outlook for gold and with that the potential for an even greater performance by silver and platinum. The timing of the next move higher remains highly uncertain with the prospect for additional vaccine news driving a deeper correction than the “weak” one already witnessed. Key support remains the area between $1850/oz and $1835/oz while a break above $1970/oz is needed to attract continued momentum buying.
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