Head of Commodity Strategy
Summary: The commodity sector continues to face multiple uncertainties with the latest being the prospect for an accelerated pace of FOMC tightening driving an economic slowdown at a time where China, another growth engine, is being challenged by extended lockdowns. Against these, sanctions and self-sanctioning of Russion produced commodities keeps many markets from energy to metals and agriculture supported. In this we take a closer look at gold, crude oil and copper.
Gold (XAUUSD) remains stuck in relative wide range between $1890 and $1960. Yesterday, another upside attempt was rejected following Fed Governor Lael Brainard hawkish comments on the pace of rate hikes and quantitative tightening, likely to start at the May 4 FOMC meeting. Her comments helped send US treasury yields sharply higher with, and this time a bit more aggressive at the longer end of the yield curve while the dollar rose. Ten year real yields reached a two-year high at -0.21%, up from -1.1% at the beginning of the year, with the market now pricing in close to ten 25 bps rate hikes during the next ten months.
The combination of a stronger dollar and rising real yields remain the two reasons why many traders continue to look for a much weaker price action. However, with gold currently up 5% in 2022 this view continues to be challenge. Instead we have seen asset managers return to gold via ETF’s as they seek protection against rising inflation, lower growth as well as elevated stock and bond market volatility. So far the battle between short-term momentum and real yield focused short sellers and more long-term focused investors continues and gold, as mentioned, remains range bound as a result of this.
In our recently published Quarterly Outlook we highlight the reasons why we see gold move higher and reach a fresh record high.
Crude oil has following weeks of extreme turbulence been settling into a relative tight range between $110 resistance and support at $103.25, the trendline from the December low and the 50-day simple moving average. Some relief selling was seen on Tuesday after the EU avoided adding Russian crude oil to the list of fresh sanctions. In addition, China lockdowns as well as growth concerns and a stronger dollar following Brainard’s comment on rates helped further deflate an otherwise very tight market. The tightness being seen through the Saudis being able to raise their official selling prices for all oil grades to all regions for May cargoes. Arab Light into Asia was increased by $4.40/b to a record $9.35/b over the benchmark, this at a time where Russia continues to struggle selling its oil at deeply discounted prices of more than 30 dollars per barrel below Brent.
Despite the SPR announcement from last week we struggle to see much additional downside to crude oil while the war in Ukraine continues. Overall, however, the combination of sharply higher global interest rates to combat inflation and an already elevated cost of everything is likely to prevent prices from spiking much above the levels already reached last month when peak panic hit the market.
Focus on EIA’s weekly stock report with the API reporting a 1.1-million-barrel increase in crude stocks. In addition the market will be keeping an eye on production data, SPR releases and implied gasoline demand which has shown seasonal weakness recently.
Copper (COPPERUSMAY22), the so-called king of green metals, continues to enjoy some tailwind from other industrial metals. Most recently zinc where the threat of shortages, especially in Europe where LME stocks are critically low, have seen the price move higher. Copper did trade near a one-month high earlier in the week after Chile, the world’s largest producer of the metal, reported a 7% year-on-year decline to 399,817 tons in February, this following a drop of 7.5% year-on-year in January.
While a tight supply outlook and the green transformation will continue to underpin prices over the coming months, the market currently has to deal with negative developments in China where draconian lockdown measures to combat covid outbreaks are likely to weaken the growth outlook by more than the government had originally forecast. Once the covid cloud has lifted, the Chinese government is likely to step in with additional measures to stimulate growth and that should help off-set the impact of lower growth elsewhere caused by high prices and accelerated tightening from the US Federal Reserve.
After reaching a record high above $5 per pound last month, HG copper traded back to $4.5 per pound before moving higher again. The outlook for copper remains supportive with tight supply offsetting the risk of an economic slowdown. We maintain this bullish view as long the price remains above the 200-day moving average, currently at $4.41 per pound.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
