Head of Commodity Strategy
Summary: Commodities traded generally lower in a week where the big lines were drawn by developments in Washington and Moscow. Powell's promise to combat runaway inflation at the expense of growth and jobs sent the market reeling with a subsequent surge in bond yields and the dollar sending most asset classes lower. Putin's increasingly desperate actions to reverse his losses in Ukraine helped support a few commodities led by wheat, diesel and initially also gold.
Commodities traded generally lower in a week where the big lines were drawn by developments in Washington and Moscow. At their latest FOMC meeting, the US Federal Reserve managed to surprise on the hawkish side of expectations after an expected 75-basis point rate hike was followed up the removal of expectations for a cut in 2023. Changes that were made despite a significant lowering of the GDP forecast for this year and next as well as a sharp rise in the unemployment rate forecast, a signal the Fed is willing to continue hiking rates even if the economy deteriorates in order to get ahead of inflation.
These developments helped send the dollar and US Treasury yields sharply higher and with other major central banks also hiking, the recession fear took hold and helped send growth-sensitive commodities like cotton and copper sharply lower. However, at the same time, other commodities like gold, wheat and diesel managed to find some support after President Putin escalated his flagging invasion of Ukraine, thereby adding a safe-haven bid to gold while increasing supply risks of key commodities such as wheat, crude oil and fuel products.
The Bloomberg Commodity Index traded lower by 2.5% on the week troubled by tighter monetary policy hurting the growth outlook, weakness in China’s economy and Europe’s energy crisis which has driven the region’s purchasing managers index to its lowest level since 2013. Losses being led by natural gas, cotton, crude oil and industrial metals.
Multiple uncertainties will continue to create a volatile environment for most commodities ahead of the year end. While the recession drums will continue to bang ever louder, the sector is unlikely to suffer a major setback before picking up speed again during 2023. The latest FOMC action has brought the market one step closer to peak hawkishness, potentially sometime during the final quarter of 2022, and once that happens, a subsequent peak in the dollar and Treasury yields may reduce some of the recent headwinds.
Our forecast for stable to potentially even higher prices led by pockets of strength in key commodities across all three sectors of energy, metals and agriculture is driven by sanctions, upstream cost inflation, adverse weather and low investment appetite, and with that in mind, we see the Bloomberg Commodity Index, which tracks a basket of 24 major commodities, holding onto most of its year-to-date gains around 15% for the remainder of the year. Gold spent most of the week managing to find a geopolitically-related bid to shield it from the negative consequences of sharply higher US Treasury yields and dollar. In the end, however, the market buckled under the weight of deteriorating market sentiment driven by a 32-basis point jump in US ten-year yields to a 12-year high at 3.75% and a 2% rise in the Bloomberg Dollar Index to a record high (since 1997).
Gold and the other semi-investment metals like silver and platinum will likely to continue to remain under pressure until the market reach peak hawkishness, potentially not before 4% is reached in 10-year yields and the dollar squeezes out any remaining short positions. Whether the turning point will be reached before yearend remains to be seen. By continuing to raise interest rates while also raising expectations for lower growth and rising unemployment, the FOMC is signaling a recession is a price worth paying for getting inflation under control. We maintain a long held view the market, just like the FOMC, may end up being too optimistic in their belief inflation will return to the sub 3% level currently being priced in via the swap market.
Resistance has moved to $1690 while the break below $1654 on Friday could see the market target the 50% retracement of the 2018 to 2020 rally at $1618.
Crude oil meanwhile headed lower after spending most of the week confined to a relative tight range with the Powell versus Putin battle (demand versus supply) not having a clear winner until Friday when both Brent and WTI dropped as the FOMC driven slump in risk appetite and growth angst was dialed up a notch as the dollar and yields continued to surge higher. A difficult and potentially volatile quarter awaits with multiple and contradictory uncertainties having their say in the direction. While the risk to growth is being priced in, the market has left it to another day to worry about the supply-reducing impact of an EU embargo on Russian oil and fuel as well as a part reversal of the US selling 180 million barrels from its Strategic Reserves.
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
