Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Commodity update with focus on oil, gold, silver and copper
Ole Hansen
Head of Commodity Strategy
Summary: Improved market conditions today have crude oil and industrial metals trade higher while gold is lower. Silver and platinum’s impressive 15% outperformance against gold during the past month has started to raise concerns about a correction.
Global stocks trade higher and bonds lower this Tuesday on hopes that calm may return to Hong Kong after Lam, the city’s chief executive, announced plans to formally withdraw the extradition bill that spark massive protests in recent weeks. In mainland China the Caixin PMI services Index beat expectations thereby reducing selling pressure on the Renminbi.
Crude oil and industrial metals trade higher while gold trades lower. This after four failed attempts to break resistance at $1550/oz. Silver and platinum’s impressive 15% outperformance against gold during the past month has for now raised concerns about a correction. The depth of which will depends on whether gold manage to stay above support at $1520/oz.
Today’s improved market conditions follows a Monday sell-off after US ISM Manufacturing dropped below 50 for the first time in three years and US and Chinese officials struggled to set a date for renewed trade talks. Sources told CNBC that President Trump wanted to double tariffs on Chinese goods last month before settling on a smaller increase. This after learning that China had formalized plans to slap duties on $75 billion in US products in response to new tariffs from Washington on September 1.
These developments helped sent both Brent crude oil and HG copper below support thereby setting up the short-covering rally triggered by today’s improved sentiment.
Crude oil remains troubled by reports that production from Opec, Russia and the U.S. all rose last month. This at a time where the strength of demand growth, due to trade war pessimism, has increasingly been called into question. Next up is the delayed until Thursday ‘Weekly Petroleum Status Report’ from the US Energy Information Administration. Surveys point to another supportive stock pile drop but overall, we remain cautious with resistance at $61.50 capping the upside for now.
Gold has settled into a wide $1515/oz to $1550/oz range with underlying demand through gold backed Exchange Traded Funds continuing to rise. During the past three months investors have increased total holdings by 280 tons to 2465 tons, some 107 tons below the 2013 record. While stock market gyrations have supported gold in recent months it has been the collapse in global bond yields that has been the main driver. Today’s event in Hong Kong may reduce the safe-haven demand thereby help trigger some additional consolidation but overall the direction of gold and the minor metals of silver and platinum will continue to be dictated by movements in yields and yield curves.
Silver's impressive breakout during the past couple of weeks has yielded a 15% return but also, at least in the short-term, raised concerns about a correction. During the past two months the gold-silver ratio has fallen to 79.7 from above 93 and is now less than 4% away from its five-year average. On that basis the relative cheapness that drove value investors into silver has started to fade. With an RSI reading into overbought territory, further upside may now hinge on gold's ability to break resistance at $1550/oz. Something it may struggle to do, at least in the short-term.
HG Copper has rebounded from the lowest in more than two years thereby setting up another short-covering squeeze. The move higher has been driven by the above-mentioned news, an elevated speculative short held by funds together with a reported pickup in withdrawals from warehouses tracked by the London Metal Exchange. We view the upside potential as being limited while uncertainty remains about trade and demand from China, the world’s biggest consumer. Something that was highlighted in a comment last Friday from the CEO of Codelco, the world’s biggest producer. He said that the prolonged trade war showed no signs of ending soon and that it had begun to impact consumption.
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