ST note - copper and crude oil divergence ST note - copper and crude oil divergence ST note - copper and crude oil divergence

ST note - copper and crude oil divergence

Junvum Kim

Sales Trader

Summary:  Divergence began to appear since last month as both XAU and HG looked to have bottomed out and make multi months swing highs but CL continued to decline making a fresh low for the year breaking the double bottom $75 this week.


My sales trading team members well and truly know that I am a fan boy of Cathie Wood whose flagship fund ARKK generated huge 149% return in 2020 but this year so far YTD return of -64% on the back of QT and challenging macro backdrop as real yield soared from -1% all the way upto 1.59%, highest since 2009.  I remember this tweet from Cathie that flagged the inflation expectations by looking at commodities such as gold (XAU), copper (HG) and oil (CL) which were already on their way down after all three peaking in March 22 while CPI peaked later in July at 9.1%.  However divergence began to appear since last month as both XAU and HG looked to have bottomed out and make multi months swing highs but CL continued to decline making a fresh low for the year breaking the double bottom $75 this week.  On the other hand, silver (XAG) and iron ore (SCO) are also showing reversal to the topside with +32% and +49% respectively so in line with the recent house view from Steen, resurgence of major commodity strength may have already begun in the anticipation of China reopening.

Some findings

  • Correlation based on weekly for 2 years: XAU vs CL (0.3), XAU vs HG (0.5), HG vs CL (0.5)
  • YTD return: XAU -1.88%, HG -13% , CL -4%
  • EUR seasonality historically shows December is the best month since 2010 on year end $ selling.
  • S&P 500 santa rally could also play out post Nov CPI (est 7.3%) and FOMC (est 50bps hike) next week as previous 11 average monthly return being +0.6% with only three occasions being negative (2018, 2015 & 2014) but median having nearly +1%.
  • S&P500 forward EPS estimate is 225.52 +9% growth vs current 206.84.
  • Since Covid low 14 in March 2020, S&P500 forward PE is 18 currently with recent 2022 low 16 and 2020 high ~28.
  • Credit spread may have topped out at 600bps and now hovering at around 500bps with 2021 low ~200bps and 2020 high ~1,100bps
  • Yield curve between 3 months and 10 year inverted to -80bps that implies the recession probability of 50% according to the old article (The Yield Curve as a Predictor of U.S. Recessions) from NY Fed.
Recession probabilities based on spread
Major commodities price action on top and yield curve spread (10 year minus 3 months) at the bottom

Quarterly Outlook 2024 Q2

2024: The wasted year

01 / 05

  • Macro: It’s all about elections and keeping status quo

    Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

    Read article
  • FX: The rate cut race shifts into high gear

    As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

    Read article
  • Equities: The AI and obesity rally is defying gravity

    Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

    Read article
  • Fixed income: Keep calm, seize the moment

    With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

    Read article
  • Commodities: Is the correction over?

    Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992