Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of Commodity Strategy
Summary: Commodities led by agriculture and industrial metals trade higher for a third week as US and Chinese leaders look to lower tensions ahead of October trade talks. Gold remains supported despite rising yields while crude oil struggle amid the risk of an emerging supply glut.
The Bloomberg Commodity Index has traded higher for a third week and during this time all three sectors have taken turns in the lead. In late August it was precious metals which surged in response to falling bond yields and reduced risk appetite. A thaw in the US China trade relations then helped trigger a strong week for crude oil and HG copper before the agriculture sector, following weeks of selling, moved higher last week.
Grains found support after a government report lowered the expected output from the coming harvest, together with renewed Chinese buying of soybeans. Precious metals continued to consolidate with gold finding support despite the recent 35 bp rise in US ten-year notes to 1.8%, a five-week high. Industrial metals maintained a bid amid optimism over signs of easing trade tensions. Crude oil markets meanwhile quickly reversed their recent gains with OPEC and Russia at a meeting in Abu Dhabi struggling to find a response to the current slowdown in demand, something that led the International Energy Agency to warn about a looming supply glut into 2020.
Ahead of the expected rate cut from the US FOMC next week the ECB gave the market an opportunity to test current market themes and assumptions. However, after delivering several measures to stimulate the economic activity, the subsequent market reaction took most by surprise. The euro rallied strongly, and bond yields jumped after it emerged that key core countries Germany, France and the Netherlands objected against the new QE. We conclude that the ECB has reached the end of the road in terms of what it can do with fiscal policies potentially taking over.
Ahead of the early October trade talks between the US and China, both countries have made steps to improve their relationship thereby raising market expectations for a breakthrough. US agriculture products have for the past 18 months been caught in the crossfire, but this past week China was seen in the market buying US produced soybeans, cotton and hogs. This comes at a time where hedge funds are holding net-short positions in all but a couple of the major agriculture futures markets.
Hopes were raised ahead of the OPEC+ JMMC meeting in Abu Dhabi that the group would do more to support the price of oil. This after Saudi Arabia, in need of $80/b to balance its budget, appointed oil veteran Prince Abdulaziz bin Salman (ABS), as its new Energy Minister. Despite promises from Iraq, Nigeria and Russia to cut production to their agreed target levels, the market again turned lower. This after monthly oil market reports from the three major forecasters all raised concerns about the continued decline in global demand growth. Something that led the International Energy Agency to warn that the market may face a looming supply glut into 2020.
Brent and WTI crude oil’s attempted breakout lasted less than a week and both have returned to their respective ranges around $60/b and $55/b. We suspect that nervous rangebound trading will continue with any renewed risk-off from failed trade talks or deteriorating economic data keeping the market on the defensive.
Gold’s high correlation to US bond yield movements has triggered the first major challenge to the rally that began back in June when bond yields turned sharply lower. While the short-term risk of a correction to $1450/oz or in worst case scenario $1380/oz exist, we maintain a bullish outlook for gold. We view the current setback, however painful, as being necessary to breathe fresh life into a rally that had gone stale.
Previous bull markets in gold, most noticeable the one from 2000 to 2010 were littered with aggressive corrections which despite the strong gains that decade made it a difficult market to trade for short-term tactical traders. The reasons behind our bullish view on gold and precious metals in general are:
The chart below shows the risk of a retracement back towards the $1450/oz, a level which would still only reflect a weak correction within a strong uptrend. It would take an unlikely break below $1380/oz, the multi-year resistance area turned support, for the technical outlook to turn back to negative.
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)