WCU: Commodities ride high as trade talks dominate the agenda
Head of Commodity Strategy
Summary: Commodities traded higher for a second week running with the Bloomberg Commodity Index reaching a ten-week high, in line with strong advances across a range of global asset classes.
The latest string of trade talk headlines has raised hopes of a market friendly US-China trade deal, but by the time this deal rolls in, we wonder if the market will even be able to muster a reaction, given how far the bounce in sentiment has taken us from the late December lows. US President Donald Trump will meet with China’s top trade negotiator on Friday to drum up a preliminary deal before a Washington-imposed deadline on March 1.
The rally in commodities was driven by industrial metals where supply concerns supported both nickel and copper. Palladium hit a fresh record as demand from the automobile industry continued to outstrip supply. Gold hit our soon-to-be-adjusted year-end target before running into another round profit taking. The energy sector continued to show strength amid continued cutting efforts by the Opec+ group of nations and the mentioned trade talk progress.
The focus on tightening supply has also helped copper buyers draw some inspiration from palladium, which despite slowing car sales has surged. This week it reached a record $1,500/oz due to the prospect of strong demand due to stricter emissions standards outstripping supply over the coming year. The upheaval seen in platinum group metals following the diesel scandal in 2014 has seen palladium move from a discount of $700/oz to a record $650/oz premium over platinum.
Staying with copper the latest (but still delayed) Commitments of Traders report from the US CFTC covering the week to January 29 showed a managed money short of 40,300 lots, not far from the June 2016 record of 47,100 lots. A 6% rally since then is likely to have attracted a significant amount of short-covering. Whether a long position has been established ahead of the price breakout this past week, however, remains to be seen. The CFTC will not be up to date before March 8 when data covering the week to March 5 will be published.
Following months of rangebound trading, high grade copper has broken above $2.84/lb to target the next level of resistance at $3.02/lb:
Recent economic data continues to point to economic weakness, something a trade deal would struggle to arrest at this point. Weak data from Germany and Japan this past week was followed by the extreme negative surprise from the February US Philly Fed survey. It registered its lowest reading since May 2016 and its worst drop in the new orders component since 2008. US core durable goods orders were also weak in December as were US existing home sales in January.
At this stage we find limited upside potential given the continued weakness in economic data and the risk of the market running into buying fatigue as a trade deal increasingly has been priced into the market.
Brent crude oil will be facing a band of resistance between $68.3/b and $70/b while support can be found at $64/b
The upside focus remains the major band of resistance between $1,365/oz and $1,380/oz where gold has peaked out on several occasions since 2016.
Investors looking for alternative metals to gold and palladium may begin to consider platinum which has seen its discount to palladium hit a record $650/oz. The prospect of carmakers beginning to make moves towards switching between the metals may provide the support needed for platinum to break higher.
Relative value traders also may start to take a closer look at platinum as an alternative to gold. The current discount to gold of close to $500/oz and the above-mentioned talk about switching could be the trigger needed to rekindle investor interest in a metal that has been struggling during the past year.
The biggest risk in the short term is the potential for a crash in palladium which has surged to a record $1,500/oz this week. High demand from automobile makers to meet stricter emissions standards and tight supplies, however, is unlikely to trigger a reversal anytime soon.
The weekly chart looks constructive above $833/oz. The blue line represents the trend-line from the 2008 record high at $2,300/oz.
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