Head of Commodity Strategy
Summary: The correction that for some commodities already started back in March has since the end of July increasingly been showing signs of reversing, driven by recent economic data strength, dollar weakness and signs inflation may have peaked. With the broad position adjustments having run their course, the focus has returned to supply which in many cases remains tight, thereby providing renewed support, especially across the sectors of energy and key agriculture commodities.
The correction that for some commodities already started back in March has since the end of July increasingly been showing signs of reversing. According to the Bloomberg commodity sector indices, the correction period triggered peak to bottom moves of 41% in industrial metals, 31% in grains and 27% in energy. The main reason for the dramatic correction following a record run of strong gains was the change in focus from tight supply to worries about demand.
Apart from China’s slowing growth outlook due to its zero-Covid policy and housing market crisis hitting industrial metals, the most important driver has been the way in which central banks around the world have been stepping up efforts to curb runaway inflation by forcing down economic activity through aggressively tightening monetary conditions. This process is ongoing but recent economic data strength, dollar weakness and signs inflation may have peaked have all helped support markets that have gone through weeks and in some cases months of sharp price declines, and with that an aggressive amount of long liquidation from financial traders as well as selling from macro-focused funds looking for a hedge against an economic downturn.
With the broad position adjustments having run their course, the focus has returned to supply which in many cases remains tight, thereby providing renewed support and problems for those who have been selling markets looking for even lower prices in anticipation of recession and lower demand.
Copper has rebounded around 18% since hitting a 20-month low last month, thereby supporting a general recovery across industrial metals, the hardest hit sector during the recent correction. Supported by a softer dollar, data showing the US economy remains robust, easing concerns about the demand outlook in China and not least disruptions to producers in Asia, Europe as well as South America potentially curtailing supply at a time when exchange-monitored inventories remain at a decade low. All developments that have forced speculators to cut back recently established short positions.
The potential for an improved demand outlook in China and BHP's recent announcement that it has made an offer for OZ Minerals and its nickel and copper-focused assets, is the latest in a series of global acquisitions aimed at shoring up supplies of essential metals for the energy transition. With its high electrical conductivity, copper supports all the electronics we use, from smartphones to medical equipment. It already underpins our existing electricity systems, and it is crucial to the electrification process needed over the coming years in order to reduce demand for energy derived from fossil fuels.
Following a temporary recovery in the price of copper around the beginning of June when China began easing lockdown restrictions, the rally quickly ran out of steam and copper went on to tumble below key support before eventually stabilizing after finding support at $3.14/lb., the 61.8% retracement of the 2020 to 2022 rally. Since then, the price has recovered strongly but may temporarily pause after reaching finding resistance in the $3.70/lb area. We maintain a long-term bullish view on copper and prefer buying weakness instead of selling into strength.
The grains sector traded at a five-week high ahead of Friday’s supply and demand report from the US Department of Agriculture. The Bloomberg Grains Index continues to recover following its 28% June to July correction with gains this past week being led by wheat and corn in response to a weaker dollar and not least hot and dry weather in the US and another heatwave in Europe raising concerns about yield and production. Hot and dry weather at a critical stage for yield developments ahead of the soon-to-be-harvested crop has given the World Agricultural Supply and Demand Estimates report some additional attention with surveys pointing to price support with the prospect of lower yields lowering expectations for the level of available stocks ahead of the coming winter.
Cotton, up 8% this month has seen the focus switch from growth and demand worries, especially in China, to deepening global supply concerns as heatwaves in the US and China hurt production prospects. Friday’s monthly supply and demand report (WASDE) from the US Department of Agriculture was expected to show lower US production driving down ending stocks by around 10% to 2.2 m bales, an 11-year low.
Arabica coffee, in a downtrend since February, has also seen a steady rise since bouncing from key support below $2/lb last month. A persistent and underlying support from South American production worries has reasserted itself during the past few weeks as the current on-season crop potentially being the lowest since 2014. Brazil’s drought and cold curbed flowering last season and severe frosts in July 2021 led farmers to cut down coffee trees at a time of high costs for agricultural inputs, notably fertilizer. In addition, Columbia another top producer, has seen its crop being reduced by too much rainfall.
2024: The wasted year
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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.
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.
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.
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.
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.
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.
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.
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.
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.
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