Access both platforms from your single Saxo account.
WCU: Focus returns to trade war
Ole Hansen
Head of Commodity Strategy
Summary: Commodities were no exception to this week's rule of trade war-related risk aversion.
It took one Sunday tweet from President Trump to shatter the relative calm across global financial markets. Instead of going into a week widely expected to yield a long-awaited trade deal between the US and China, the president instead tweeted that he was preparing to lift tariffs from 10% to 25% on $200 billion worth of Chinese imports.
The decision was taken in response to an apparent backtracking by China on almost all aspects of the trade deal. Predictably, it spooked the market and risk sentiment was hit across the board, with safe-haven US bonds and the Japanese yen being two of the few markets receiving a boost.
A record short position held in the Cboe VIX future, which tracks equity volatility as represented in the S&P 500 index, raised concerns about a major blowout like the one witnessed in February 2018.
With negotiations still ongoing Friday despite the imposition of tariffs, the market adopted a nervous wait-and-see approach knowing full well that it was dealing with a binary outcome, the result of which could swing the market dramatically in either direction.
The decision was taken in response to an apparent backtracking by China on almost all aspects of the trade deal. Predictably, it spooked the market and risk sentiment was hit across the board, with safe-haven US bonds and the Japanese yen being two of the few markets receiving a boost.
A record short position held in the Cboe VIX future, which tracks equity volatility as represented in the S&P 500 index, raised concerns about a major blowout like the one witnessed in February 2018.
With negotiations still ongoing Friday despite the imposition of tariffs, the market adopted a nervous wait-and-see approach knowing full well that it was dealing with a binary outcome, the result of which could swing the market dramatically in either direction.
Like most other asset classes, commodities did not respond well to the heightened risk to global growth presented by an escalated trade war. The Bloomberg Commodity Index hit its lowest level since January following four weeks of selling. The energy sector, however, held up reasonably well with a whole host of supply disruptions and geopolitical worries offsetting the negative feedback loop from equities and demand concerns.
Metals were mixed with gold outperforming most other metals despite stopping short of a steep safe-haven surge. Silver was among those contenders bested, with the XAUXAG ratio hitting a 25-year high above 87 ounces of silver to one ounce of gold.
The Bloomberg Agriculture Index led by grains slumped to a multi-decade low with several components such as soybeans and cotton caught up in a perfect storm of ample supply and the risk of a further reduction in demand from China.
We have to wonder, however, if the trade deal's spoiler could prove grains' champion following the latest tweets from President Trump, who teased a massive US agricultural buy in his most recent barrage against Beijing.
Metals were mixed with gold outperforming most other metals despite stopping short of a steep safe-haven surge. Silver was among those contenders bested, with the XAUXAG ratio hitting a 25-year high above 87 ounces of silver to one ounce of gold.
The Bloomberg Agriculture Index led by grains slumped to a multi-decade low with several components such as soybeans and cotton caught up in a perfect storm of ample supply and the risk of a further reduction in demand from China.
We have to wonder, however, if the trade deal's spoiler could prove grains' champion following the latest tweets from President Trump, who teased a massive US agricultural buy in his most recent barrage against Beijing.
Palladium, which almost doubled in price between August and late March, lost further ground in response to weak auto sales and the trade dispute moving focus away from tight supply.
Copper was left relatively unscathed despite concerns that failure to strike a trade deal would hurt global growth and reduce demand for key commodities such as industrial metals. This reaction probably came in response to speculation that an escalated trade war could trigger stimulus policies in the US and especially China, the world’s biggest consumer.
Soybeans slumped to a 10-year low with the market once again being caught in the trade war crosshairs, which could see bulging supply struggling to find a home. This comes ahead of a monthly supply and demand report on May 10 that would give the US government’s first estimate of the size of the grain stockpiles left over at the end of the 2019-20 season.
The speculative combined net-short in wheat, corn and soybeans reached a fresh record high in the week to April 30. At 539,000k futures contracts short (1 contract = 5000 bushels), the short was some 488,000 contracts higher than the seasonal five-year average.
Copper was left relatively unscathed despite concerns that failure to strike a trade deal would hurt global growth and reduce demand for key commodities such as industrial metals. This reaction probably came in response to speculation that an escalated trade war could trigger stimulus policies in the US and especially China, the world’s biggest consumer.
Soybeans slumped to a 10-year low with the market once again being caught in the trade war crosshairs, which could see bulging supply struggling to find a home. This comes ahead of a monthly supply and demand report on May 10 that would give the US government’s first estimate of the size of the grain stockpiles left over at the end of the 2019-20 season.
The speculative combined net-short in wheat, corn and soybeans reached a fresh record high in the week to April 30. At 539,000k futures contracts short (1 contract = 5000 bushels), the short was some 488,000 contracts higher than the seasonal five-year average.
Gold tried but to reassert its role as the go-to market in times of uncertainty, but its efforts were not an outstanding success. It barely managed to muster a positive return while struggling to break above $1,292/oz, the resistance level highlighted on the chart below.
A perfect setup for a gold rally coming from geopolitical worries, weaker stocks and lower bond yields failed to lift the market. Part of the explanation is the weaker Chinese yuan, to which gold in the past has shown a high degree of correlation.
Until now, paper demand has been mostly negative with total holdings in bullion-backed ETFs having seen continued reductions this year. Hedge funds, who are much more price-sensitive, chased the market during this period; in the week to April 30. gold was bought to the tune of 33k lots, making it the second-biggest week of buying this year.
The move returned the position to a net-long and highlighted the continued struggle for direction. Failure to break above the aforementioned level at $1,292/oz would now carry the risk of recently established longs heading for the exit. Likewise, a break higher, which remains our preferred expectation, could see the market move higher towards the April high at $1,316/oz followed by $1,325/oz.
A perfect setup for a gold rally coming from geopolitical worries, weaker stocks and lower bond yields failed to lift the market. Part of the explanation is the weaker Chinese yuan, to which gold in the past has shown a high degree of correlation.
Until now, paper demand has been mostly negative with total holdings in bullion-backed ETFs having seen continued reductions this year. Hedge funds, who are much more price-sensitive, chased the market during this period; in the week to April 30. gold was bought to the tune of 33k lots, making it the second-biggest week of buying this year.
The move returned the position to a net-long and highlighted the continued struggle for direction. Failure to break above the aforementioned level at $1,292/oz would now carry the risk of recently established longs heading for the exit. Likewise, a break higher, which remains our preferred expectation, could see the market move higher towards the April high at $1,316/oz followed by $1,325/oz.
Trying to form a short-term prediction for crude oil at this stage is close to impossible. Increasingly supportive supply fundamentals and geopolitical worries have been countered by trade-related weakness. But with geopolitical and supply risks continuing to build, we believe that renewed strength remains the biggest risk.
Supportive crude oil drivers
• Tightening markets due to voluntary and not least involuntary production cuts.
• Russia’s pipeline contamination, cutting supplies to Europe
• Iran’s threat to stop observing restrictions on uranium enrichment
• US moving aircraft carrier to Middle East on credible Iran threat
• Fighting around Tripoli raising risk to supplies from Opec’s most volatile producer
Non-supportive drivers
• Risk of failed US-China trade talks prompting a global economic slowdown
• Stock market weakness and surging VIX reducing general risk appetite
• Hedge funds caught on the wrong side should the price continue to weaken
The risk to the upside despite the current US-China standoff is also being reflected in the lack of selling appetite from funds, as can be seen in the latest update on speculative positions from the week to April 30. During that week, funds continued to buy Brent crude oil despite the weaker price action following the failed attempt to break above $75/barrel.
Adding to this, we see tightening supply in the spreads between prompt Brent crude and deferred contract months. The front July contract has reached a $2.2/b premium or backwardation above October, the widest in almost five years. The fact that the backwardation has increased while the prompt price has been falling is sending quite a strong signal that the market is growing worried about tight supply.
In the short term, the 50-day and 200-day moving averages, which crossed to create a technical buy signal this week, provided the support needed to stop the correction. Into next week, the market will be closely watching developments in Washington and Beijing for signs of the trade war’s direction, and with that whether some additional weakness can be seen before tight fundamentals once again take over the driving seat.
Supportive crude oil drivers
• Tightening markets due to voluntary and not least involuntary production cuts.
• Russia’s pipeline contamination, cutting supplies to Europe
• Iran’s threat to stop observing restrictions on uranium enrichment
• US moving aircraft carrier to Middle East on credible Iran threat
• Fighting around Tripoli raising risk to supplies from Opec’s most volatile producer
Non-supportive drivers
• Risk of failed US-China trade talks prompting a global economic slowdown
• Stock market weakness and surging VIX reducing general risk appetite
• Hedge funds caught on the wrong side should the price continue to weaken
The risk to the upside despite the current US-China standoff is also being reflected in the lack of selling appetite from funds, as can be seen in the latest update on speculative positions from the week to April 30. During that week, funds continued to buy Brent crude oil despite the weaker price action following the failed attempt to break above $75/barrel.
Adding to this, we see tightening supply in the spreads between prompt Brent crude and deferred contract months. The front July contract has reached a $2.2/b premium or backwardation above October, the widest in almost five years. The fact that the backwardation has increased while the prompt price has been falling is sending quite a strong signal that the market is growing worried about tight supply.
In the short term, the 50-day and 200-day moving averages, which crossed to create a technical buy signal this week, provided the support needed to stop the correction. Into next week, the market will be closely watching developments in Washington and Beijing for signs of the trade war’s direction, and with that whether some additional weakness can be seen before tight fundamentals once again take over the driving seat.
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)