WCU: Commodities focus on Trump

Ole Hansen

Head of Commodity Strategy, Saxo Bank Group

Commodities remain under pressure from uncertainty surrounding the US’ trade dispute with the rest of the world and the continued weakness seen across emerging market stocks, bonds, and currency markets. These developments have resulted in the Bloomberg Commodity Index losing close to 9% since its early June peak while sending it towards its lowest weekly close in more than a year. 

The expected announcement from the White House that China is about to get hit by additional tariffs on goods valued at up to $200 billion helped further sour sentiment this past week, particularly after the latest US trade balance for July showed the US in the red by $50bn while the trade deficit with China rose to a fresh record of $36.8bn.

With his domestic agenda being challenged by the upcoming midterm elections, less-than-flattering comments from White House insiders, and the ongoing Mueller investigation, President Trump is unlikely to step back from his fight with the Chinese.

The prospect of an escalated trade war continues to make matters worse for EM bonds, stocks and currencies. The MSCI EM stock index has moved into a bear market after losing 20% since January while the MSCI EM currency index has lost 8.5% of its value since April when the focus turned to trade tensions. 
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Source: Bloomberg, Saxo Bank
The combination of a stronger dollar and tightening global liquidity conditions has supported a move by many investors towards markets offering strong liquidity and thus a certain amount of protection. The US stock and bond markets both tick that box and so long as we do not see any contagion into the US market, there is still room to be optimistic that the global economy will avoid the slowdown currently being priced in. 

Industrial metals led the slump despite China vowing to protect its economy should the US decide, as expected, to move ahead with plans to expand tariffs. Crude oil remains rangebound as the focus continues to switch between supply and demand, both of which could be negatively impacted by current developments. 

Gold showed signs of stabilising with speculators holding a record short becoming tentative buyers for the first time since June. Silver and platinum, meanwhile, both fell foul to lower liquidity concerns and their industrial metal link. Silver dropped to $14/oz, a 2-1/2 year low against the greenback and a 23-year low against gold while platinum’s discount to gold expanded to a fresh record of $420/oz.
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The agriculture sector was mixed with sugar and coffee attempting a recovery from a decade low. The ongoing trade dispute with China and a huge US crop kept a lid on soybeans as the price remained close to a 10-year low. Wheat’s drought premium continued to fade amid the imminent arrival of a bumper US crop and easing concerns about the winter crop conditions in both the US Plains and the Black Sea region. 

The crude oil roller coaster continues with the alternating focus between supply and demand having kept the price rangebound since April. The price support has come from the short-term challenging outlook for supply due to US sanctions against Iran. Against this we have a medium- to longer-term outlook that remains troubled by the risk to demand from the current EM slowdown and rising dollar. 

A three-week rally ran out of steam on Tuesday when Brent crude, despite being supported by technical buying above $78.50/barrel, once again ended up running into a brick wall of resistance ahead of $80/b.

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Source: Saxo Bank
On supply

Production surveys from both Bloomberg and Platts this week showed how Opec so far had been able to offset a beginning slowdown in production from Iran. With most of the increased being contributed by one-off increases, especially from Libya, the outlook still points to a period where Opec’s total production is likely to drop as the Iranian slowdown accelerates. On that basis and until hard data or monthly surveys from Opec and IEA begin to show demand softness, the upside risk is likely to be viewed as the direction offering the least resistance. 

On demand

Rising oil prices due to the short-term impact of US sanctions may, however, create a medium-term challenge for demand growth. This as emerging markets, the main source of demand growth, suffer from a perfect storm of rising oil prices and weaker currencies.  While Brent crude trades well below the $110/b average seen between 2011 and 2014, some key oil-consuming nations are seeing prices in their local currencies at or even above that level.

Another event which has could begin to receive some attention would be an emerging slowdown in demand from China’s strategic petroleum reserves (SPR) purchase programme. A recent update from Bloomberg’s intelligence unit estimated that China's SPR purchases have accounted for about a third of annual global oil demand growth since 2016. 

A slowdown of this magnitude would go a long way to offset the potential drop in supply from Iran. Such a development, together with the already heightened risks to overall demand going into 2019, could force a rethink of the medium-term price outlook and eventually help send the price back down to $70/b – hence our call for the market to remain rangebound for now. 

Gold has stabilised around $1,200/oz as it begins to show signs of resilience following the 200 dollar drop since April.  In the week to August 28, funds bought gold for the first time in 11 weeks but the 9,000-lot reduction was still small compared with the 143,000 lots sold since June. We conclude, as mentioned in recent updates, that a bigger move is needed before short sellers start to worry.

The US-China trade war and its currency impact remains a key focus in the market. President Trump’s threat to impose tariffs on an extra $200bn in Chinese imports will undoubtedly be met by retaliatory measures from China. With no relief yet in sight for EM countries, the risk of contagion to the US stock market, however safe, is likely to increase.

In order to see a strong recovery in gold a combination of US stock market and dollar weakness is needed. Following Friday’s strong US job report for August the FOMC remains on track to hike interest rates two more times this year with the next coming at the September 26 meeting. 

With or without these developments, a break above $1,220/oz as per the chart below is likely to attract some additional buying but whether it will be strong enough the get the short-covering wheel to accelerate remains to be seen.
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Source: Saxo Bank
Energy-related events next week

‍● Sept 11: EIA’s Short Term Energy Outlook
‍● Sept 11: Opec and non-Opec Joint Technical Committee meeting
‍● Sept 12: EIA’s Weekly Petroleum Status Report
‍● Sept 12: Opec’s Monthly Oil Market Report
‍● Sept 13: IEA’s monthly Oil Market Report
‍● Sept 14: Weekly Commitments of Traders reports from ICE and CFTC

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