Head of Commodity Strategy, Saxo Bank Group
Summary: The early January recovery across key commodities extended into a second week with the Bloomberg Commodity index rallying by more than 4% since touching a near three-year low on the first trading day of year.
Back to the current market, it has been the combination of renewed trade optimism, the US Federal Open Market Committee signalling its willingness to hold back on further rate hikes, combined with a weaker dollar, that have all helped support a major risk-on rally from stocks to high-yield corporate bonds and commodities.
The grains sector found support from the prospect of renewed Chinese buying of agricultural products. For soybeans however, the prospect of a bumper South American harvest hitting the market over the coming weeks could mean that a potential deal between China and the US may arrive too late to ensure a meaningful reduction in US stockpiles and with that, a recovery in the price.
Soft commodities, especially coffee and not least sugar, recovered strongly on a combination of a stronger Brazilian real, and specifically for sugar the prospect of increased cane-based ethanol demand (for fuel) continues its recovery.
After finding support at $50/barrel last month, Brent crude oil has swiftly returned to the November-to-December consolidation area between $57.50/b and $64/b. Just like all other assets it’s the hopes of a deal between the US and China on trade which could reduce worries about the strength of demand going forward. Adding to this, the weaker dollar and not least ongoing production cuts from the Opec+ group, which should further reduce supply over the coming months.
A trade deal between the US and China, however, is likely to slow but unlikely to reverse the deterioration seen recently in forward-looking economic data from the US to Europe and China. On that basis the upside at this stage may be limited and it could lead to slowing upside momentum as we approach the upper area of the abovementioned consolidation zone for Brent at $64/b and WTI at $55/b.
Please note that due to the US government shutdown the CFTC has not issued any Commitments of Traders reports since the week of December 18. The COT report provides an important weekly insight into the size and direction of positions held by hedge funds across key futures markets from currencies to bonds and not least commodities.
The ICE Futures Europe Exchange, however, continues as normal with Brent crude and gas oil data still being published. In the week to December 31 when Brent touched $50/b, hedge funds cut bullish Brent crude oil bets by 10,000 lots to 152,000 lots, a 70% reduction since October when the sell-off began.
Brent crude oil has returned to its November to December consolidation area. Next key resistance at $64/b being the 38.2% retracement of 42% sell-off since October.
The recent dollar weakness, not least against the CNY, has provided a bulwark against the negative impact of surging stocks and rising bond yields. A potential US-China trade deal may give global risk sentiment a further boost but with global growth momentum slowing investors remain cautious and still on the lookout for ways to protect themselves against renewed weakness.
On that basis and with the Fed on pause amid increased economy and policy uncertainty we maintain a bullish outlook for gold.
As noted, due to the US government shutdown data covering speculative positions held by hedge funds has not been available since December 18. During this time however, we have seen a continued rise of holdings in gold-backed ETFs. During the past week total holdings compiled by Bloomberg climbed to 2,234 metric tons. Just 5.5 tons shy of the recent peak from last May, which was the highest in more than five years.
It does, however, show that the momentum and sentiment in the market is back to being bullish. In this particular instance a break would likely coincide with a break above $1,300/oz, a move that would likely attract renewed hedge funds buying.
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