WCU: Commodities look to Fed and bonds for guidance

Ole Hansen

Head of Commodity Strategy, Saxo Bank Group

Summary:  For the second week running, the Bloomberg Commodity Index traded lower as the price hovered close to a three-year low. The weak sentiment continued to be led by global growth concerns, ample supply of key commodities and this past week also renewed dollar strength


Note: This update was written before Fed Chair Powell’s speech at Jackson Hole at 2pm GMT on Friday

For the second week running, the Bloomberg Commodity Index traded lower as the price hovered close to a three-year low. The weak sentiment continued to be led by global growth concerns, ample supply of key commodities and this past week also renewed dollar strength. Industrial metals and key crops bore the brunt, while crude oil headed for its first back-to-back weekly gain since June. Gold traded lower in a relative tight range at around $1500/oz. while it waited for Fed Chair Powell’s Friday speech at the Annual Federal Reserve Policy Symposium in Jackson Hole, Wyoming.

Some of the profit taking in gold was triggered by the release of the minutes from the July 31 Federal Open Market Committee (FOMC) meeting. It raised the odds for a disappointing speech, from a cutting perspective. This removed the up until now 20% probability of a surprise 50bp interest rate cut on September 18.

US traded natural gas suffered the biggest weekly loss as it got caught up in the cross-hairs between surging production, up 8.8% year-on-year and the prospect for cooler weather reduction demand from power plants.

Source: Bloomberg, Saxo Bank

All major crops traded lower with corn reaching a three-months low thereby further raising the pressure on US farmers. Following one of the wettest planting seasons on record the market was waiting for the result of the annual Pro Farmer Midwest Crop Tour, due August 23. The goal of this annual scouting trip into the fields is to provide the industry with accurate yield assessments for corn and soybeans. Recent above analyst projections from the US Department of Agriculture has been met with a great deal of anger from farmers who questioned the accuracy the government reports. With no end in sight to the trade war farmers are increasingly blaming Trump which could dampen his chances of being reelected in 2020. 

High Grade copper continues to hover just above key support at $2.55/lb, after failing to trigger a short-covering rally above $2.65/lb. Speculators who are using metal as a hedge against recession currently hold a near record short according to the weekly data from the US Commodity Futures Trading Commission (CFTC). We compile a weekly report on Monday where we break down and analyse the findings from the ‘Commitments of Traders’ update.

We maintain a bullish outlook for gold with the technical target being $1585/oz. However, in the short-term the elevated long remains a challenge with the market in need of a catalyst to send it higher in order to avoid the temptation to book profit. On that bases, potential buyers may need to stay patient with key supports below $1500/oz being $1480/oz, the August 13 washout low followed by $1468/lb as per the chart.

Source: Saxo Bank

The mountain of negative yielding bonds currently $16 trillion and renewed Fed interest rate cutting cycle together with the chance for of renewed quantitative easing measures (QE) remain the key pillars of support for gold. Adding to this the increasingly unpredictable behavior of the US President as recession risks rise and the 2020 election gets closer as well as the trade war between the US and China and continued central bank buying.

Preliminary data for July shows that central banks led by Russia, China and Kazakhstan continued to increase official gold reserves. At its current pace the official sector buying is on track to exceed last year’s record 650 tons of buying.

In the short-term gold has run out of steam with profit taking emerging following a $265 rally since May. Higher bond yields, stocks and dollar this past week have all contributed to the first weekly drop in four thereby creating the first major challenge for investors currently holding an elevated “paper” long through futures and exchange-traded funds. However, given the size of speculative positions, especially the near record long held by funds in futures, the setback so far has been relatively small and points to continued support.

Platinum, supported by palladium, found a bid and once again tried to challenge the downtrend from 2011. The combination of profit taking in gold at a time where the speculative long is near a record and a much smaller net-long in platinum, below its five-year average, has supported a $45 reduction in the spread to $635.

Crude oil remains stuck with the relief rally in recent weeks not removing the fear that recession risks could still lead to another drop in the market. The price was supported by renewed US-China trade hopes and another weekly drop in US crude stocks. Not least at Cushing, the delivery hub for WTI crude oil futures, after improved pipeline capacity from the Permian Basin to refineries and export terminals on the U.S. Gulf Coast have resulted in crude oil flowing away from Cushing since June.

The reduction in stocks have supported WTI crude oil while Brent crude oil has struggled relatively given it is the preferred contract by macro funds looking for a hedge against recession. The prompt spread between the two contracts have dropped back to $4.5/b from above $10/b back in June due to these factors.

We maintain a neutral outlook for oil given the strength of the opposing forces currently at play. From a chart perspective, both contracts remain in a downtrend with WTI currently showing the best prospects of challenging resistance. The closest level to watch being $56.5/b, the 200-day moving average, followed by $57.8/b, the trendline from the April high. 

Source: Saxo Bank

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