Head of Commodity Strategy
Summary: Precious metals and energy have reacted strongly in opposite directions after Pfizer and BioNTech earlier today said their coronavirus vaccine was more than 90% effective in preventing Covid-19. Gold slumped by more than 100 dollars while crude oil jumped by close to 10%. We believe both moves set up a mean reversion sooner rather than later.
Precious metals and energy have reacted strongly in opposite directions after Pfizer and BioNTech earlier today said their coronavirus vaccine was more than 90% effective in preventing Covid-19, hailing it a great day for science and humanity.
Coming at a time where Europe and the U.S. are facing a growing number of coronavirus cases, the dramatic shift in focus gave European stocks a major lift while the S&P 500 outperformed the technology heavy, and recently to a certain extent safe haven, Nasdaq composite index
Cyclical commodities depending on growth and demand jumped with crude oil trading higher by 10% while copper extended overnight gains to challenge the October high. Although the timing of a global rollout remains unclear, it is the first major light at the end of the tunnel for parts of the global economy that has been particularly hard hit by the pandemic. Some of these being the airline industry and others depending on our ability to move around.
Brent crude oil which has traded within a downtrend for the past couple of months broke higher, thereby signaling a return to the range that has prevailed since June. Crude oil and commodities in general do not like equities have the luxury of being able to roll forward expectations as supply and demand need to balance every day. With oil in particularly this means that once it is out of the ground, it needs to be stored or consumed.
While today’s news eventually will set oil on the path to a more sustained, we think the market will struggle to break the September high at $46.50/oz before demand begins to recover. The news may also make it more difficult for OPEC+ to agree on a deal to postpone the planned January production hike. Hedge funds cut bullish oil bets ahead of the U.S. election and with rising Covid-19 cases they were unprepared for today’s news, hence the strong upside reaction through short covering and fresh momentum buying.
When asked by a journalist earlier today about the sharp fall in gold and silver I answered that the vaccine can kill Covid-19 but not remove the mountain of debt that has been accumulated during the past six months. By saying this we believe that the fundamental reasons for holding gold has not gone away by today’s announcement. With super loose monetary policy in place across the world – China being the exception - we could see an increased risk of a policy mistake being made. If and when that happens, we may see inflation start to make a comeback, thereby supporting demand for protection.
The sustainability of the gold rally after the U.S. election had already started to fade as dollar weakness was not backed up by lower real yields. The news therefore caught the market off guard and once $1930/oz, last week’s breakout level, was breached, long liquidation and fresh short selling helped drive the market sharply lower. In the short-term we will keep a close eye on 10-year U.S. breakevens (+6bp to 1,72%) and real yields (+5 to -0,79). As long real yields continues to rise, gold will struggle. The potential reflation risk emerging from today’s vaccine announcement probably holds the key to the eventual recovery in precious metals.
We do not believe that the gold market rally, let alone silver, has ended with today’s news. For now however the falling knife risk may keep potential buyers sidelined while waiting for the bounce. In terms of support, the first major level is the 38.2% retracement of the March to August rally at $1836/oz. Above that level the current correction can best be described as being a weak one within the existing bull market.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
