Commodity weekly: Rising yields a short-term threat to the commodity bull run

Commodity weekly: Rising yields a short-term threat to the commodity bull run

Ole Hansen

Head of Commodity Strategy

Summary:  Weekly commodity update focusing on the potential short-term negative impact on the sector from spiking bond yields. A development that has triggered higher volatility and with that the risk of deleveraging. Commodities have enjoyed several months of increased attention and the strong momentum across many individual raw materials have led to a speculative buying frenzy. While fundamentals point to further gains over the coming months, the short-term focus may turn to profit taking and deleveraging.


Commodities continue to witness increased attention and demand. Following a near decade of trading sideways to lower, it has embarked on a strong rally with individual commodities reaching multi-year highs. During the past decade we witnessed a period of strength among individual commodities but in recent months it has become noticeably more synchronized across all the three sectors: energy; metals; and agriculture.

However, following the spike in U.S. bond yields this past week, the sectors recent success in attracting record amounts of speculative buying may in the short-term, and despite strong fundamentals, force a correction or at best a period of consolidation. In this update we take a closer look at the reasons behind the rally and why yield moves matter.

There are plenty of reasons why commodities are on the move, but importantly there are expectations for a post-pandemic growth sprint with large amounts of stimulus driving demand for inflation hedges and green transformation themes. This is against a backdrop of the tightening supply of several key commodities following years of under investment. These developments increasingly drive expectations that we have entered a new dawn for commodities, raising the prospect for a new super cycle.

A super cycle is characterized by prolonged periods of mismatch between surging demand and inelastic supply. These supply and demand imbalances take time to correct due to high start-up capex for new projects, alongside the time needed to harness new supply. For example, in the copper industry it can be ten years from decision to production. Such periods often cause companies to postpone investment decisions awaiting rising prices, at which point it is often too late to avoid further price gains.

Previous demand-driven super cycles included rearmament before WW2, and the reform of the Chinese economy which accelerated following its accession to the WTO in 2001. Then, the period prior to the 2008 global financial crisis saw the Bloomberg Commodity Total Return index surged by 215%. Super cycles can also be supply driven with the most recent being the OPEC oil embargo of the 1970’s.

It is expected that the next commodity super cycle will not only be driven by recovering demand, but also heightened inflation risks at a time when investors will need real assets such as commodities to hedge their portfolios following years of sub-par returns. In addition, following a decade when investment in technology was preferred over hard assets there has been a lack of new supply lines. 

Whereas the early November vaccine news coupled with Joe Biden’s winning of the US presidency helped boost the sector, its current rally is almost ten months old (see chart above). Launched last April at the peak of the Covid-19 pandemic's first wave, the initial rally was driven by producers cutting supplies while China embarked on a massive stimulus program to reignite their economy.

Fund positions in key commodities relative to the one-year minimum and maximums showing the extent to which long positions have risen in recent months. Especially within the agriculture and energy sectors.

Strong commodity momentum in recent months, alongside emerging signs of tighter supply, helped attract increased  buying from speculators, some looking for inflation hedges while others simply jumped on board the momentum train. Whereas physical demand and tight supply look set to support prices over the coming months, if not years, the short-term outlook may become more challenging as “paper” investments have been exposed to the reduced risk appetite spreading from the recent rise in bond yields, most notably in real yields.

The emerging tightness across several commodities has, for the first time in seven years, helped create a positive carry on a basket of 26 commodity futures - a key development which has raised the investment appetite from investors seeking a passive long exposure in commodities.

    While most of the rise is being driven by increased inflation expectations through higher break-even yields, rising bond yields are manageable.  During the past few weeks however, the rise in nominal bond yields saw real yields increase faster. This is worrying for the stock market because valuations among many so-called bubble stocks, with strong momentum but no earnings, suddenly look frothy.

    A period of risk reduction driven by falling equities and rising volatility may become the catalyst for consolidation across the commodity sector: caution is warranted during that time. We firmly believe that inflation will eventually rise by more than expected, thereby stabilizing, or perhaps even sending real yields deeper into negative territory. However, with many individual commodity positions at elevated levels, and RSI’s pointing towards overbought markets, the prospect for a correction, or at best a consolidation, will probably prove beneficial for medium-term prospects.

    Finally, a word on gold, one of the commodities that has suffered the most in recent weeks but which potentially also could be one of the first to benefit from the latest bond yield spike.  We have in updates and comments highlighted the risk that gold could suffer until bond yields rose to levels, that could force a response from the US Federal Reserve in terms of introducing measures to prevent longer dated yields from rising further.

    During the past few months gold traded lower despite real yield’s staying close to -1%. That, however changed this week when 10-year real yields at one point spike to -0.55% without gold suffering a similar dramatic sell-off. These developments have brought yields and gold back in line. In the  short-term, gold remains at risk of a deeper correction should it fail to stay above key support at around $1760/oz.

    The copper-gold ratio against US 10-year nominal yields highlight clearly the recent disconnect between rising copper prices indication a return to growth while bond yields stayed low. Under normal circumstances we are now seeing the two get more in line. But these are not normal times and given the risk of a Fed intervening in order to curb yields from rising we could see a major realignment. Primarily from much higher gold prices as real yields would slump as inflation expectations continue to rise. 

    Quarterly Outlook

    01 /

    • Macro Outlook: The US rate cut cycle has begun

      Quarterly Outlook

      Macro Outlook: The US rate cut cycle has begun

      Peter Garnry

      Chief Investment Strategist

      The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
    • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

      Quarterly Outlook

      Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

      Althea Spinozzi

      Head of Fixed Income Strategy

    • Equity Outlook: Will lower rates lift all boats in equities?

      Quarterly Outlook

      Equity Outlook: Will lower rates lift all boats in equities?

      Peter Garnry

      Chief Investment Strategist

      After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    • FX Outlook: USD in limbo amid political and policy jitters

      Quarterly Outlook

      FX Outlook: USD in limbo amid political and policy jitters

      Charu Chanana

      Chief Investment Strategist

      As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    • Commodity Outlook: Gold and silver continue to shine bright

      Quarterly Outlook

      Commodity Outlook: Gold and silver continue to shine bright

      Ole Hansen

      Head of Commodity Strategy

    • FX: Risk-on currencies to surge against havens

      Quarterly Outlook

      FX: Risk-on currencies to surge against havens

      Charu Chanana

      Chief Investment Strategist

      Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    • Equities: Are we blowing bubbles again

      Quarterly Outlook

      Equities: Are we blowing bubbles again

      Peter Garnry

      Chief Investment Strategist

      Explore key trends and opportunities in European equities and electrification theme as market dynami...
    • Macro: Sandcastle economics

      Quarterly Outlook

      Macro: Sandcastle economics

      Peter Garnry

      Chief Investment Strategist

      Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    • Bonds: What to do until inflation stabilises

      Quarterly Outlook

      Bonds: What to do until inflation stabilises

      Althea Spinozzi

      Head of Fixed Income Strategy

      Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    • Commodities: Energy and grains in focus as metals pause

      Quarterly Outlook

      Commodities: Energy and grains in focus as metals pause

      Ole Hansen

      Head of Commodity Strategy

      Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
    Disclaimer

    The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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-hk/legal/disclaimer/saxo-disclaimer)

    None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

    Saxo Capital Markets HK Limited
    19th Floor
    Shanghai Commercial Bank Tower
    12 Queen’s Road Central
    Hong Kong

    Contact Saxo

    Select region

    Hong Kong S.A.R
    Hong Kong S.A.R

    Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

    Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

    The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

    The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

    Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.