WCU: Gold sold as stocks receive a China boost WCU: Gold sold as stocks receive a China boost WCU: Gold sold as stocks receive a China boost

WCU: Gold sold as stocks receive a China boost

Commodities 10 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  The ongoing risk rally, abetted by central bank and government action, is the dominant factor in the commodities space.

Commodities started March on the defensive as losses across key agricultural products and emerging profit-taking in precious metals more than offset gains especially among industrial and platinum group metals. Continued investor appetite for global stocks was led by strong markets in Asia, not least in China. 

Central bank and government action has in recent weeks provided market-supportive fiscal and monetary stimulus. These developments have supported a 28% surge in the CSI 300 index since the beginning of January. Adding to the bullish sentiment this week was confirmation from the MSCI that it will raise the weight of Chinese stocks in its global emerging markets index. 

Strong US data helped send yields higher and the Japanese yen to a 10-week low at ¥112 to the dollar, thereby supporting the risk-on sentiment. US inflation expectations, meanwhile, continued to climb higher towards 2%, raising some early warning signs that the market’s dovish belief in no further US rate hikes may be challenged sooner rather than later. 

So far, these developments (especially in China) have led to speculation about increased demand for industrial metals while easing fears about slowing demand growth for crude oil. 
Source: Bloomberg
The agriculture sector remains the most challenged among the three major commodity sectors. Weakness was led by the grains sector with the Bloomberg Grains Index heading for a record low close. This comes after the May CBOT Wheat contract dropped hard in response to weak US export sales amid continued stiff competition from other producers and ahead of what is expected to be another bumper 2019 crop. Because of this weakness, the premium to corn hit a contract low of just 86 cents/bushel – well below the one-year average at 155 cents/bushel. 
Wheat and Corn
Source: Saxo Bank
Precious metals suffered from the aforementioned risk appetite across other assets with gold seeing its biggest weekly decline since November. A combination of continued demand for stocks, a stronger dollar, rising US bond yields and the recent rejection at $1,350/oz all helped attract profit-taking. 

After reaching a six-year high on January 31, total holdings in bullion-backed ETFs have since seen a continued decline throughout February.   

While gold’s six-month rally showed signs of pausing, platinum has picked up the baton to emerge from gold’s shadow. The combination of the continued rally in palladium and a record discount to gold has helped attract renewed (speculative) demand. During the past two weeks, the discount to gold has collapsed by more than $80 to $440/oz. The white metal is not facing the same amount of strong resistance that has helped trigger profit-taking in gold. 

Gold has gone looking for support after breaking the uptrend from November. The first level of support at $1,300/oz is followed by the more important $1,275/oz – a level that represents the January consolidation low and the 38.2% retracement of the August to February rally.
Source: Saxo Bank
High-grade copper was a star performer during February on the back of tightening supply and optimism on several Chinese fronts. However, with a positive outcome of the US-China talks almost fully priced in and the dollar grinding higher we see the risk of a short-term pullback to test support. 

Supporting the rally has been a recent decline in copper stocks held at London Metal Exchange-monitored warehouses to the lowest since 2005. While this has created a sense of tight supply, we have simultaneously seen a strong increase in deliverable stocks at the Shanghai Futures Exchange.

HG Copper is showing signs of consoldation and with that the risk of a short-term reversal towards the highlighted area below $2.8650/lb.
Source: Saxo Bank
Crude oil experienced a roller-coaster week at the hands of another Trump tweet and continued supply cuts from the Opec+ group of producers. The recent rally in WTI and Brent crude oil towards $60/b and $70/b respectively once again caught the attention of President Trump. In a tweet last Monday, he once again went after Opec and asked the cartel to “take it easy” on production cuts, saying that the world is too “fragile” to handle price hikes at this stage. 

Following the initial sell-off, the market quickly recovered after comments from the Saudi Minister of Energy saying that the current production cut deal could be extended into the second half of the year. The minister is playing it safe with this comment to make sure that the market refrains from selling oil in response to rising US shale production and before the price-supportive tightness becomes visible in the data.

In addition, Russia’s Energy Minister Alexander Novak was out saying that Russia has cut output by close to 150,000 barrels/day and that it will reach its 228,000 b/d target by early April. 

The extent to which Opec has cut production in recent months was seen in the monthly production survey carried out by Bloomberg. In February production from its members slumped by 560,000 barrels/day to 30.5 million barrels/day, a near four-year low.
Opec total production
Source: Saxo Bank
Speculators increased bullish Brent crude oil bets by 10.7k lots to 275k lots in the week to February 19. Seven weeks of buying, however, began to show signs of fading with fresh short-selling emerging last week despite the technical break above $64/b witnessed during the week in question. 

On the back of this observation and a continued drop in open interest on the Brent futures contract since February 15, we suspect macro funds have started to fade (sell into) the current rally in the belief that economic headwinds may offset the positive impact of production cuts. 

Macroeconomic uncertainties still exist but the drumbeat of worsening economic data has so far been difficult to hear amid all the hype about the potential positive impact of a trade deal. We suspect that most of the positive impact of a deal has been priced in, particularly considering that global stocks have returned to their pre-trade war levels – an unsustainable height given the raised recession risk currently emerging across the world.

Despite supportive fundamentals, as supply tightens we see the short-term risk of a deeper correction than the one seen post- the Trump tweet. Just like gold has broken its uptrend, the same could happen to Brent crude on a break below $65.30/b. This would potentially create a period of consolidation with support at $64/b and ultimately $60/b being tested. 
Crude oil
Source: Saxo Bank

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.