WCU: Trade optimism drives commodities higher WCU: Trade optimism drives commodities higher WCU: Trade optimism drives commodities higher

WCU: Trade optimism drives commodities higher

Commodities 10 minutes to read
Ole Hansen

Head of Commodity Strategy

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.


From an historical perspective we have often found that the initial direction financial markets take at the beginning of a new calendar year can end up being the wrong one. To avoid a turnaround, the market will be closely watching the current trade negotiations and whether China, the US and Europe manage to steer away from a looming economic slowdown. 

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. 
Source: Saxo Bank
As per the table below we find that the recovery has been broad-based and primarily led by a strong recovery in crude oil. The safe-haven asset of gold which rallied strongly during December has despite the recovering sentiment elsewhere managed to hold onto its gains. Perhaps a sign that investors while returning to riskier assets are still buying protection against the risk of renewed weakness related to the continued shaky outlook for global economic growth. 

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. 
Source: Bloomberg
Copper, while still range-bound, headed for its biggest weekly gain in two months on a combination of trade optimism, supportive Chinese economic policies, such as the recent announcement of a 1% cut in the reserve requirement ratio (RRR) and not least the Chinese renminbi. The CNY has rallied to an almost six-month high at 6.74 against the dollar and in the process moved firmly away from the critical 7-dollar level which attracted a great deal of nervous attention back in Q4.  
Source: Saxo Bank

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.

Source: Saxo Bank
The recovery across riskier assets failed to deliver a blow to gold, which after reaching $1,300/oz and after rallying by more than 100 dollars since November, was overdue a correction. However, despite surging stocks and rising bond yields, gold continued to attract demand with buyers on several days emerging ahead of $1,280/oz. 

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. 
Gold has spent the past week consolidating between $1,280/oz and $1,300/oz. The chart below shows the potential for a golden cross occurring as the 50-day moving average moves above the 200-day. A golden cross is a bit like the 20% bull/bear correction. It tends to create headlines but whether it is used as a signal to add position is more doubtful.

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.
Source: Saxo Bank
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.