WCU: Commodities remain the hot property of 2021
Head of Commodity Strategy
Summary: The "everything rally" in commodities continues to gather steam with the Bloomberg Commodity Spot index rising for the fifth straight week to reach its highest level since 2011. Spurred on by multiple factors from a vaccine-led rebound in global growth, transportation bottlenecks crimping supplies, weather concerns in key growing regions along with rising inflation concerns and a speculative frenzy triggering increased investment demand
The “everything rally” in commodities continues to gather steam with the Bloomberg Commodity Spot index rising for the fifth straight week to reach its highest level since 2011. Spurred on by multiple factors from a vaccine-led rebound in global growth, transportation bottlenecks crimping supplies, weather concerns in key growing regions along with rising inflation concerns and a speculative frenzy triggering increased investment demand.
All the major commodities traded higher this past week led by iron ore, Arabica coffee, corn and lumber. Metals of all colors rallied as well with copper reaching a record high while gold, supported by silver, managed to break above $1800. The energy sector came bottom with crude oil, rightfully so, struggling to break higher with virus outbreaks in Asia creating a very uneven demand recovery.
On a macroeconomic level, both the dollar and US Treasury yields provided further support with the Greenback trading softer and nominal yields holding steady. The latter receiving a great deal of attention with rising inflation focus sending 10-year breakeven yields to an eight-year high and real yields back down towards minus 1%.
One of the biggest concerns related to the current surge in global commodity prices is the impact rising food costs have on those populations and economies that can least afford it. The UN FAO’s Global Food Price index, which tracks a basket of 95 food quotations from around the world, surged higher in April to record an annual rise of more than 30%. Food inflation has not risen this fast since 2011 - when higher food prices helped trigger the Arab Spring - with all sectors rising led by a 100% jump in edible oils, sugar 58% and cereals at 26%.
Grain futures in Chicago remain the key engine behind the continued rally across the agricultural sector. Persistent drought concerns in Brazil and strong demand from animal feed producers have buoyed the corn market while also adding renewed support to sugar and coffee prices. Corn, wheat and soybeans all trade at fresh eight-year highs, while Arabica coffee has reached a four-year high above $1.5/lb
Technical comment on Arabica coffee: After breaking previous resistance at $1.40, the uptrend has accelerated with several indicators supporting the underlying bullish sentiment. To demolish the current positive outlook, a close below $1.3950 is needed in the short term while the longer-term bullish picture remains intact above $1.20. Upside focus now the 2017 high at $1.57.
Copper reached a record high above $10,300 per tons on the London Metal Exchange and $4.72/lb in New York. Copper is front and centre in the rally that is currently driving raw materials to multiyear or even record highs. Being an integral part of the green transformation process through the rollout of millions of electricity-hungry vehicles over the coming years, copper has surged higher on a combination of both physical but also paper demand from investors looking for inflation hedges in markets with a strong fundamental outlook. An outlook that according the Glencore and Trafigura, two physical commodity titans, could see the need for 50% higher prices in order to provide mining companies the economic incentive to increase the search for additional supply.
Technical comment on High Grade: Copper’s strong uptrend during the past year has seen the price not only double but even accelerating since its latest correction last month. On daily charts, RSI divergence seems to be building which could indicate the short-term risk of the uptrend becoming exhausted, however, a trend change is not in the cards.
Brent and WTI crude oil both lagged the momentum seen across metals and agriculture, and despite increased calls for +70 dollar Brent, the market has sensibly adopted a wait-and-see approach. Before drifting lower, Brent got tantalizing close to $70/b, a level it briefly breached two months ago before suffering a 15% correction. The market, already supported by investment demand, has also increasingly been focused on reopening’s in Europe and the U.S. driving a strong recovery in fuel demand.
Oil bulls, however, may have to remain patient given ongoing production increases from OPEC+, the prospect for a renewed Iran nuclear deal leading to increased production, and not least the current risk to demand in parts of virus-hit Asia. Since late March, Brent crude oil has traded within a four dollar wide uptrend, currently between $66.50 and $70.50.
Precious metals: Having failed on a handful occasions during the past couple of weeks, gold finally managed to mount an attack strong enough to take it above $1800. While lower U.S. real yields and a softer dollar provided the fundamental tailwind the yellow metal needed support from in-demand silver, one of the best performing commodities this week. During the past month, the continued rally across industrial metals have supported silver relatively more than gold. This can be seen through the gold-silver ratio which has been declining since late March.
Silver is currently trading within a rising channel and after hitting the upper end at $27.55 it may need to spend some time consolidating before mounting a fresh upside attempt towards the 2021 high at $30. In order for gold to continue higher, it first needs to establish support above $1795 before chasing after long-term trend following short positions. The next level of upside interest is $1851, the 200-day moving average and 61.8% retracement of the January to March sell-off.