WCU: Commodities ride high as trade talks dominate the agenda WCU: Commodities ride high as trade talks dominate the agenda WCU: Commodities ride high as trade talks dominate the agenda

WCU: Commodities ride high as trade talks dominate the agenda

Commodities 10 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Commodities traded higher for a second week running with the Bloomberg Commodity Index reaching a ten-week high, in line with strong advances across a range of global asset classes.

Global markets from stocks to corporate bonds and commodities have experienced strong performance in recent weeks on upbeat comments from US and Chinese trade negotiators. The attention has been so intense that markets have struggled to hear the drumbeat from weak economic data growing ever louder.

The latest string of trade talk headlines has raised hopes of a market friendly US-China trade deal, but by the time this deal rolls in, we wonder if the market will even be able to muster a reaction, given how far the bounce in sentiment has taken us from the late December lows. US President Donald Trump will meet with China’s top trade negotiator on Friday to drum up a preliminary deal before a Washington-imposed deadline on March 1. 

The rally in commodities was driven by industrial metals where supply concerns supported both nickel and copper. Palladium hit a fresh record as demand from the automobile industry continued to outstrip supply. Gold hit our soon-to-be-adjusted year-end target before running into another round profit taking. The energy sector continued to show strength amid continued cutting efforts by the Opec+ group of nations and the mentioned trade talk progress.
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Source: Bloomberg
HG copper broke higher following several months where supply worries helped offset the headline risks associated with the US-China trade war and weaker economic data. Glencore, at the presentation of their quarterly result, joined other miners in flagging supply concerns from India, Peru and Africa. Adding to this, we have support from China where a stable to stronger yuan and looser credit conditions have boosted sentiment.

The focus on tightening supply has also helped copper buyers draw some inspiration from palladium, which despite slowing car sales has surged. This week it reached a record $1,500/oz due to the prospect of strong demand due to stricter emissions standards outstripping supply over the coming year. The upheaval seen in platinum group metals following the diesel scandal in 2014 has seen palladium move from a discount of $700/oz to a record $650/oz premium over platinum.

Staying with copper the latest (but still delayed) Commitments of Traders report from the US CFTC covering the week to January 29 showed a managed money short of 40,300 lots, not far from the June 2016 record of 47,100 lots. A 6% rally since then is likely to have attracted a significant amount of short-covering. Whether a long position has been established ahead of the price breakout this past week, however, remains to be seen. The CFTC will not be up to date before March 8 when data covering the week to March 5 will be published.

Following months of rangebound trading, high grade copper has broken above $2.84/lb to target the next level of resistance at $3.02/lb:
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Source: Saxo Bank
Crude oil continued to be carried higher on a combination of trade optimism and voluntary as well as involuntary supply cuts from Opec and Russia. Against this a surge in US crude oil production to 12 million barrels/day attracted plenty of headlines but limited market reaction. While the Opec+ group of nations will continue to curb supply and support the market the risk is rising that the market has already priced in a positive outcome of the trade talks between the US and China. 

Recent economic data continues to point to economic weakness, something a trade deal would struggle to arrest at this point. Weak data from Germany and Japan this past week was followed by the extreme negative surprise from the February US Philly Fed survey. It registered its lowest reading since May 2016 and its worst drop in the new orders component since 2008. US core durable goods orders were also weak in December as were US existing home sales in January.
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Both Brent and WTI crude oil broke higher to reach three-month highs and in the process almost clawed back half of what was lost during the October to December sell-off. In Brent crude oil, speculators have increased bullish bets to 266,057 lots, a 15-week high. Short-covering during December and January has now been replaced by a noticeable pick-up in fresh buying. Data covering WTI crude oil positioning will not be up to date for another two weeks.

At this stage we find limited upside potential given the continued weakness in economic data and the risk of the market running into buying fatigue as a trade deal increasingly has been priced into the market.

Brent crude oil will be facing a band of resistance between $68.3/b and $70/b while support can be found at $64/b
Source: Saxo Bank
Gold almost reached our end-2019 target of $1,350/oz before running into profit taking. A short-term correction phase could see the metal revisit and potentially test support at $1,300/oz. Overall, however, we maintain a bullish outlook for the yellow metal given the prospect of a weaker dollar, stock markets having run ahead of themselves to the upside and bond yields telling us all is not well across some of the major economies. The biggest risk to this assumption apart from renewed dollar strength is another turnaround from the Federal Open Market Committee where recent dovish comments has led to an 87% probability of no rate change this year. 

The upside focus remains the major band of resistance between $1,365/oz and $1,380/oz where gold has peaked out on several occasions since 2016.

Investors looking for alternative metals to gold and palladium may begin to consider platinum which has seen its discount to palladium hit a record $650/oz. The prospect of carmakers beginning to make moves towards switching between the metals may provide the support needed for platinum to break higher.

Relative value traders also may start to take a closer look at platinum as an alternative to gold. The current discount to gold of close to $500/oz and the above-mentioned talk about switching could be the trigger needed to rekindle investor interest in a metal that has been struggling during the past year.

The biggest risk in the short term is the potential for a crash in palladium which has surged to a record $1,500/oz this week. High demand from automobile makers to meet stricter emissions standards and tight supplies, however, is unlikely to trigger a reversal anytime soon. 

The weekly chart looks constructive above $833/oz. The blue line represents the trend-line from the 2008 record high at $2,300/oz.
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Source: Saxo Bank

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