WCU: Trade deal lifts commodities
Head of Commodity Strategy
Summary: Commodities, not least industrial metals, received a boost this week from news that a phase-one trade deal had been reached. The Bloomberg Commodity Index was 2.2% higher on the week with all sectors recording gains.
Commodities, not least industrial metals, received a boost this week from news that a phase-one trade deal had been reached. The Bloomberg Commodity Index was 2.2% higher on the week with all sectors recording gains. Once signed by both countries it holds a Chinese promise to buy more U.S. agricultural goods while the U.S. would lower some of the existing tariffs. Apart from metals, softs stood out with coffee extending its two-month surge to 45%.
However, several major obstacles remain before all tariffs are removed and a phase-two deal is now unlikely to be agreed until after the 2020 U.S. elections. A phase-one deal may also attract a lot of scrutiny given U.S. expectations that China will buy up towards $50 billion of U.S. agricultural goods, equalling a sum bigger than what China bought in total from the U.S. during the past three years.
Chinese total demand for soybeans, the biggest of these items, is already down on previous years due to the sharp reduction in its flu-hit pig herd. On that basis the market needs to see more details about which products and what timeframe the two sides have agreed upon. The trade agreement helped drive a soybean futures towards a weekly gain of 3%.
Overall commodities received a boost from OECD’s newest update on global leading indicators. They hinted that the global economy turned a corner back in October, moving from contraction phase into the recovery phase. October was also the month when crude oil and copper, both pro-cyclical commodities, began their current recovery. The uncertainty however is still high and adjustments over the coming months could wash away what, on the surface, appears to be a turning point in the global economy.
Industrial metals, led by a recovering nickel, and (surprisingly given the circumstances) precious metals all traded higher on the week. A perfect storm of fundamental and technical news helped palladium race towards $2000/oz thereby supporting platinum which saw its discount to gold narrow to $530/oz, a six month low.
HG Copper’s recent rally through several key technical levels of resistance extended further following the trade news. This has been driven by reports siting a pickup in Chinese demand combined with a drop in inventories monitored by the three major exchanges in NY, London and Shanghai falling to the lowest level since January. Hedge funds covering short positions held since January helped provide the additional momentum driving the market higher.
Crude oil continued to grind higher with support being provided by the trade deal news and the OPEC+ group’s decision to cut its production ceiling by an additional 500,000 barrels/day through to next March. The additional and voluntary 400,000 barrel/day cut announced by the Saudi oil minister at last week’s meeting in Vienna was mostly viewed as the Kingdom’s attempt to drive a $2tn valuation of Aramco. Supported by strong demand and one of the world’s smallest free floats of just 1.5%, that level was reached on the second day of trading. Whether such elevated evaluation can be maintained when the next and much bigger tranche eventually hits the market remains to be seen.
Monthly oil market reports from OPEC, IEA and EIA found a small improvement in the outlook for global oil demand. However, the gap between world demand and rise in non-OPEC supply remains and it highlights the need for OPEC+ to keep production tight, especially during H1’20. Over the coming months the market will be focusing on Iraq and Nigeria to see whether they implement the cuts needed to keep Saudi Arabia content with carrying the main burden of keeping prices supported.
WTI crude oil reached $60/b as the uptrend from the October low extended further. We maintain the view that the oversupplied market situation should keep the upside limited while keeping the price within the range highlighted in the chart below.
Gold continues to defy gravity with the price holding firm despite the loss of support from surging stocks, a trade deal in the making, a reduction in future US rate cut expectations and rising bond yields. The latter has driven a drop in the total amount of global negative yielding debt to $11.5tn, a six-month low. It was the surge to a record $17tn between June and September which helped gold break out of its yearlong range.
Despite these end of year developments gold has stayed firm above its line of support at $1450/oz. While looking a bit tired and potentially in need of a deeper correction to rekindle demand, we maintain a positive outlook for gold into 2020. This belief is based on a continued low yield environment, very compressed equity return expectations and multiple tail risks.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.