Commodities diverge as uncertainty spreads

Commodities diverge as uncertainty spreads

Commodities 6 minutes to read

Ole Hansen

Head of Commodity Strategy

Summary: Growth-dependent commodities such as crude oil and industrial metals remain weighed down by deteriorating macro while precious metals rekindle their safe haven role.

The "synchronised growth to synchronised sell-off" theme I highlighted in last week’s commodity update continues to play out across markets, including commodities. Growth-dependent commodities such as oil and industrial metals remain under pressure with investors and traders becoming increasingly worried about the deteriorating macroeconomic outlook that lies ahead in 2019.

The risk-off move has this week has been amplified by the continued sell-off in US stocks following weak economic data from Europe and China last week.

The Bloomberg Commodity Index, which tracks a broad-basket of futures in energy, metals and agriculture, has dropped to an 18-month low following a year-to-date loss of 8%. A strong dollar, surging US shale oil production, growth worries strengthened by the US-China trade war and an ample supply of agriculture products have all played their parts. Adding to this we have the negative impact of rising price of global money from the Fed’s tightening and the declining quantity of money from not only the Fed’s tightening, but also a tapering of balance sheet growth from both the BoJ and ECB.

These developments together with the reversing of globalisation as the US and China face off over trade were highlighted in Saxo Bank chief economist Steen Jakobsen's latest piece, "the global policy panic".

The most important FOMC decision of this cycle

Stepping into this global mess of uncertainty is the FOMC, which on Wednesday is going to deliver the most important decision during the current rate hike cycle that began back in December 2015. As Saxo FX Head John Hardy wrote in his FX update today, the market is begging for FOMC mercy. Will the Federal Reserve prove willing to pull a dove or two out of its hat, or is Powell determined to hit neutral?

Over 40 basis points of rate hike expectations have been priced out or the December 2019 Fed Funds future since early November and the question Wednesday is now whether Powell delivers a dovish hike (followed by a pause) or no hike at all.

The 30-day Fed Funds forward curve has collapsed since early November with the peak in rates already seen next year.

Crude oil

The sell-off in crude oil has resumed after initially pausing in the aftermath of the Opec+ decision to cut production by 1.2 million barrels/day over the coming months. The limited bounce seen in the aftermath of that decision combined with the continued deterioration in the macro outlook has acted as a red flag, not to the bulls, but instead the bears who have sent WTI and Brent below the psychological important levels at $50 and $60/barrel respectively.

Apart from the stock market sell-off, the latest weakness was driven by the EIA which in its monthly Drilling Productivity Report for January saw US shale oil production rise by 134,000 barrels/day to 8.17m b/d.

Following the renewed weakness below $60/b, Brent crude oil is close to challenging support at $57/b, the 50% retracement of the rally from the 2016 low. A break below would from a technical perspective put $50/b into focus.

Gold

Precious metals, meanwhile, have rekindled their role as a safe haven amid all the uncertainty hitting other markets. This has been most noticeable after hedge funds last week collectively surrendered the bearish beliefs they have held the previous five months. Spot gold is currently testing the recent high while being within striking distance of the 200-day moving average at $1,253.5/oz. We maintain a positive outlook for gold and not least silver, given its historical cheapness to gold, into 2019 with a dovish FOMC and later a weaker dollar providing the support the markets need in order to move higher.

Gold has been in an uptrend since August but only last week did hedge funds revert to a net-long position. Additional gains are therefore likely to attract continued buying from funds as they rebuild long positions. In the short-term the market will be focusing on resistance at $1,253/oz, the 200-day moving average followed by $1,263/oz as per the chart below. Only a break above $1,287/oz will from a technical perspective confirm that this current move is more than just a correction within the downtrend that began back in April.

HG copper

Most industrial metals, and copper in particular, are trading lower today after Chinese president Xi Jinping's keynote speech offered no fresh initiatives to stimulate the country’s economy. The speech was held to mark the 40th anniversary of the Reform and Opening Up campaign that helped trigger the country’s economic boom. HG copper dropped to a one-month low but has so far managed to stay within the sideways trading formation seen since July.

With the combination of the ongoing trade war between the US and China and recent weakness in key economic data such as retail sales and industrial production, the market has been looking for action from the world’s biggest consumer of industrial metals.

While headline risks to copper remain elevated, the fundamental outlook has been providing some support on expectations that the market will tighten into 2019. We favour the upside on the back of increased risk of additional Chinese stimulus measures raising demand at a time where global mine production looks set to contract. The key risk events for industrial metals, apart from Wednesday’s FOMC meeting, will be China’s annual Central Economic Work Conference which kicks off Wednesday and which will run into Friday.

This is the forum where detailed plans for the year ahead are revealed and given the current outlook some additional measures to stimulate the economy may see the light of day.

Quarterly Outlook Q4 2023

Bond. Long Bond(s)

Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.

Steen Jakobsen,
Chief Investment Officer
Read article
The road to a bond bull market is paved, although challenges remain
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.

Althea Spinozzi,
Senior Fixed Income Strategist
Read article
FX: King dollar and its far-reaching repercussions
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.

Charu Chanana,
Market Strategist
Read article
Equities: Higher cost of capital is getting painful
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.

Peter Garnry,
Head of Equity Strategy
Read article
Commodity sector supported by peak rates, tight supply focus
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy

Read article
No one's indestructible
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
Read article
Time to (re)consider bonds
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.

Peter Siks,
Investment Coach
Read article

You can access all of our platforms from a single Saxo account.

Preview platform Open Account

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-sg/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 Markets 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 Capital Markets or its affiliates.

Commodities diverge as uncertainty spreads

Ole Hansen

Share

Latest Market Insights

Quarterly Outlook Q4 2023

Bond. Long Bond(s)

The road to a bond bull market is paved, although challenges remain

FX: King dollar and its far-reaching repercussions

Equities: Higher cost of capital is getting painful

Commodity sector supported by peak rates, tight supply focus

No one's indestructible

Time to (re)consider bonds

Your browser cannot display this website correctly.