Head of Commodity Strategy
Summary: The commodity sector suffered broad losses this past week with China-centric commodities leading the decline on concerns about growth in the top consuming nation. In addition the continued spreading of the Delta coronavirus variant helped trigger reduced mobility across some of the world's major economies. All topped up with a firmer greenback as the general level of risk appetite faded ahead of a possible taper announcement from the U.S. Federal Reserve.
The commodity sector suffered broad losses this past week with China-centric commodities leading the decline on concerns about growth in the top consuming nation. In addition, and from a short-term perspective, more worrying is the continued spread of the Delta coronavirus variant leading to temporary lockdowns and reduced mobility across some of the world’s major economies. Headwinds that were topped up with the prospect for an earlier-than-expected return to a tightening regime by the US Federal Reserve helping put upward pressure on the dollar, thereby reducing the risk appetite across markets.
In Asia, the South Korean and Chinese equity markets are sounding alarm bells with the KOSPI 200 touching the lowest levels since January while the CSI 300 is down 9% for the year. The technology crackdown and changing priorities in China, including its new data privacy law, are causing a reversal of global money flows from Asia to other regions, especially the U.S., which helps to explain the near-record levels despite emerging clouds on the economic horizon.
Fading risk appetite on fears the Delta virus strain and U.S. tapering could derail the global recovery helped drive the Bloomberg Dollar Spot Index to its biggest weekly gain in two months and highest level since November. Combined, these developments have all raised doubts about the short-term direction of commodities, and the performance table shows how just a couple of commodities avoided taking a hit this past week. Somewhat offsetting the stronger dollar were stable to lower US Treasury yields in response to lower commodity prices reducing inflationary pressures and also the big question whether the global economy, including the U.S. has already passed ‘peak growth’ thereby reducing a future rate hike trajectory.
Container rates: The cost of shipping goods, including several raw materials, by container across the world continues to rise. This week, the Drewry Composite Container Freight Index reached $9,600 for a 40 ft container. The index is derived from the cost of shipping a container across the major routes from Asia to Europe and the U.S. as well as across the Atlantic. The index is currently exceeding the five-year average by a factor of six and it highlights the continued challenges across the global supply chain.
The biggest rise this past week was seen on the U.S. West Coast, as the biggest trade gateway with Asia is clogged with inbound container vessels, thereby delaying turnarounds and the availability of containers elsewhere. Furthermore, the world’s third-busiest container port, China’s Ningbo-Zhoushan, has remained partially closed for a prolonged period due to Covid-19 outbreaks.
Precious metals: While silver struggled due to the general weakness across industrial metals, gold managed to build on the strong technical signal from the previous week, when a rising yield-driven crash was followed by a strong bounce. The relative support for gold, despite the stronger dollar, has been driven by some haven demand which apart from gold also managed to keep bond yields down, even with the increased taper risk signaled in the minutes from the latest FOMC meeting.
The market may also conclude that the virus-related turnaround in consumer sentiment since that meeting may cause the FOMC to think twice before hitting the taper button. An example of this was seen in New Zealand this week where a Covid-19 outbreak led to renewed lockdowns and the cancellation of an expected rate hike by the RBNZ.
The short-term outlook remains challenged by the risk of yields and the dollar both moving higher ahead of the August 27 meeting of central bankers at Jackson Hole, the annual symposium which in the past has been used to send signals of changing policies or priorities to the market. Speculators have responded to these potential headwinds by making deep cuts in their net long positions in CME futures. The net long slumped by 52% to 5.1 million ounces in the week to August 10. The reduction was driven by a 2.6 million ounce drop in the gross long while the naked short jumped by 2.9 million ounces to a 26-month high. In order to squeeze out these recently established short positions, and for gold to shine again, it needs to break decisively above $1830/oz.
Copper slumped to a four-month low with the break below trendline support in the $4.2 area attracting fresh selling from tactical shorts. It traded below $4/lb before managing a small bounce ahead of the weekend. The metal together with iron ore, the most China-centric commodity has been hurt by the recent weakness in Chinese economic data, the spreading of Covid-19 and a firmer dollar. While the short-term technical outlook has deteriorated and the price potentially could drop as far as $3.77/lb, the long-term bullish outlook for copper remains. Not least considering the global green transformation push which over time is expected to create an increasingly tight market. Against the mentioned headwinds, we should not forget a potential threat to supplies from strike actions in Chile, the world’s biggest producer.
High Grade Copper crashed below $4.2 with the next major level of support at $3.77
Brent crude oil dropped to the lower end of the $65 to $75 range, that we could see prevail for the remainder of the year. We see reduced risk of a slump below this range on expectations OPEC and friends may step in and announce measures to support the market, potentially by postponing agreed production hikes until a clearer demand picture emerges. Crude oil has been on the defensive this month since the number of Covid-19 cases in China and the U.S. began rising, thereby clouding the demand outlook in the world’s biggest importer and consumer of crude oil.
Adding to current price risks, apart from demand concerns and the general level of risk adversity sending the dollar higher, was weekly data from the EIA showing US drillers, in response to the earlier price surge, are pumping the most crude in a year. In addition to an expected seasonal slowdown in demand, perhaps strengthened by the Covid-19 surge, and the market is suddenly looking less tight than what was expected just a few weeks ago.
A new fragmented world order can render some of today's infrastructure obselete, but it also calls for massive new investments across the globe, which requires a new set of strategic and tactical investment strategies.
Steen Jakobsen,
Chief Investment Officer
As globalisation turns to fragmentation, China seems set on playing a role in the global economy, while simultaneously working towards proofing its own economic situation from external shocks and crises.
Redmond Wong,
Market Strategist
The recent bank runs and ensuing challenges are reminicent of something we've seen before. Will it end like the S&L crises of 1986 and 1995?
Chris Dembik,
Head of Macroeconomic Research
Equity markets need to recalibrate to another - fragmented - global world. What's your view on equities in this market - are they going up or down?
Peter Garnry,
Head of Equity Strategy
With every development comes new opportunites, some of which could be in India. Have you considered the country as a part of your diversification strategy?
Charu Chanana,
Market Strategist
A collar is an option strategy that allows some protection while maintaining some upside potential. What investment would you like to use a collar strategy for?
Hans Oudshoorn,
Trainer Academy
There are arguments to be made for many commodities to have upside. Which are you paying the most attention to this quarter?
Ole S. Hansen,
Head of Commodity Strategy
In a very challenging macro environment, which currencies do you think will come out on top?
John J. Hardy,
Head of FX Strategy
