Commodities jolted on Pfizer vaccine news

Cyclical commodities depending on growth and demand jumped with crude oil trading higher by 10% while copper extended overnight gains to challenge the October high. Although the timing of a global rollout remains unclear, it is the first major light at the end of the tunnel for parts of the global economy that has been particularly hard hit by the pandemic. Some of these being the airline industry and others depending on our ability to move around. 

Brent crude oil which has traded within a downtrend for the past couple of months broke higher, thereby signaling a return to the range that has prevailed since June. Crude oil and commodities in general do not like equities have the luxury of being able to roll forward expectations as supply and demand need to balance every day. With oil in particularly this means that once it is out of the ground, it needs to be stored or consumed.

While today’s news eventually will set oil on the path to a more sustained, we think the market will struggle to break the September high at $46.50/oz before demand begins to recover. The news may also make it more difficult for OPEC+ to agree on a deal to postpone the planned January production hike. Hedge funds cut bullish oil bets ahead of the U.S. election and with rising Covid-19 cases they were unprepared for today’s news, hence the strong upside reaction through short covering and fresh momentum buying.

When asked by a journalist earlier today about the sharp fall in gold and silver I answered that the vaccine can kill Covid-19 but not remove the mountain of debt that has been accumulated during the past six months. By saying this we believe that the fundamental reasons for holding gold has not gone away by today’s announcement. With super loose monetary policy in place across the world – China being the exception - we could see an increased risk of a policy mistake being made. If and when that happens, we may see inflation start to make a comeback, thereby supporting demand for protection.

The sustainability of the gold rally after the U.S. election had already started to fade as dollar weakness was not backed up by lower real yields. The news therefore caught the market off guard and once $1930/oz, last week’s breakout level, was breached, long liquidation and fresh short selling helped drive the market sharply lower. In the short-term we will keep a close eye on 10-year U.S. breakevens (+6bp to 1,72%) and real yields (+5 to -0,79). As long real yields continues to rise, gold will struggle. The potential reflation risk emerging from today’s vaccine announcement probably holds the key to the eventual recovery in precious metals.

We do not believe that the gold market rally, let alone silver, has ended with today’s news. For now however the falling knife risk may keep potential buyers sidelined while waiting for the bounce. In terms of support, the first major level is the 38.2% retracement of the March to August rally at $1836/oz. Above that level the current correction can best be described as being a weak one within the existing bull market.