Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Head of Commodity Strategy
Summary: Vaccine and stimulus optimism continue to propel stock markets and commodities higher, and the dollar lower. Commodities, especially industrial metals, crude oil and fuel products, have responded strongly to the prospects that already strong demand from Asia, led by China, will increase further once Europe and the U.S. emerge from underneath the Covid-19 cloud. We also take a closer look at the risk of rising input costs as seen through rising freight costs
Vaccine and stimulus optimism continue to propel stock markets and commodities higher, and the dollar lower. Since the first of a several encouraging vaccine announcements on November 9 from Pfizer/BioNTech, many markets, especially stocks related to technology and a certain car company, have all behaved as if they have been injected by steroids. Thereby creating market conditions which most of all resembles the weeks leading up to the bursting of the tech bubble two decades ago. With this in mind, we see an increased risk of the ‘party’ sooner or later being disrupted by a reality check.
Commodities, especially industrial metals, crude oil and fuel products, have responded strongly to the prospects that already strong demand from Asia, led by China, will increase further once Europe and the U.S. emerge from underneath the Covid-19 cloud. In doing so, some markets, especially the energy sector, have managed to shrug off a renewed slowdown in fuel demand as the coronavirus case count and number of deaths continue to rise.
Gold continued to consolidate with the current lack of momentum into the low liquidity time of year raising the risk of increased volatility. Especially after its return to relative safety above $1850/oz lasted less than a day. Silver, meanwhile, also turned lower after being forcefully rejected at $24.80/oz. As mentioned, we have entered the time of year where profits are being defended and where a lack of momentum can cause some major price swings. Markets that currently lacking momentum are precious metals and more recently platinum, while copper has yet to break levels that may cause a sweat among speculators holding elevated long positions.
Industrial metals prices continued to rally this past week with traders in Asia driving key commodities from copper to iron ore to fresh seven-year highs. Iron ore has jumped by more than 40% and on Friday it reached $160/tons in Singapore before some profit taking emerged. This was driven higher by a cocktail of lower supply estimates from Vale, the world’s biggest producer, after November shipments from Brazil dropped to a six-month low, robust Chinese demand from infrastructure stimulus which has run down inventories and not least speculation which is currently running wild.
HG copper, meanwhile, almost touched $8000/t on the London Metal Exchange before profit taking emerged. At the same time and completely unrelated, the cost of cotton hit a 19-month high after the U.S. Department of Agriculture slashed its world stocks forecast with production in 2020-21 cut to a four-year low amid lower production in India, Pakistan and not least the U.S.
If Doctor Copper has a Phd in economics, due to its usefulness in determining the health of the global and particularly the Chinese economy, one could argue that Doctor Cotton has a Phd in consumer behaviour given its use to make a number of textile products. Jokes aside, what both of these developments highlight is the risk of rising input costs becoming a theme into 2021.
Staying with the rising input cost theme, during the past couple of months we have seen a dramatic spike in the cost of shipping containers from China to the rest of the world. The stimulus and government handouts in Europe and the U.S. during the first phase of the pandemic helped create a massive boom in consumer spending. A lot of that stimulus has been sent to China in exchange for consumer goods while demand from China into the same markets has been relatively weak. These developments have dislocated the market with ports around the world being full of empty containers that need returning to China. As a result, the cost of hiring a 40-foot container from Shanghai to Los Angeles has surged above 4,000 dollars and to Rotterdam above 4,500 dollars, both from a five-year average close to 1,500 dollars.
Crude oil continues higher and during the past month both WTI and Brent, the two global benchmarks, have rallied by close to one-quarter. This week, Brent crude oil returned to $50/b for the first time since Saudi Arabia’s ill-timed price war declaration in early March. Happening during a week where U.S. inventories of oil surged and demand for fuel slowed further amid an out-of-control pandemic highlights to what extent the market is prepared to look beyond weak short-term fundamentals towards expectations of a brisk vaccine-led recovery, primarily towards the second half of 2021.
Given the way Brent has behaved since June around the key technical Fibonacci levels highlighted in the chart, it makes sense to expect that the market may now try to consolidate around current levels. While the stock price of energy companies can rally in the expectations of a future recovery in oil prices and earnings, the physical oil market needs to balance on a daily basis in order to avoid a price negative inventory build-up. Given the current headwind from lockdowns across the world, the price of oil currently risks running too far ahead of what can be justified by current fundamentals.
Finally this past week, the strategy team at Saxo Bank released its ten Outrageous Predictions for 2021. In its 20th year, the publication gives us the opportunity to think outside the box and speculate about events or developments which, if realised, could have a profound impact on the markets. It is not an exercise in being right more than its an attempt to challenge how we view the markets.
Steen Jakobsen, our Chief Investment Officer, in his introduction writes: “For the 2021 batch of Outrageous Predictions, we decided for the most part to don our futurist caps rather than getting too bogged down in market trends and central bank policies. That is largely because the Covid-19 pandemic and the painful U.S. election cycle have brought what might have seemed a distant future a quantum leap closer, accelerating nearly every underlying social and technological super-trend. Simply put, the traumas of 2020 mean that in 2021, the future is now”.
In our commodity related OP-21 titled "Sun shines on silver, which sizzles on solar panel demand" we speculate that a combination of the green transformation, a weaker dollar and the rising threat of inflation could see the price of silver double to an all-time high of $50/oz.
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