Head of Commodity Strategy
Summary: Gold, crude oil and copper put in different responses to last night's US rate hike, but given the Fed's unexpectedly hawkish tone, what's the outlook like for these three bellwether commodities in the months ahead?
The Federal Open Market Committee and Chairman Powell stood their ground yesterday as they unanimously decided to hike the Fed funds rate by another 0.25% to 2.5%. While the rate hike was dovish given the lowering of their forecast for hikes next year, the market had clearly been looking for a stronger dovish shift. The subsequent press conference turned out to be far less dovish than anticipated as Powell touted the strength of the US economy, robustly defending the Fed’s independence when asked about Trump’s tweets. He even went out of the way to praise the Fed’s Quantitative Tightening (QT) schedule.
Judging from the reaction in stocks and not least US Treasuries, the market seems to be telling us that the Fed is making a policy mistake that it will eventually be forced to reverse. The yield on US 10-year notes dropped to 2.75%, the lowest since April, while the 2-10-year spread flattened further to reach 10 basis points.
While the FOMC was busy looking at incoming data, the market has been looking forward and is clearly seeing much bigger clouds on the horizon. Commodities reacted differently with growth dependent commodities such as crude oil and industrial metals falling while safe-haven assets such as gold remained firm despite some initial dollar-related weakness.
Gold, which reached a five-month high ahead of the announcement, ran into some initial profit taking as it reacted to the initial dollar strength following the rate hike. But the subsequent sell-off in stocks and drop in bond yields soon attracted renewed buying interest and given the troubled economic outlook into 2019 we see the upside potentially for gold as strengthened further by the Fed’s decision.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
