The week ahead in macro
Saxo Bank Head of APAC Macro Strategy Kay Van-Petersen takes a look at the weak ahead with special focus on Sino-US relations into the November 29 G20 summit in Buenos Aires.
Head of Commodity Strategy
Summary: The commodity sector remains on the defensive with rising supply hurting a diversified group of raw materials from crude oil to grains.
Growth concerns in the world’s two biggest economies into 2019 put industrial and semi-precious metals under pressure while gold struggled to build on the recent recovery amid a strong dollar with a hawkish Federal Open Market Committee staying on course to hike rates further over the coming months.
The US midterm election yielded no major surprises with the Democrats, while taking control of the House, failing to create a ‘Blue Wave’. The Republicans did not see a ‘Red Repeat’ but still managed to strengthen their Senate majority. A relief rally was seen in stocks, bond yields resumed their climb while the dollar, after some initial weakness, strengthened once the Federal Reserve indicated it would keep raising rates gradually over the coming months.
The initial impact of the election on commodities has been limited but over time we may keep an eye on the following:
Late-cycle US economic growth not receiving a further boost through tax cuts
Unfunded infrastructure spending impacting industrial metals, budget deficit and bond yields
Opposition against Trump’s deregulatory energy agenda could impact the long-term prospect for US oil production growth
A divided US government potentially weakening the dollar over time
The biggest headline grabber was crude oil, which continued its slump as Iran sanctions worries faded and the world’s biggest producers continued to ramp up production. Overall the energy sector was close to flat on the week with the strongest natural gas surge in two years helping to offset the weakness in crude oil and products.
Natural gas is up by more than 10% on the week as a cold blast across the eastern part of the US has increased the focus on stock levels which will enter the winter peak demand period at a 15-year seasonal low.
Trade war weighs on industrial metals
Industrial metals, more than other sectors, have felt the pressure from a prolonged trade war’s potential negative impact on global growth and demand. Copper has, however, managed to settle into a wide $2.55/lb to $2.85/lb range following the June to July sell-off with support coming from signs a tightening physical market. Chile’s Codelco, the world’s largest copper producer, posted the lowest quarterly output this year after reporting declines across all its mines due to lower ore grades.
A challenging outlook for supply due to lower grades and lack of investment has already led to speculation that a structural deficit may emerge over the coming years, something that could see copper and other industrial metals move higher. Not least if both China and the US were to opt for increased investment in infrastructure projects.
Gold is currently stuck in a range between $1,210/oz and $1,240/oz with the October recovery primarily driven by short-covering from hedge funds. Back then they found themselves holding a record and, in the end, unsustainable short position amid emerging signs of safe-haven and diversification demand as the stock market rout unfolded and bond yields jumped.
Following a 55% reduction during the past three weeks the tailwind from buyers covering bearish bets has now faded. With risk appetite for stocks and the dollar returning together with the Federal Reserve continuing to hike rates, the bears at this stage are once again looking to take control. Not helping the sentiment has been and even bigger sell-off in silver, which remains troubled by its link to under-pressure industrial metals.
In the belief that the stock market recovery is on its last leg and that a strong dollar remains unsustainable we maintain the view that investors will continue to look for alternative investments. This will be done both as a hedge against the risk of inflation and an emerging positive correlation between stocks and bonds.
Gold is currently trading within a 31-dollar range. A break below $1,201/oz and more importantly $1,191/oz would see the bears back in charge. Potential buyers, meanwhile, are likely to sit on the fence and wait for a break above $1,243/oz, a move that would force renewed fund short-covering.