Over the past two months, equity markets have been hitting new highs—exhibiting a “risk on” sentiment. With the exception of energy, commodity markets have been quite the opposite. Fears of a trade war have driven a “risk off” sentiment in commodities with intermittent US Dollar strength acting as another headwind. We believe the markets have been overly focused on demand destruction and have ignored the impact on supply chains from burgeoning trade protectionism. As a result, we believe many commodities are ripe for an upward correction in price.
Remarkably, if an investor looked at the US Dollar (measured by the US Dollar Index, DXY) at the start of August 2018 and the end of August 2018, they wouldn’t see much change. Of course, this would mask a move from approximately 94.5 to almost 97 and then back towards a range from 94.5 to 95.0. The move toward 97.0 was very sharp, leading to the strong US Dollar story gaining a lot of attention—very important for the prospects of commodities priced in Dollars.
We would also note that in the US Treasury market the difference between the yield of the 10 Year and 2 Year interest rates dropped below 20 basis points—to a level of 18.75 on 24th August. Historically, times when the 2 Year interest rate has eclipsed the 10 Year interest rate have presaged economic recessions in the next 12 to 18 months. Given the relative positioning of these rates, the next move by the Fed, should it occur in September, could lead to an inverted yield curve. Fed Chair Jerome Powell’s speech at Jackson Hole led market participants to believe that this rate hike is all but a foregone conclusion. Does this have to lead to US economic recession over the coming 12 to 18 months? It’s an interesting question to consider. As of this writing, the gold price is hovering back around the $1,195 level, representing a bit of recovery from recent lows around $1,175. The US Dollar’s drop during the latter half of August was definitely a contributory factor—we also continue to monitor the global geopolitical risk environment. Currently, we’re getting a lot of movement as it relates to different trade agreements, but as of yet there is insufficient clarity on the negotiated deals. We also are entering the home stretch before the US midterm elections.
Agricultural commodities struggle amidst trade war uncertainty. With the exception of cocoa, agricultural commodities posted a negative performance over the period. The weaker Brazilian Real and higher coffee crop expectations remain headwinds for coffee prices. Wheat is also expected to suffer a pull-back as higher supply from the US and Russia is expected to partially offset lower supply from the EU.
Industrial metals weighed down by persistent trade war concerns and risk off mode. The strong US Dollar, trade war concerns and weak Chinese economic data have been contributing to negative sentiment towards the sector. However, tighter fundamentals across key industrial metals illustrates athe extent to which the trade war concerns have distorted prices and highlight the scope for recovery within the industrial metals sector when the uncertainty fades away.
Energy markets buck commodity price capitulation as supply disruptions and unabated demand a support energy prices. A combination of global warm weather and a continued economic recovery has helped on the demand front. Supply of oil has been constrained due to the economic collapse of Venezuela.
Sentiment towards gold fell further after the yellow-metal failed to post any gains despite an emerging market sell-off. Gold’s lack of response is less worrying when viewed in light of continued strong developed market equity market performance. Short-covering could aid gold’s recovery if excessive negative sentiment abates.
Den monatlichen Rohstoff-Monitor von ETF Securities finden Sie links als PDF.