Head of Commodity Strategy
Donald Trump’s resounding victory in the US election, which also saw the Republican Party gain control of both the Senate and the House of Representatives, helped trigger some major moves across different asset classes. While his expected business-friendly policies saw the S&P 500 stock index race to a record high, the bond market responded less enthusiastically, with yields rising in anticipation of increased government borrowing. The USD meanwhile reached a one-year high before paring back gains to end the week near unchanged. The initial rally reflected confidence in the US economy and demand for US assets, together with a potential divergence between central banks, as the Federal Reserve may opt to slow its pace of rate cuts while other major central banks continue to cut.
A stronger USD initially helped drive broad weakness across the commodities sector, with the metals sector suffering the most on expectations a Trump-led majority in Congress will introduce a 10% tariff on all countries, with 60% on specific nations, and potentially revoke China’s Permanent Normal Trade Relations (PNTR) status, granted in 2020, which has been a cornerstone of US-China relations—a move feared to trigger a new wave of trade tensions and economic disruptions. From a commodities perspective, this is viewed as unfriendly towards metals, with copper, silver, and iron ore being among the major casualties, along with gold, which suffered a long-overdue setback amid technical selling as the USD broke higher.
However, Wednesday’s initial negative response triggered fresh demand, and following a succession of rate cuts from central banks, led by the Federal Reserve, the Bloomberg Commodity Total Return Index headed for a small weekly return around 0.7%, with a year-to-date gain of 4.6% supported by a 30% gain in precious metals and 24% in softs, only partly offset by losses in grains at 16% and energy at 7%.
While increased tariffs may take months to implement, the market nevertheless has been looking to China for additional measures to support its troubled economy. However, hopes for a significant stimulus were dented after a week-long meeting of China’s NPC delivered little in terms of fresh initiatives, leading to some fresh weakness across the sector, led by crude oil, copper, and iron ore.Industrial metals responded negatively to proposed tariffs on imports, particularly from China—a move that may disrupt global trade and reduce demand for industrial metals like copper and aluminium. Furthermore, copper, which initially slumped 5% before staging a recovery ahead of the FOMC meeting and a key meeting in China, was also impacted by fears over a slowdown in the energy transition after Trump said he would "rescind all unspent funds" under the Inflation Reduction Act (IRA), the Biden-Harris administration's signature climate law.
We believe the initial negative price response should cover the near-term risks, as infrastructure spending plans and potential deregulation may boost demand for metals in the medium to long term. Additionally, the last time Trump imposed tariffs on China, it took almost a year before implementation, and a similar timeframe or a watered-down version may limit the overall impact. Also, China has introduced several measures since September to stimulate its troubled economy; however, the lack of clarity over the size and composition of the package has so far limited the impact. The week concluded on a bit of a sour note after the conclave of the National People’s Congress Standing Committee failed to deliver additional stimulus measures to support the Chinese economy, overall leaving copper near unchanged following a roller-coaster week within a +6% range.
The US debt situation will likely continue to deteriorate as the Trump administration increases unfunded spending towards tax cuts, infrastructure, and defence. In addition to continued demand from central banks seeking to de-dollarise their reserves, tariffs will raise inflation concerns, which should more than offset a potential slowdown in US rate cuts. The biggest short-term challenges remain the overhang of long positions from speculators, silver weakness, and the outlook for diverging central bank policies supporting the USD.
Spot gold slumped below support-now-resistance around USD 2710 before finding fresh demand ahead of the 50-day moving average, currently at USD 2644. A deeper correction would still only be considered a weak one within a strong uptrend as long USD 2600 holds.
However, US crude production will likely only increase if oil producers see a profit, and with WTI currently trading near USD 60, the incentive to increase production further is very limited. With that in mind, we see a bigger opportunity in natural gas, as strong global demand makes cheap US natural gas very attractive around the world.
The OPEC+ group of producers may face increased challenges in 2025, not only from Trump’s "drill, baby drill" stance but more importantly from a weak economic outlook and the energy transition, which is now seeing Chinese demand close to peaking. These developments will likely lead to production outstripping demand, leaving limited room for increased production from OPEC+ producers, many of whom are facing growing government deficits and need to generate revenue, putting pressure on the group’s ability to hold together, especially if some members continue to produce more than agreed.
WTI crude continues to trade within a narrowing range, currently some 10% below the average price realised throughout the last two years, and close to levels where U.S. production growth may slow.
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Head of Commodity Strategy
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