Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Commodity weekly: Middle East and rates key drivers; Bitcoin ETFs first week and freight rates
Ole Hansen
Head of Commodity Strategy
Summary: Commodities have yet to record a winning week in 2024 with losses in grains, industrial as well as precious metals being only partly offset by a gain in energy and soft commodities. The market’s main focus remains geopolitical tensions in the Middle East, China economic weakness and not least the timing, pace and depth of US rate cuts in 2024. In this update we also take a look at surging container rates and in a slight detour from normal, we catch up with Bitcoin to see what happened in the first week of ETF trading
Commodities have yet to record a winning week in 2024 with the Bloomberg Commodity Index, which tracks the performance of 24 major commodity futures spread almost evenly between energy, metals and agriculture trading lower by around 1% so far this month. Losses in grains, industrial as well as precious metals have only been partly offset by a gain in energy and soft commodities. The market’s main focus remains geopolitical tensions in the Middle East, China economic weakness and not least the timing, pace and depth of US rate cuts in 2024.
The grain sector remains under pressure from improved crop weather in Brazil, adding to the risk of a large carryout this summer after recent stock upgrades saw soybean futures drop to their lowest level in more than two years and corn futures set a three-year low.
The industrial metal sector, meanwhile, has been struggling amid weak economic data coming out of China and the government holding off from implementing major stimulus despite the deepening property crisis and consumers holding back on spending. Precious metals have softened in line with a stronger dollar and bond yields moving higher after stronger than expected US economic data raised doubts about the timing of the first rate cut. In addition, we saw comments from central bankers in the US and Europe push back against market views on how quickly rates might ease.
Crude oil rangebound despite cold weather boost and Middle East risks
The energy sector continues to trade within a relatively narrow range with rising concerns about the stability in the Middle East where Houthis continue to send waves of Iranian-produced missiles and drone strikes on ships in the Red Sea while the US military launched multiple airstrikes against targets in Yemen. A deeper involvement by Iran this past week added to worries that the conflict, albeit highly unlikely, may end up impacting the flow of oil and gas from key Middle Eastern producers. Also supporting crude, and especially fuel prices this past week, was a severe cold snap in the US which sent demand sharply higher while temporarily cutting production of oil and gas due to freeze-offs – when low temperatures freeze wells and other equipment. The cold ‘bomb’ also triggered record demand for natural gas, the fuel of choice for power generators over coal as prices remain relatively low.
Overall, we see Brent crude oil remain rangebound around $80 per barrel during the first quarter with the very weak positioning, OPEC+ production restraint, and incoming rate cuts potentially leaving the risk/reward skewed slightly to the upside. The biggest downside risk is a disunited OPEC+ leading to a collapse in the current agreement to keep production down, and the upside from a major geopolitical event disrupting the flow of crude oil and gas from the Middle East.
Soft commodities extend last years strong gains
The softs sector – last year’s best performing sector – saw a renewed surge, led by sugar, cotton and coffee, especially the Robusta variety which raced to a record $3175 per ton. Primarily produced in Vietnam, the bean has seen low levels of exchange-monitored stocks being made worse by farmers in Vietnam holding back parts of a shrinking production in anticipation of even higher prices. In addition, the Red Sea turmoil that’s impacting shipping routes from Asia to Europe has also hit the market for Robusta beans with buyers shunning purchases from Asia due to surging shipping costs and longer-than-normal travel routes. Buyers have instead been trying to secure more supplies from Brazil, highlighting how the normal flow of goods around the world has once again been upended.
The relentless rise in global container freight rates continue with the Drewry composite showing a weekly rise of 23% to $3,777 per 40 ft box, a 173% increase since late Nov, with the most recent gains being led by +35% increases on routes from China to New York and Los Angeles. Since the Red Sea crisis began in early December the cost of shipping a container from the Shanghai to Europe through the Red Sea to the Suez Canal has jumped by more than 300%, raising the cost to consumers while delaying the arrival of goods.
Industrial metals and miners troubled start to 2024
Industrial metals have posted a weak start to the year as the outlook for global manufacturing and construction remains under scrutiny, for now more than offsetting calls for stronger stimulus measures in China, and the potential positive impact of restocking once an expected series of rate cuts from major central banks begin later this year. The Bloomberg Industrial Metal index trades down 5% on the month with losses being led by aluminum and zinc.
Copper prices, meanwhile, remains mostly rangebound as China and rest of the world demand worries continue to be offset by miners cutting their production forecasts driven by, among others, declining ore quality, water restrictions and increased scrutiny of new permits. The combination of supply worries together with a strong push towards electrification, not least in China, continue to provide support in the short term. However, to see a sustained rally towards a fresh record high, the market will need answers to the questions about the timing of and depth of future US rate cuts. Only then may we see renewed restocking by companies that offloaded metals last year amid the rising cost of financing their stockpiles.
Mining companies, meanwhile continue their struggle to control costs towards labor, fuel, and materials during a time when rising interest rates and inflation have added to the overall cost of funding and running a business which increasingly has been struggling with harder-to-mine deposits and lower ore grades. Increased Environmental, Social, and Corporate Governance (ESG) scrutiny by investors, rising regulatory costs and government intervention have also been weighing. These developments have all helped drive the sector lower with the shown example, the Vaneck Global Mining ETF, trading down 10% this month and 15% during the past year.
All the major miners, except those operating in the uranium business, trade lower on the month, led by Newmont and Barrick Gold Corp. Earlier in the week, Barrick’s stock plunged the most since August 2020 after the Canadian miner reported higher costs and lower-than-expected gold sales for its last quarter. These developments, together with expectations for rising demand in the coming years for precious metals as funding costs come down, and most importantly for green transformation metals as the electrification of the world gathers momentum, basically mean that higher commodity prices will be needed to incentivize higher production. Until such time, the mining industry may struggle to deliver the returns, making the sector attractive from an investment perspective.
As mentioned, the exception to this is the uranium mining industry, which has seen the price of its product surge higher in recent months amid a tightening market driven by increased demand, not only from utilities, but also increasingly from funds investing in physical uranium and oxides. An example being Cameco Corp in Canada which trades up 10% on the month and nearly 90% over the past year.
Gold’s current dollar and economic data fixation
The precious metals sector trades down on the month with gold and silver both stuck in ranges while speculation continues about the timing, pace and depth of future US and EU rate cuts. Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction, like to one we saw during the week when gold almost touched $2000. With that in mind, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the timing and pace of future rate cuts. Gold’s weakness this past week was initially driven by the stronger dollar but after once again finding support, the yellow metal saw fresh buying interest, potentially helped along by a small geopolitical risk premium being added to the price.
Recently, Saxo’s strategy team released their Q1 2024 outlook titled “What happened to the future?”. In the commodities section, we outlined the reasons why we believe 2024 could become the “Year of the metals” with focus on gold, silver, platinum and copper. In precious metals, we believe the prospect for lower real yields and lower funding costs as central bank rate cuts will drive a revival in demand from interest rate-sensitive investors. Adding to these developments a fragmented world supporting continued demand from central banks and haven demand from others, the potential for a fresh record remains on the cards.
Bitcoin ETF launch triggers classic market reaction
In a slight departure from our usual commodity focus we will take a moment to look at the recently launched Bitcoin exchange-traded funds (ETF) and their initial market impact. Bitcoin surged 157% last year, with a big portion of the gains being driven by optimism about the eventual January 11 launch of the first US ETF to directly hold the token. In addition, digital currencies, just like gold, received a late 2023 boost from the prospect of peak rates being followed by loser monetary policy in 2024 – supportive for non-coupon paying assets like commodities and cryptos.
What we have witnessed following the launch can best be described as a classic “buy the rumor, sell the fact” scenario, with Bitcoin peaking on the day of the launch at $49000, only to suffer a +15% loss in the days that followed. So far, the correction has not triggered any major technical sell signals, but it has left the early entrants bruised with all ETFs suffering a loss during the first week of trading. From the table below, it’s also clear that two winners have emerged out of the ten that were launched – with BlackRock’s iShares Bitcoin Trust and the Fidelity Wise Origin Bitcoin Fund attracting the bulk of inflows, however with the caveat that, instead of being new money, the bulk has come from the sale of Grayscale’s Bitcoin Fund, a Trust that began trading in 2013 before the recent conversion to an ETF.
Coinbase, known for its safety and security for investors as well as low transaction fees, emerged as the custodian for most of the recently launched ETFs. Its share price rose more than 400% last year with strong earnings and speculation about the ETF launch giving it a strong boost during the last two months. However, in the weeks up to, and after the launch the share price has corrected by one-third in the realization that low cost ETFs may threaten to erode Coinbase’s margins and trading volumes.
Commodity articles:
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
12 Nov 2023: Copper supported by green transformation demand and peak rate speculation
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside
Previous "Commitment of Traders" articles
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
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