Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
Commodity weekly: Sticky inflation and adverse weather focus
Ole Hansen
Head of Commodity Strategy
Key points
- A fifth consecutive weekly gain drives commodity sector to a seven month high
- A heavily shorted grains sector springs back to life led by wheat
- Copper rallies as a mega merger highlights its future potential
- Gold supported by sticky inflation and rising debt piles
The commodity sector trades higher for a fifth week with the Bloomberg Commodity Total Return index heading for its highest weekly close in seven months. While precious metals and soft commodities paused following weeks of strong gains, the grains sector took over led by wheat as it headed for its best week since last June amid adverse weather conditions in key growing regions across the Northern Hemisphere.
In metals, gold suffered a long overdue but so far modest setback with momentum traders instead switching their attention to copper which reached a fresh cycle high, during a week that was dominated by BHP’s attempted takeover of Anglo American in order to get their hands on the smaller rival’s stable of copper assets in South America. A move which highlights the importance of copper in the coming years as the electrification of the world gathers momentum.
On the macroeconomic front, US Q1 GDP data sparked fears of stagflation as growth slowed, coming in weaker-than-expected at 1.6% from 3.4% while price index measures accelerated with the Core PCE Prices for Q1 surging to 3.7% from 2.0%, above the 3.4% forecast. The dollar continues to trade choppy, heading for a small weekly loss with gains in most G8 currencies being partly offset by the Japanese yen hitting a record low after the Bank of Japan surprised dovish again, both in action and in language. Bond yields meanwhile continued their recent ascent while the prospect for sticky US inflation further deflated expectations for US rate cuts this year, down to just one 25 basis point cut in December from seven at the start of the year.
Surging wheat sees grains sector top the table
The grains sector topped the table this past week as surging wheat prices supported a near 4% gain in the BCOM Grains index, its best week in two months. The CBOT wheat futures trade up more than 9% hitting highs not seen since January, on persistent dry weather conditions in top exporter Russia, and recently also parts of the U.S. Plains. Together with colder-than-normal weather in Western Europe and forecasts showing limiting rain relief in southern Russia until at least early May, the Northern Hemisphere growing season has seen a bumpy start.
So far, the impact on corn and soybeans, the two major US crops, has been limited as the planting season is only just getting underway. However, rain and colder temperatures in the Midwest may slow the planting process, potentially adding some price support, at this stage primarily through funds being encouraged to cover some of their near record short positions held in the six major US traded grains and soybean futures contracts.
The CBOT wheat futures contract hit a USD 1363 record high in March 2022 following the Russian attack on Ukraine, two major wheat producers, before big production years helped trigger a 61% slump lasting more than two years. So far this year, and before the rally this past week, the contract showed signs of stabilising, and the combination of a double bottom around USD 5.25 a bushel followed by a break of the downtrend, currently aat USD 6.10 a bushel may signal further upside. In the week to April 16, hedge funds and other speculators held a near record short position of 544k contracts, split between soybeans (-168k), corn (-280k) and CBOT wheat (96k).
Gold supported by inflation and rising debt piles
Gold’s aggressive rally since the mid-February low is currently being challenged with bullion suffering a long overdue and relatively aggressive, but healthy correction, which will help determine the real level of underlying demand besides momentum and managed money accounts who normally trade with a short-term focus and will reduce longs should the technical and/or fundamental picture change.
Having rallied by almost USD 450 from the mid-February low, the correction currently unfolding has not yet been strong enough to challenge traders' overall belief in higher prices. From a technical standpoint, the key area of support using Fibonacci retracement levels can be found in the USD 2,255-60 area where we find 61.8% of the March to April extension and 38.2% of the whole move from the mid-February low. Holding above this level will send a signal to the market that the retracement is nothing but a weak correction within a strong uptrend.
We maintain our positive outlook for investment metals with the below drivers still the focus once the correction dust settles:
- Geopolitical risks related to an increasingly fragmented world with special focus on Russia/Ukraine and the Middle East
- Strong retail demand in China amid the desire to park money in a sector seen as relatively immune to a struggling economy amid deepening property woes and the risk of the Yuan devaluation.
- Continued central bank demand amid geopolitical uncertainty and de-dollarisation, and not least gold’s ability to offer a level of security and stability that other assets may not provide.
- Rising debt-to-GDP ratios among major economies, not least in the US, raising some concerns about the quality of debt. In other words, rising Treasury yields are not necessarily negative for gold as they raise the focus on overall debt levels and the sustainability of those.
- In addition, the focus is changing from the negative impact of lower rate cut expectations towards support from a reaccelerating inflation outlook.
Where gold goes, silver goes but faster
Just like gold, silver also went through a relatively aggressive correction, with the selling being amplified by its recent failure to break above USD 30 per ounce, the 2020 and 2021 high. Having outperformed gold during the recent run-up, silver initially dropped faster than gold before the continued rally in copper helped cushion the slide, leading to support being found in the USD 27 area. The gold-silver ratio which at one point hit 86 ounces of silver to one ounce of gold, from an 81.3 low last month, has since drifted lower to the current 85, still well above its long-term average around 79.
Copper hits fresh cycle high with momentum bulls in control, for now…
Copper and copper mining stocks continue to push higher with the futures prices in New York and London reaching levels last traded in April 2022. For the past two years, Dr. Copper aka the King of Green Metals has traded mostly sideways, navigating relatively unscathed through rough seas created by sharply higher funding costs as central banks around the world hiked interest rates to combat inflation, and not least a slowdown in China, the world’s top consumer of copper.
During the past couple of months, the metal has steadily climbed, buoyed by global growth and demand optimism, and material downgrades to 2024 mine supply increasingly tightening market conditions. Several mining companies have announced production downgrades due to factors like increased input costs, declining ore grades, rising regulatory expenses, and weather-related disruptions.
Furthermore, the ongoing green transformation and increased use of AI applications are augmenting demand from traditional sectors like housing and construction, and together with the green transformation, we maintain our long-standing bullish stance on copper and copper miners. However, while we have and continue to highlight a supportive medium to long-term outlook for copper demand leading to higher prices, there are some concerns traders have jumped the gun at a time where underlying fundamentals are not yet strong enough to support a rally towards to March 2022 record, a level we see being reached, but potentially not until later this year.
Cocoa rally pauses, yet underlying stress persists
New York cocoa futures traded lower on the week after hitting a fresh record high near USD 12,000 per ton. While the rapid rise seen in the first quarter has slowed, concerns over a diminished harvest in West Africa, a major chocolate ingredient supplier, persist. Adverse weather, aging trees, and crop diseases in Ghana and Ivory Coast have caused cocoa prices to more than double in the past year. Output is expected to fall short of consumption for a third consecutive season, indicating a potential long-term decline in the region's cocoa production.
Complicating matters, a widespread virus threatens cocoa tree health, particularly in Ghana, where the cocoa swollen shoot virus disease (CSSVD) carried by mealybugs has caused harvest losses ranging from 15 to 50%. While tree vaccines can combat the virus, their cost is prohibitive for many low-wage farmers struggling to meet ends meet following years of low cocoa prices and rising costs. Moreover, vaccinated trees yield smaller cocoa harvests, compounding the virus's impact.
These factors have driven prices significantly higher, not only during the current cycle but also next year as reflected by the May 2025 futures contract trading near USD 8,000 per ton. Market volatility, not seen at this level since the 1970s, has dampened trading activity, exacerbating price swings.
Commodity articles:
23 April 2024: What drives the gold and silver correction ?
19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
27 Mar 2024: Crude oil maintains support amidst array of bullish signals
26 Mch 2024: Gold's behaviour points to sustained demand
20 Mch 2024: Attacks on Russian refineries lift risk premium and crude prices
19 Mch 2024: How to add copper exposure to your portfolio
15 Mch 2024: Commodity weekly: Green shoots seen across key sectors
13 Mch 2024: Lack of catalyst pushes crude into tightening range
8 Mch 2024: Commodity weekly: Gold and silver steal the limelight
8 Mch 2024: Investing with options - Gold optionality
6 Mch 2024: How to add gold exposure to your portfolio
6 Mch 2024: Video: What happened to the gold prices?
1 Mch 2024: Grains dip, cocoa soars, gold and oil see rays of strength: February’s commodity mix
Previous "Commitment of Traders" articles
22 April 2024: COT: Declining momentum may signal shift toward consolidation
15 April 2024: COT: Hedge funds propel multiple commodities positions beyond one-year highs
8 April 2024: COT: Speculative interest in metals and energy gain momentum
2 Apr 2024: COT: Gold and crude longs maintained amid strong underlying support
25 Mch 2024: COT: Hedge funds zoom in on crude, copper and silver
18 Mch 2024: COT: Hedge funds buying expands from precious metals to copper and grains
11 Mch 2024: COT: Specs rush back into gold, elevated yen short in focus
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge
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