The Bloomberg Commodity Index traded lower for a third week with macro-economic data continuing to signal further weakness ahead. Losses in energy, led by natural gas and not least industrial metals, courtesy of a nickel drubbing, were only partly off-set by gains in precious and platinum group metals. The agriculture sector was mixed with soybeans and cotton drifting lower while coffee continued higher on improved fundamentals.
Economic data from major economies continue to highlight that the low point in global growth most likely remains in front, not behind us. US Q4 GDP growth as measured by the New York Fed’s Nowcast model dropped to just 0.39%, a 1.57% collapse in less than two months. We see the risk of a policy mistake by the US Fed in the making and believe that the current probability of a January rate cut of 18.5% is too low.
The road towards securing a trade deal between the U.S. and China got increasingly bumpy with China threatening to retaliate after the U.S. Senate passed a bill backing Hong Kong’s protestors. At the same time, they raised the prospects for a “Phase One” deal after inviting U.S. trade negotiators to Beijing for further talks. Traders have increasingly been caught in the hamster wheel of alternating news and the reaction was seen across several commodities from safe-haven gold to crude oil, which ended the week close to unchanged after having travelled more than nine dollars to get there.
The seasonal weather-related price swings in natural gas continued, with the price falling close to 5% in response to warmer-than-normal weather forecasts in the weeks ahead. Record production and high inventory levels has seen the premium for March gas over April drop to the lowest since 2016. An indication that the market has all but ruled out the risk of an end-winter supply crunch.
Nickel, down 25% from the September peak, led industrial metals lower with the Bloomberg Industrial Metals index falling to the lowest level since late August. Nickel’s spectacular Q3 surge became unstuck in recent weeks after Indonesia, the world’s biggest nickel ore exporter, revised earlier plans to ban the export of ore from January 2020. Copper traded weaker but in a relative tight range with traders primarily focusing on trade news from Washington and Beijing.
The highflyer of the week was Arabica coffee which saw its biggest two-day rally in four years. During the past month, it has jumped by 25% as the outlook for a 2019-20 supply deficit began receiving some attention. Coffee has for many months been one of the most favoured hedge fund shorts given the positive yield harvested from holding and rolling a short futures position. However, the one-year roll yield has now dropped below 10%, from a peak above 16% earlier in the year. Further upside depends on whether funds abandon the strategy and begin accumulating a long position for the first time since early 2017.
Gold has adopted a wait-and-see approach trading in a range between $1450/oz and $1480/oz. This, while the news flow continues to go hot and cold on the prospect for a trade deal. Silver meanwhile benefitting from the prospect for tightening outlook, has managed to cover some lost ground with the gold-silver ratio, which measures the value of one ounce of gold in ounces of silver, touching a two-week low at 85.5.
Platinum, supported by palladium, also managed to move higher and at one point the discount to gold narrowed to $550/oz, a level through which platinum has failed to strengthen on several occasions since June.
The outlook for gold remains in our opinion constructive above $1380/oz with the prospect for further upside emerging into 2020. This belief is based on the following assumptions:
- The Federal Reserve has lost control and will cut rates sooner and faster than expected;
- The dollar is potentially on its final leg of strength;
- A prolonged US-China trade war raising inflationary risks;
- Central bank demand to remain strong for various reasons, one being de-dollarization;
- Robust demand for bullion-backed ETF’s.
Crude oil spent a very volatile week going close to nowhere. The price temporarily broke the uptrend from early October with Brent almost touching $60/b before recovering back to unchanged. While the news flow from Washington and Beijing on the prospect for a trade deal remained a key source of volatility, some oil related news also played its part.
Faced with a rising supply surplus in early 2020, due to rising non-OPEC production, the market took comfort from speculation that OPEC would extend production cuts until mid-2020. Earlier, the price weakness had to a large extent been driven by concerns that Russia would balk at supporting an extended production cut period. OPEC and Russia meet in Vienna on December 6, the day after the regular OPEC meeting. The supply side also attracted some attention with social unrest in both Iran and Iraq being a potential threat to supplies. The weekly U.S. inventory report from the Energy Information Administration provided some relief after showing the biggest drop in stockpiles at Cushing since August.
While the global economic slowdown and its impact on demand may approach a stage of being fully priced in the short-term, outlook remains troubled by the prospect for strong non-OPEC supply not being countered by action from the OPEC+ group. On that basis and barring any geo-political disruption, we maintain the view that Brent crude oil is likely to remain stuck in the low 60’s before eventually recovering sometime during 2020.
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