Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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WCU: Commodities look to Fed for support amid recession risks
Ole Hansen
Head of Commodity Strategy
Summary: Global commodity markets have seen their fair share of turmoil in recent weeks. The potential twin disruptive impact of trade war and upcoming recession helped sent energy and industrial metals sharply lower during May while continued weather related disruptions to the US planting season saw grain prices surge higher.
These developments, which hurt global stocks, eventually helped trigger a dramatic rally in US bonds with the 10-year yield dropping to a 21-month low. The biggest and eventually market-supportive development has been the significant drop in the future US Fed Funds expectations as per the chart below.
The rally in Fed funds futures during May has seen rate cut expectations over the next 12 months double from 0.5% to 1%. This development has been the main reason behind the latest recovery in gold and silver but also one that now poses its biggest short-term challenge should economic data improve. This with reference to the Federal Open Market Committee, led by chair Powell which, at least for now, is not signalling a willingness to adopt the recent aggressive change in market expectations.
The rally in Fed funds futures during May has seen rate cut expectations over the next 12 months double from 0.5% to 1%. This development has been the main reason behind the latest recovery in gold and silver but also one that now poses its biggest short-term challenge should economic data improve. This with reference to the Federal Open Market Committee, led by chair Powell which, at least for now, is not signalling a willingness to adopt the recent aggressive change in market expectations.
Despite Europe having its own and potentially bigger economic problems, the prospect of lower US rates, something the European Central Bank will struggle to copy with rates already on the floor, has supported some profit taking and for commodities supportive dollar weakness.
Precious metals traded higher for a second week before gold once again struggled ahead of the hitherto impenetrable area of resistance between $1,365 and $1,390/oz. The monthly US jobs report provided an additional layer of support after missing all estimates with US employers adding the fewest workers in three months while wage gains cooled.
Crude oil began the week on the defensive with continued focus on the risk to global growth and demand which drove the recent 10-dollar slump. In addition, the weekly US stock report proved challenging following another big jump in US crude oil stocks. In fact, the 22.5-million-barrel weekly rise in crude and product stocks was the biggest since records began in 1990.
A pickup in global equities as sentiment recovered together with technical and psychological support at $50/b on WTI and $60/b on Brent, however, proved strong enough to attract fresh buying.
The short-term focus will move to monthly oil market reports from the EIA on June 11, Opec on June 13 and the IEA on June 14. The market will scrutinise these reports for any change in the demand outlook from these major forecasters.
Precious metals traded higher for a second week before gold once again struggled ahead of the hitherto impenetrable area of resistance between $1,365 and $1,390/oz. The monthly US jobs report provided an additional layer of support after missing all estimates with US employers adding the fewest workers in three months while wage gains cooled.
Crude oil began the week on the defensive with continued focus on the risk to global growth and demand which drove the recent 10-dollar slump. In addition, the weekly US stock report proved challenging following another big jump in US crude oil stocks. In fact, the 22.5-million-barrel weekly rise in crude and product stocks was the biggest since records began in 1990.
A pickup in global equities as sentiment recovered together with technical and psychological support at $50/b on WTI and $60/b on Brent, however, proved strong enough to attract fresh buying.
The short-term focus will move to monthly oil market reports from the EIA on June 11, Opec on June 13 and the IEA on June 14. The market will scrutinise these reports for any change in the demand outlook from these major forecasters.
Gold: Two weeks of steep gains with the latest providing the best return in two months have left the yellow metal in need of consolidation, especially given its continued struggle to mount a challenge at the above-mentioned area of resistance between $1,365 and $1,390/oz.
We maintain the view that global growth momentum is slowing and likely to worsen further before renewed policy panic from global central banks will help to stabilise the outlook. On that basis, we believe that gold will continue to act as a late-cycle hedge which eventually will see it challenge resistance. From a technical perspective a breakout of the range that has prevailed since 2014 could initially trigger a $100 extension towards $1,480/oz, the 50% correction of the 2011-15 sell-off.
We maintain the view that global growth momentum is slowing and likely to worsen further before renewed policy panic from global central banks will help to stabilise the outlook. On that basis, we believe that gold will continue to act as a late-cycle hedge which eventually will see it challenge resistance. From a technical perspective a breakout of the range that has prevailed since 2014 could initially trigger a $100 extension towards $1,480/oz, the 50% correction of the 2011-15 sell-off.
Silver’s recent rally following the breakout from its downward sloping wedge has so far met resistance at $15/oz. In a recent update, we highlighted the potential for silver to outperform gold due to the risk of short-covering from funds holding a near record net-short in COMEX silver. On that basis we maintain a focus on the XAUXAG ratio which, following three successive attempts to break 90 (ounces of silver to one ounce of gold), is now challenging support at 89.25.
HG Copper headed for its first weekly gain in two months after once again managed to find support at the trend-line dating back to early 2017. Technical traders see this support as being the neckline of a major head-and-shoulder formation which on a break could signal further losses.
Supporting the recovery was the general improvement in risk sentiment and more specifically for copper the prospect of additional Chinese stimulus and comments from Codelco, the world’s largest producer that demand remains good. The chief commercial officer even warned that the latest price deterioration could deter much-needed investments and further negatively impact future supply outlook which is already tightening.
Supporting the recovery was the general improvement in risk sentiment and more specifically for copper the prospect of additional Chinese stimulus and comments from Codelco, the world’s largest producer that demand remains good. The chief commercial officer even warned that the latest price deterioration could deter much-needed investments and further negatively impact future supply outlook which is already tightening.
Crude oil: The difficulty in navigating a market with several and major opposing forces was laid bare recently when following a period of rangebound trading Brent crude oil collapsed. The slump towards key support at $60/barrel was triggered by President Trump’s decision to add tariffs on Mexican imports in order to force a reduction in the flow of migrants from Central America. The temporary break below occurred this past week following the mentioned counter seasonal jump in US crude stocks.
The recession themed sell-off has in our opinion potentially already run its course after Brent crude found support around $60/b. A sustained break below could signal a return to the December low which current fundamentals just simply don’t support, at least not while the structure of the Brent forward curve continues to scream tightness. The prompt contract of August currently trades close to $3/b above the price for delivery in six months’ time, a near five-year high.
The recession themed sell-off has in our opinion potentially already run its course after Brent crude found support around $60/b. A sustained break below could signal a return to the December low which current fundamentals just simply don’t support, at least not while the structure of the Brent forward curve continues to scream tightness. The prompt contract of August currently trades close to $3/b above the price for delivery in six months’ time, a near five-year high.
Arabica coffee: The fragile state of the coffee market was once again put on display this week when Arabica coffee futures in in New York dropped by 7.3%, their worst one-day drop since 2010. The sell-off came after the market had rallied by 19% since mid-May.
The initial rally last month was led by frost fears and a stronger Brazilian real; these developments helped trigger short covering from hedge funds while also attracting renewed buying from traders looking for the price of beans to bounce from a 14-year low.
The heightened volatility could indicate an emerging battle ground between buyers and short sellers who for many months have been benefitting holding and rolling short futures positions. Currently the one-year roll return on a short position is 14%, one of the highest rewards for holding a short commodity position.
The key area of support 95 cents/lb while the next area of resistance can be found just below 107 cents/lb.
The initial rally last month was led by frost fears and a stronger Brazilian real; these developments helped trigger short covering from hedge funds while also attracting renewed buying from traders looking for the price of beans to bounce from a 14-year low.
The heightened volatility could indicate an emerging battle ground between buyers and short sellers who for many months have been benefitting holding and rolling short futures positions. Currently the one-year roll return on a short position is 14%, one of the highest rewards for holding a short commodity position.
The key area of support 95 cents/lb while the next area of resistance can be found just below 107 cents/lb.
Upcoming commodity events next week (Times are GMT)
Tuesday June 11:
16:00 EIA’s Short Term Energy Outlook (STEO)
20:00 USDA’s Weekly Crop Condition report (first of the year to include corn and soybeans)
16:00 USDA’s World Agriculture Supply and Demand Estimates (WASDE). First to include the governments take on the wet weather impact on yield, production and stocks.
Wednesday June 13:
11:00* OPEC’s Monthly Oil Market Report (OMR)
14:30 EIA’s Weekly Petroleum Status Report
Thursday June 14:
09:00* IEA’s Oil Market Report (First to include 2020 forecasts)
14:30 EIA’s Natural Gas Storage Change
*estimated times
Tuesday June 11:
16:00 EIA’s Short Term Energy Outlook (STEO)
20:00 USDA’s Weekly Crop Condition report (first of the year to include corn and soybeans)
16:00 USDA’s World Agriculture Supply and Demand Estimates (WASDE). First to include the governments take on the wet weather impact on yield, production and stocks.
Wednesday June 13:
11:00* OPEC’s Monthly Oil Market Report (OMR)
14:30 EIA’s Weekly Petroleum Status Report
Thursday June 14:
09:00* IEA’s Oil Market Report (First to include 2020 forecasts)
14:30 EIA’s Natural Gas Storage Change
*estimated times
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