Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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WCU: Fortress energy joins metals to record a weekly loss
Ole Hansen
Head of Commodity Strategy
Summary: Energy prices showed some weakness this week despite supportive headlines, while soft commodities and precious metals led the sector to a third consecutive week of losses.
Commodities traded lower for a third consecutive week with metals both industrial and precious, as well as with soft commodities, on the receiving end of investor selling. Fortress energy also showed signs of weakness with crude oil, as highlighted last week, being hit by technical selling despite the news flow being predominantly price-friendly.
Apart from the recent dollar strength, which reduced the appeal of metals during the latter part of April, it was the slowdown in manufacturing activity in both US and China that did most of the damage to growth-dependent commodities such as copper (a conductor of heat and electricity) and palladium (catalytic converters).
The drop in the US ISM manufacturing index for April was particularly aggressive as it moved to the lowest level since October 2016. At 52.8, it remains in expansionary territory above 50, but broad-based declines in new orders, new export orders and production highlight the risk of a further cooling.
Apart from the recent dollar strength, which reduced the appeal of metals during the latter part of April, it was the slowdown in manufacturing activity in both US and China that did most of the damage to growth-dependent commodities such as copper (a conductor of heat and electricity) and palladium (catalytic converters).
The drop in the US ISM manufacturing index for April was particularly aggressive as it moved to the lowest level since October 2016. At 52.8, it remains in expansionary territory above 50, but broad-based declines in new orders, new export orders and production highlight the risk of a further cooling.
The price of pork in Chicago resumed its rally with the potential risk of a significant, African swine fever-derived herd reduction in China raising demand for US exports. The size of the reduction in China has been put as high as 134 million herds by the US Department of Agriculture, the equivalent to US’ entire annual output. Apart from the damaging impact on rising meat prices, a reduction on such a dramatic scale is also going to negatively impact demand for feed such as corn and especially soybeans, which hit a six-month low during the week.
Apart from fundamentals that help determine the long-term direction of commodities, speculators hold a major sway over short-term price movements. The table below shows how hedge funds, measured in number of futures contracts, are positioned across the major futures markets. The table, which is based on data from the Commitments of Traders report, is released every Friday by the US CFTC with data covering the week up until the previous Tuesday.
The latest report shows how hedge funds increasingly have been focusing on energy and livestock for price gains while net-short positions have been rising across metals with platinum group metals being the exception. Most of the selling, however, continues to be concentrated in grains and soft commodities such as sugar and coffee.
Apart from fundamentals that help determine the long-term direction of commodities, speculators hold a major sway over short-term price movements. The table below shows how hedge funds, measured in number of futures contracts, are positioned across the major futures markets. The table, which is based on data from the Commitments of Traders report, is released every Friday by the US CFTC with data covering the week up until the previous Tuesday.
The latest report shows how hedge funds increasingly have been focusing on energy and livestock for price gains while net-short positions have been rising across metals with platinum group metals being the exception. Most of the selling, however, continues to be concentrated in grains and soft commodities such as sugar and coffee.
US farmers are currently struggling with too much stock left over from several years of strong production. So far, the spring weather prospects have not done much to dent the outlook for the coming season despite heavy rainfall and cold weather delaying the planting. These developments, together with the US-China trade war and the aforementioned slowdown in Chinese demand, have all helped drive a significant amount of selling across the sector.
It is worth keeping in mind that hedge funds are very disciplined when it comes to maintaining and expanding positions – long or short - while momentum supports the direction. They are, however, also often the first movers once the technical and/or fundamental outlook changes. This means that once a market direction shifts, hedge funds are often those holding the largest potentially unsound positions at either the highs or lows. These situations have led some to use the term “dumb money”, but one shouldn’t forget that these funds’ disciplined approach to trading benefits them throughout the periods in between such major directional shifts.
Traders will be watching weekly US planting progress reports, released on Mondays after the Chicago close. Any delay in corn and wheat planting could trigger increased acreage switching towards later planted soybeans. In addition the USDA will release its monthly supply and demand estimates report on May 10.
Soybeans remain troubled by the sharp, trade war-related slowdown in Chinese demand. Adding insult to injury, there is now the possibility that a trade deal might not boost demand given the deterioration in the outlook for Chinese feed buyers.
It is worth keeping in mind that hedge funds are very disciplined when it comes to maintaining and expanding positions – long or short - while momentum supports the direction. They are, however, also often the first movers once the technical and/or fundamental outlook changes. This means that once a market direction shifts, hedge funds are often those holding the largest potentially unsound positions at either the highs or lows. These situations have led some to use the term “dumb money”, but one shouldn’t forget that these funds’ disciplined approach to trading benefits them throughout the periods in between such major directional shifts.
Traders will be watching weekly US planting progress reports, released on Mondays after the Chicago close. Any delay in corn and wheat planting could trigger increased acreage switching towards later planted soybeans. In addition the USDA will release its monthly supply and demand estimates report on May 10.
Soybeans remain troubled by the sharp, trade war-related slowdown in Chinese demand. Adding insult to injury, there is now the possibility that a trade deal might not boost demand given the deterioration in the outlook for Chinese feed buyers.
The combination of months of speculative crude oil buying and a sell signal on the weekly crude oil charts helped trigger the first weekly reversal in six. Tightening fundamentals led by multiple voluntary and involuntary supply disruptions (from Venezuela, Iran and now also Russia following the pipeline contamination scandal) nevertheless gave way to selling with traders responding to the negative technical price action.
US waivers granted to eight buyers of Iranian crude oil last November expired this week, but the market had concluded that Washington would struggle to bring down Iranian exports to zero. US crude oil production estimates, meanwhile, hit a new record of 12.3 million barrels/day, an astonishing 1.7 million b/d year-on-year increase, while inventories jumped to 471 million barrels, a 21-month high.
With Saudi Arabia unlikely to provide extra barrels before being needed the short-term risks still point to higher prices. In the short term however, the battle between strong supportive fundamentals and a short-term deterioration in the technical outlook will be the focus. A break below the 200-day moving average on WTI crude oil at $61.5/b could see the market target the first major retracement level at $57.3/b. Even if that level is reached, however, it would still only reflect a weak correction within a strong uptrend.
US waivers granted to eight buyers of Iranian crude oil last November expired this week, but the market had concluded that Washington would struggle to bring down Iranian exports to zero. US crude oil production estimates, meanwhile, hit a new record of 12.3 million barrels/day, an astonishing 1.7 million b/d year-on-year increase, while inventories jumped to 471 million barrels, a 21-month high.
With Saudi Arabia unlikely to provide extra barrels before being needed the short-term risks still point to higher prices. In the short term however, the battle between strong supportive fundamentals and a short-term deterioration in the technical outlook will be the focus. A break below the 200-day moving average on WTI crude oil at $61.5/b could see the market target the first major retracement level at $57.3/b. Even if that level is reached, however, it would still only reflect a weak correction within a strong uptrend.
Copper was down more than 3% on the week to record its biggest weekly drop since November. The price hit a 10-week low of $2.772/lb, close to its 200-day moving average before finding support after Chile’s Codelco (the world’s largest producer) said that demand was strong. The forecast for tight supply, the continued move towards electrification as well as infrastructure projects are likely to provide long-term support for copper. In the short term, however, the focus will primarily be on finding support with $2.717 representing a key line in the sand.
It was not a good week for gold either with the metal failing to build on its relatively strong performance the previous week when it managed to rally despite headwinds from a stronger dollar and US equities trading at record levels. The short-covering rally that followed the first failed attempt to break below $1,275/oz was reversed as dollar strength resumed and the latest Federal Open Market Committee meeting turned out to be less dovish than expected.
The market has priced in at least one rate cut in 2019. Instead of entertaining that idea, however, Federal Reserve chair Powell sounded more upbeat at the central bank’s latest meetings, signalling to investors that the Fed is not ready to turn determinedly dovish just yet.
Just like the strong Q1 GDP the previous Friday surprisingly sent gold higher the same thing occurred following the monthly US job report which also proved to be on the strong side. Both signs that the selling interest remains muted and for now it points towards continued consolidation with a weaker dollar and/or stocks required to attract renewed safe-haven and diversification demand.
It was not a good week for gold either with the metal failing to build on its relatively strong performance the previous week when it managed to rally despite headwinds from a stronger dollar and US equities trading at record levels. The short-covering rally that followed the first failed attempt to break below $1,275/oz was reversed as dollar strength resumed and the latest Federal Open Market Committee meeting turned out to be less dovish than expected.
The market has priced in at least one rate cut in 2019. Instead of entertaining that idea, however, Federal Reserve chair Powell sounded more upbeat at the central bank’s latest meetings, signalling to investors that the Fed is not ready to turn determinedly dovish just yet.
Just like the strong Q1 GDP the previous Friday surprisingly sent gold higher the same thing occurred following the monthly US job report which also proved to be on the strong side. Both signs that the selling interest remains muted and for now it points towards continued consolidation with a weaker dollar and/or stocks required to attract renewed safe-haven and diversification demand.
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