Macro: Sandcastle economics
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Commodity weekly: Metals and energy drive early July gains
Ole Hansen
Head of Commodity Strategy
Key points
- The commodities sector began July notching up gains across all sectors
- Gains were led by precious and industrial metals after softer economic data increased bets on a September US rate cut
- Container freight rate continues to soar amid a return of bottlenecks on the major China to US and EU routes
- Hurricane Beryl sends early warning to crude and fuel market
- US rate cut and China stimulus hopes see the return of copper bulls
The commodities sector began July notching up gains across all sectors amid support from a weaker dollar on further signs the US economy is slowing, thereby raising the prospect of the Federal Reserve pivoting towards more than just one 25 basis point rate cut this year. Gains were led by precious and industrial metals, both sectors trading higher after figures showed the US service sector contracted in June at the fastest pace in four years, due to a sharp pullback in business activity and declining orders. Earlier in the week, the ISM manufacturing PMI for June showed a third consecutive monthly drop with a reading of 48.5 indicating a contraction across the manufacturing sector.
Also in demand were the energy sector minus natural gas, with crude oil and fuel products gathering additional strength after an early start to the Atlantic hurricane season raised concerns of a supercharged storm season disrupting production and flow of crude and fuel products to and from the Gulf of Mexico. Together with renewed and heightened geopolitical risks in the Middle East, these developments helped offset signs of demand weakness in Asia.
The Bloomberg Commodity index trades up 1.6% on the week and 6.8% year-to-date, led by a 2.5% weekly gain in precious metals as silver surged back above USD 30 and not least a 2.9% gain in industrial metals where copper jumped 6.2% amid fresh momentum buying after the recent deep correction ran out of steam, partly driven by optimism over additional China stimulus being introduced at the Third Plenum meeting in mid-July. Some concerns remain regarding copper's ability to move higher at a time where the futures curve structure points to ample supply and exchange-monitored stocks continue to rise, reaching a fresh four-year high this past week.
Gold and silver look to early rate cut for support
Our latest thoughts on gold and silver can be found in this update while the technical setup is being described here. Friday’s US job report provided some additional price support with bond yields falling following downward revisions in prior payrolls and the unemployment rate rising to 4.1%, both keeping the prospect for a September rate cut alive.
Container freight rates on a tear, again…
The surge in global container freight rates continues with rates continuing to benefit from the absorption of available capacity as ships take longer routes to bypass the volatile Red Sea region, as well as increased port congestions. The latter somewhat similar to the situation witnessed during the pandemic when a sudden surge in demand for consumer goods from Asia saw goods get stuck at ports and soaring transportation costs became an early accelerant for inflation. Just like then, we are witnessing a logistic nightmare with empty containers clocking up harbors around the world, in the process creating a shortfall in China where they were needed.
In addition, as more companies see the congestion at some Asian ports, they have been inclined to pull forward peak-season demand by ordering early, thereby contributing to the surge of volume that is currently choking the system. Overall, the Drewry Global Composite has now risen for the past ten weeks, and last week's 10% rise to USD 5868 per 40-foot container drove the year-over-year increase to a staggering 300%, once again adding upward pressure on goods. As per the chart below, the rise is being driven by surging prices on the three major routes from China to Rotterdam, New York, and Los Angeles.
Hurricane Beryl sends early warning to crude and fuel market
Crude oil futures in New York and London continue to recover from the early June sell-off, which by now has resulted in a +10-dollar rally to a two-month high. Overall, both futures contracts remain stuck in a narrowing range which during the past year has resulted in a succession of lower highs and higher lows. In fact, since Q4-2022 Brent, the global benchmark, has been averaging close to USD 83.50 per barrel, a level which traders for now have left behind in order to challenge upper bound resistance towards USD 90 per barrel, a level OPEC+ has been aiming for since April last year when the group introduced production curbs in order to support stable prices.
In addition to continued concerns about the geopolitical situation in the Middle East which continues to ebb and flow, thereby triggering what we believe are unfounded concerns about a supply disruption, crude oil and especially the fuel products traded higher as Hurricane Beryl - the earliest category 5 storm in recent memory - raised concerns that we may witness a supercharged storm season, disrupting production and flow of crude and fuel products to and from the Gulf of Mexico. Also, this week, the EIA reported the biggest weekly draw in US crude stocks in almost a year while implied demand for gasoline and jet fuel stayed strong ahead of the US Independence Day holiday, both developments supporting a positive demand outlook across the Northern Hemisphere this summer.
US rate cut and China stimulus hopes see the return of copper bulls
Copper bulls who back in May ended up getting hurt after taking the metal on a premature ride to a record high showed signs of life again this week after prices surged higher by more than 6%. This following a prolonged setback that saw the price surrender a sizeable portion of the strong gains achieved between February and up to the May record high at USD 5.20 per pound. While maintaining our long-term bullish outlook for copper we thought the timing of the May rally was wrong given the lack of fundamental drivers to support a sustained price increase. In recent months, we have seen inventories at exchange-monitored warehouses rise to a four-year high, with the latest week being no exception after total stocks jumped to 522k tons, with increases seen both on the London Metal Exchange and Shanghai Futures Exchange.
Apart from the increased prospect for more than one US rate cut this year, traders have also become increasingly optimistic that additional China stimulus could be introduced at the Third Plenum meeting in mid-July. Not least considering how China’s record-breaking deployment of wind and solar has worsened regional power imbalances, forcing the country to idle increasing amounts of renewable generation. Copper demand fundamentals need to improve in order to support a sustained move higher, and besides the elevated stock levels some other indicators are showing a glimmer of hope that we could be moving in the right direction. The premium paid on imported refined copper rose to USD 3 a ton this week after having traded at a rare discount for the past couple of months, potentially a sign that factories have stepped up buying to replenish inventories.
Long-term fundamentals support robust future demand for copper from electric vehicles, grid infrastructure, and AI data centres, while production may struggle to meet demand, leading to potential supply deficits. Miners need higher prices to justify investments in new discoveries, which take over a decade to yield returns. However, for a sustained rally to unfold, copper needs support from improved copper fundamentals and not just from momentum-chasing hedge funds.
Saxo’s Quarterly Outlook is out and can be accessed here
The title is Sandcastle economics reflecting that the economy and financial markets look pretty with resilient growth and equities at an all-time high. We expect favourable market conditions to continue in Q3, but sandcastles are naturally fragile and thus our clients should be aware of the potential risks lurking around the corners ranging from geopolitics, US election in Q4, unsustainable fiscal trends, and demographics longer term.
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