Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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WCU: Metals-led commodity rally on US dollar slump
Ole Hansen
Head of Commodity Strategy
Summary: Since the U.S. election this Tuesday, nearly all assets including most commodities have enjoyed a strong surge. The everything up and U.S. dollar down narrative unfolded despite the prospect of at least two years of political gridlock in Washington preventing U.S. fiscal stimulus from flowing into a Covid-19 hit economy, while also putting the brakes on the reflation trade.
Since the U.S. election this Tuesday, nearly all assets including most commodities have enjoyed a strong surge. The everything up and U.S. dollar down narrative unfolded despite the prospect of at least two years of political gridlock in Washington preventing U.S. fiscal stimulus from flowing into a Covid-19 hit economy, while also putting the brakes on the reflation trade.
Commodities nevertheless rallied hard as it became increasingly apparent that Joe Biden was heading to the White House despite Trump’s unfounded claims about foul play. While equities surged higher in response to collapsing volatility, it was the weaker dollar that gave precious and industrial metals as well as other commodities a boost. Following the election, the Bloomberg Commodity Index has risen by 1.4% with strong gains seen in silver, platinum, gold and copper.
The agriculture sector led by soybeans, coffee and corn traded higher, thereby adding to the prospect of rising food costs. Chicago soybeans reached a four-year high with local prices in China hitting record levels on supply shortages. Dry weather conditions in key production regions from the Black Sea area to South America and the U.S. Midwest together with strong demand from China and now the weaker dollar have all helped drive prices of key crops higher in recent weeks.
The UN FAO published its monthly Global Food Price index for October and it showed a continuation of the upward trend. While showing a year-on-year rise of 6%, the month-on-month 3.1% increase was driven by much firmer prices of sugar, dairy, cereals and vegetable oils with only meat prices showing a small drop.
Precious and industrial metals jumped as the dollar slumped to a two-and-a-half year low with gold breaking above previous resistance at $1930/oz and together with copper recording the biggest weekly gain since July. Silver, meanwhile, was the star performer with the price rallying close to 6% since Tuesday. With the gold-silver ratio breaking lower at the same time, silver could potentially be in for a period of outperformance with the ratio potentially heading back towards 70 (ounces of silver to one ounce of gold).
Combined with the weaker dollar, bond yields also softened as the risk of reflation faded with the divided U.S. Government. While the Fed kept its stimulus steady at its meeting this past week, they also said that more fiscal and monetary support may be needed. The market is now speculating that with Biden unable to spend money given resistance from a Republican controlled Senate, the Fed may have to step up and fill the gap soon. Hence the strong rally in precious metals, but also the stock market where TINA (There Is No Alternative) has been given renewed focus.
Gold may now take aim at our end of year target at $2000/oz, but in order to do so the metal needs to stay above the $1920 to $1930 area of support.
Energy: After hitting a five-month low at the beginning of the week on Covid-19 worries and rising production from Libya, crude oil made an abrupt turnaround in response to a big drop in U.S. crude oil stocks together with increased speculation that OPEC+ will step in to support the price. The rally, however, began to deflate once the attention turned from the U.S. election and back to the coronavirus pandemic, with record high case counts being recorded in both Europe and the U.S.
Overall, Brent crude remains stuck in a wide downtrend, currently with resistance at $42/b and support at $35.50/b. As we have said before, the only proper cure for crude oil at these relatively low levels are the removal of the virus threat through the discovery of a vaccine that can be rolled out globally. Only then can and will the market start to ponder how much the lack of investment in new discoveries will help boost the price over the coming years. For now, global demand remains challenged and by how much we should find out next week when monthly oil market reports will be published by the EIA on Tuesday, OPEC on Wednesday and the IEA on Thursday.
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