Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
The commodities sector is closing the week with losses, largely led by declines in the energy and industrial metals segments. Investors and traders have adjusted positions in anticipation of the U.S. elections on November 5—a pivotal event that introduces considerable binary risks due to the high uncertainty surrounding the outcome. This pre-election repositioning underscores the intricate balance between market sentiment and potential economic impacts. The Bloomberg Commodity Total Return Index, preferred for its diversified exposure to energy, metals, and agriculture, remains up by roughly 5% year-to-date. Gains in precious metals, soft commodities, and industrial metals have offset declines in grains and energy, with the latter dragged down primarily by a steep 41% drop in natural gas.
The biggest losses occurred across the energy sector, led by continued weakness in natural gas prices amid warmer weather forecasts in the US and Europe, indicating sluggish demand for heating fuels. Crude oil fluctuated with the flow of news from the Middle East, where an initial slump followed Israel’s retaliatory attack on Iran. This was followed by renewed bids ahead of the weekend after Iran threatened further action, potentially via proxies that it backs in Iraq. Additionally, speculation about another delay in OPEC+ plans to restore curbed production, stronger-than-expected US economic data, and China’s stimulus efforts helped stabilise and support prices ahead of key support.
Hedge funds have for now adopted a sell into rallies strategi in crude oil, and combined with an already weak position in the fuel products, especially distillates, amid global demand worries and excess refinery capacity, the directional risk from a positioning perspective seems increasingly skewed to the upside on any supportive change in the technical or fundamental outlook.
This sector experienced a small weekly decline after gold’s record-breaking rally paused with a mini-correction unfolding ahead of next week’s US elections—a major risk event that had recently driven prices higher despite rising headwinds from robust US economic data and increasing yields, which could reduce the pace and depth of future rate cuts. Depending on the election outcome, we see the risk of a USD 100+ correction next week, especially if the results prevent one party from gaining control of the White House and Congress—an event likely to heighten concerns over excessive government spending, potentially pushing the debt-to-GDP ratio higher while fuelling inflation fears.
Overall, however, we maintain a long-held bullish view on gold supported by concerns over fiscal instability, safe-haven demand, geopolitical tensions, de-dollarisation driving strong demand from central banks, Chinese investors turning to gold amid record-low savings rates, and recently, as mentioned, increased uncertainties surrounding the aftermath of the US presidential election. In addition, the US Federal Reserve is despite a less dovish tone following a number of strong economic data prints still expected to cut rates on November 7, potentially supporting additional demand for bullion-backed ETF’s.
The BCOM Industrial Metal Index was heading for a fifth, albeit small, weekly decline, led by zinc and aluminium, following a late September rally fuelled by Chinese stimulus and US rate cut expectations that later dissipated on concerns the stimulus measures would insufficiently address China’s significant challenges, especially with the possibility of tariffs on Chinese exports under a potential Trump administration. Some support emerged after China’s manufacturing activity unexpectedly picked up in October, potentially offering sign of improved confidence. In addition to the US election, traders will focus on next week’s key gathering of China’s top legislative body and the upcoming Federal Reserve meeting.
HG Copper continues to find support near USD 4.30 per pound, with upcoming events potentially determining if this level will continue to attract buyers. Our bullish long-term view remains unchanged, supported by solid demand, especially towards the energy transition, potentially creating a supply shortfall as miners struggle to increase production amid rising input prices, declining ore grades, climate change, and increasing regulatory costs and government intervention. The overall uptrend from the 2020 pandemic low appears well-established and would require a weekly close below USD 4 to change that.
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