Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Commodities: Is the correction over?
Ole Hansen
Head of Commodity Strategy
Summary: Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Five quarters of hibernation
A year-long consolidation phase, following the surge from 2020 to 2022, during which the Bloomberg Commodity Total Return Index more than doubled in response to a post-pandemic growth sprint supported by rock-bottom central bank rates, shows signs of maturing. In Q1, the index traded close to unchanged for a fifth consecutive quarter as some sectors remained under pressure while others flourished. As we approach a quarter that may see rate cuts from major central banks, led by the US Federal Reserve and the European Central Bank, and the first rate hike in Japan since 2007, the prospect of a softer dollar and lower funding costs to support growth could end up being the triggers supporting a broad bounce.
Excluding natural gas, down around 25% on the year, commodities would be up around 2.5%. With announced production cuts from major US producers of natural gas starting to lower an overhang of supply in the coming months, we no longer see gas dragging the index lower. In addition, prospective growth-supportive rate cuts, a well-supported crude oil market, and an oversold grains sector raise the risk of a rebound into the important northern hemisphere planting and growing season, increasing prospects for the mentioned index to deliver a positive return in the coming months.
The shown ETF is for inspiration only and is one among several ETF’s tracking the Bloomberg Commodity Total Return Index.
Appetite for gold rises despite high real rates
In our Q1 outlook, we talked about 2024 becoming the year of the metals with a focus, among others, on gold, silver, and copper. So far, this prediction has worked well for precious metals, the second-best performing sector after surging softs, and has been realised somewhat earlier than anticipated with continued headwinds from elevated Treasury yields and reduced US rate cut expectations. Gold still managed to rally strongly, reaching a fresh record, supported by strong physical demand from central banks and retail investors in Asia. While some of this demand may slow in Q2 as investors adapt to a higher gold price, the prospect for lower funding costs may finally see demand for bullion-backed, exchange-traded funds from real money asset managers pick up for the first time since 2022.
We maintain our 2024 call on gold to reach USD 2,300 per ounce, with the technical picture pointing to a level as high as USD 2,500. In line with this, we lower our silver target by two dollars to USD 28.
Will China’s stimulus attempts revive industrial metals?
The combination of lower funding costs as interest rates finally start to come down, driving a long-overdue period of industry restocking, and China continuing to support its ailing economy, could see selected industrial metals do well in the coming months. Copper, range-bound for almost a year, remains our favourite industrial metal. This is due to expected robust demand, as seen in China this past year, which has kept exchange-monitored stocks near a multi-year low, and due to the increasing risk of supply disruptions and production downgrades. Most of the major miners are dealing with rising labour and construction material costs, as well as lower ore grades as mines mature.
As mentioned, we continue to favour copper, the so-called "King of green metals" given its usage in multiple applications. The first sign of a move away from its year-long, range-bound behaviour would be a break above USD 4.3 per pound in High Grade and USD 9,500 per ton in LME. A successful break may, in our opinion, lead to a fresh record being reached later in the year.
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