Head of Commodity Strategy
Key points
The Bloomberg Commodity Total Return index hit a fresh 17-month high earlier this week, supported by strong rallies across industrial and precious metals, before suffering a small weekly loss after minutes from the latest FOMC meeting reiterated the higher-for-longer stance on rates with some officials even discussing whether current policies were restrictive enough. The short-term interest rate futures market responded by lowering the expected number of interest rate cuts this year to just one, and only after the US Presidential election in November.
The Invesco Bloomberg Commodity UCITS ETF trades up 8% year to date as it seeks to replicate the return of the Bloomberg Commodity Total Return index, an index which tracks the performance of 24 major commodity futures, spread between energy (30.1%), metals (34.2%), and agriculture (35.7%). Following a year-long consolidation phase the index recently broke higher supported by gains across all the mentioned sectors. Do note the shown ETF is just one of several tracking the BCOM TR Index
Having reached a fresh record high at USD 2450, gold suffered a USD 125 correction, in the process heading for its worst week in three months. Silver which earlier in the week surged to an 11-year high at USD 32.50 also suffered a sharp reversal, but for now the semi-industrial metal holds above key support in the USD 30 area. Copper’s premature rally to fresh record high also suffered a correction towards key support in the USD 4.70 to USD 4.75 area. Overall, we maintain a positive outlook and suspect traders and investors will maintain a buy-on-dip strategy across all three metals.
US and especially EU gas prices jumped with the Dutch TTF benchmark hitting a year high in response to an unplanned outage in Norway and renewed concerns about the remaining supplies from Russia. Staying with energy, Brent trades down around 6% on the month, near key psychological support at USD 80, and it has now lost more than half the strong gains seen between December and early April. A recent weakness in refinery margins and weaker time spreads in both WTI and Brent suggesting oil demand has hit a soft patch following a strong first quarter.
However, despite the current softness we still see demand picking up in the coming months amid seasonal strong demand in the Middle East towards cooling, as well as the US summer holiday driving season, and strong demand for jet fuel. All eyes now on the June 2 OPEC+ meeting and how the group will respond to prices trading close to USD 80 instead of USD 90, a price level preferred by most members.
Partly offsetting the mentioned losses across energy and metals were the agricultural sector with the softs and grain sectors both rising, as weather related worries supported continued strong gains in wheat, corn, cotton, and coffee. Wheat futures in Chicago and Paris were heading for another weekly gain, trading at ten-month highs, supported by adverse weather-related crop losses in the Black Sea region, as well as other major producers such as Australia, France, and Germany.
Following a recent and relative deep correction, coffee prices reverted sharply higher amid renewed focus on the damaging impact of dry weather conditions, not least in Vietnam, a key producer of the Robusta bean, leading to the biggest two-day rally since at least 2008. In Brazil dryness and heat remain a concern for most Arabica coffee producing regions, potentially negatively impacting the production outlook.
CBOT Wheat, first month contract:
Gold, copper, and silver, some of the recent highflying metals, all ran into profit taking this week after hitting record highs in gold and copper and silver, an 11-year high. Apart from an increasingly overbought market condition, the trigger was the minutes from the latest FOMC meeting in which officials said interest rates will need to stay higher for longer to combat stubborn inflation. Some softness had already started to emerge prior to the announcement amid signs of softening demand amid hesitancy from investors, central banks, and traders to pick up metals at record price levels.
Despite this week’s correction, the Bloomberg precious and industrial metals total return indices both trade up by around 17% this year, however, the combination of high prices deterring some buyers and an even longer wait before the first US rate cut, may now lead to another period of consolidation, the depth of which depends on whether prices drop further to levels that may force hedge funds and CTAs to reduce an elevated exposure. With that in mind gold’s recent correction low around USD 2285 will be key, while in silver the level to watch is whether the spot price will manage to hold above USD 30, a former resistance level turned support following last Friday’s explosive, but now deflating breakout.
We maintain our positive outlook for investment metals with silver potentially enjoying additional tailwind from expected industrial metal strength. We are currently focusing on the below drivers to support prices:
Futures and ETF positions held by financial actors highlighting how recent rallies have been underpinned by strong demand from hedge funds and CTAs, especially in the leveraged futures market.
Copper meanwhile suffered a sharp setback after the recent surge to record highs in London and New York, which further deterred demand from physical buyers. Not least in China, the world’s top consumer of copper, where data for weeks has been telling a story about demand softness that financial traders thoroughly ignored amid the bullish price momentum, and the long-term focus on supply struggling to meet strong demand towards the electrification of the world. Recently the mentioning of AI and an anticipated demand for power to run a growing number of data centres supporting AI helped attract new investors into copper, some perhaps not fully understanding how commodities work.
Commodities are spot products where the price is determined by the prevailing balance between supply and demand, not what that balance may look like in six or twelve months’ time. The recent copper squeeze in the High Grade Copper future traded in New York occurred after traders sold into a rising premium between the High Grade copper price in New York and the LME price in London. However, as the spread due to speculative demand for HG futures continued to dislocate, short sellers were eventually forced to buy back their short positions, thereby triggering a dislocation which is only now getting worked back to normal levels.
Overall, we believe the direction of copper remains up, but following the latest surge to a record high - the timing of which occurred somewhat sooner than expected, given the current weakness in underlying demand fundamentals - a period of consolidation looks increasingly likely. Given how far copper has travelled in a relatively short time, the contract can retrace to USD 4.56 or even USD 4.40 per pound without disturbing the bullish setup.
Recent commodity articles:
23 May 2024: Podcast: 2024 is heavy metals
22 May 2024: Crude oil struggles near two-month low
17 May 2024: Commodity weekly: Metals lead broad gains
16 May 2024: Gold and silver rally as soft US data fuels market optimism
15 May 2024: Copper soars to record high, platinum breaks out
14 May 2024: COT: Crude long slump; grain purchases surge
8 May 2024: Fund selling exacerbates softening crude outlook
8 May 2024: Grains see bumpy start to 2024 crop year
6 May 2024: COT: Commodities correction spurs muted selling response
3 May 2024: Commodity weekly: Grains boost, correction in softs and energy
2 May 2024: Copper's momentum-fueled rally halts amid weakening fundamentals
29 April 2024: COT: Gold bulls stand firm despite recent correction
26 April 2024: Commodity weekly: Sticky inflation and adverse weather focus
23 April 2024: What drives the gold and silver correction ?
22 April 2024: COT: Declining momentum may signal shift toward consolidation
19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
15 April 2024:COT: Hedge funds propel multiple commodities positions beyond one-year highs
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
8 April 2024:COT: Speculative interest in metals and energy gain momentum
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
2 Apr 2024:COT: Gold and crude longs maintained amid strong underlying support
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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.
