コモディティ・ウィークリー：中国とFOMCの苦境が重荷に/Commodity weekly: China and FOMC woes weigh

Overall, the Bloomberg Commodity Total Return index traded lower for a third week, surrendering more than one-third of the strong gains achieved following the early June low. Most major commodities and all sectors traded lower, led by softs. Coffee traded sharply lower on increased selling pressure from Brazilian producers as the harvest near completion, thereby easing shortage concerns that in recent months helped underpin the price. Cotton prices also slumped on demand concerns despite the outlook for a much smaller US cotton harvest due to record-high temperatures in the US South.

At the top of the table for the second week we find EU TTF gas futures, a contract which is not a member of the Bloomberg Commodity index. It remains supported by concerns over strike action at three major LNG export facilities in Australia, potentially impacting 10% of global LNG shipments and in the process causing increased competition from Asian buyers for gas otherwise destined for Europe – a region that has become more dependent on LNG imports following a steep drop in supplies from Russia. The latest spike highlights the risk of another volatile winter given the uncertainty about weather and production from renewables.

Crude oil: Tight supply meets macroeconomic headwinds

The energy sector traded lower for the first time in eight weeks as the focus turned to consolidation after the general level of risk appetite took a knock from strengthening macroeconomic headwinds from China growth to rising rate concerns. China, the world’s top importer of crude oil remains a major piece in the oil puzzle, not least considering that the bulk of this year’s robust demand growth forecasts, according to the IEA, is being driven by Chinese demand. So, when it comes to current oil market developments, it is especially important to focus on China for demand and Saudi Arabia for supply with the voluntary 1 million per day production cut likely to underpin the market and prevent a deeper correction at this stage.

On the other hand, rising spare capacity from OPEC producers, as a result of supply constraints, together with rising exports from countries like Iran and Venezuela who are not restrained by quotas, together with the mentioned demand concerns are in our opinion, forces that will prevent prices from a sustained move above $90.

Earlier in the week, Brent and WTI both dropped below their 21-day moving averages, thereby signaling a pause in the strong run up in prices that started in early July following the Saudi production cuts. Together with the loss of risk appetite spreading from the continued rise in bond yields and stock markets suffering broad declines, the focus has shifted to consolidation, but as long Brent holds above $81.75 and WTI above $78 the risk of another round of long liquidation from funds remains limited.

Copper on yuan watch

Copper futures in London and New York continue to defy gravity, trading sideways for months while the rest of the industrial metal sector has suffered steep declines amid growth concerns. The Bloomberg Industrial Metal index which tracks the performance of copper with a weighting of 35.9%, aluminium (27.4%), zinc (16.1%), nickel (14.2%) and lead (6.4%) trades down 16.4% on the year and near last year’s low point when China’s prolonged Covid lockdown hurt sentiment and not least demand from the world’s top consumer.

However, while the industrial metal weakness led by nickel and zinc has created a challenging environment for investors, copper remains resilient, and despite an environment of stagnant manufacturing PMIs – normally well correlated with copper demand – Chinese demand has remained surprisingly robust. Not least driven by strong, and government supported, green transition demand towards batteries, electrical traction motors, energy storage and grid upgrades.

Apart from the mentioned weakness in China and global manufacturing PMIs weighing on prices, copper’s very strong correlation with the Chinese Renminbi continues to challenge the metal’s short-term resolve, after the latest rate cuts from the PBoC drove the offshore Renminbi to the lowest level against the dollar since last November before government intervention supported a small bounce and with that, a small recovery in copper.   

While low stock levels continue to provide some underlying support, the lack of big mining projects to ensure a steady flow of future supply continues to receive attention from long-term focused investors as it supports our structural long-term bullish outlook, driven by rising demand for green transformation metals and mining companies facing rising cash costs driven by higher input prices due to higher diesel and labour costs, lower ore grades, rising regulatory costs and government intervention, and not least climate change causing disruptions from flooding to droughts.

Gold bulls need patience

Gold prices remain in a downward trending channel, with a fourth weekly decline in a row, being driven by rising yields and a stronger dollar amid speculation the FOMC may have to hike rates further as incoming economic data points to continued price pressure. As long as this remains the focus, asset managers and other large investors will have their focus elsewhere amid the current high opportunity/funding cost for holding gold relative to short-term money market products. 

The cost of carry or opportunity cost in holding a gold position is equal to storage cost and the interest income an investor otherwise can receive on a short-term interest rate instrument like T-bills or a money market product. So, whether you own physical gold or hold and roll a futures position, there is no escape from the fact that it carries a cost, either through not receiving the +5% through a short-term interest rate instrument or through the roll into a higher priced forward price in the futures market. 

While we maintain a bullish outlook for gold, these developments also highlight the risk that gold may continue to struggle attracting demand from investors until something breaks, either through a credit event, a weaker dollar, or the belief the FOMC has switched its focus towards cutting rates. Technical traders are unlikely to offer much support until the downtrend is broken and, until then, gold may be at risk of an extension towards $1865.