Commodities weaker on geopolitics and trade risks

The Bloomberg Commodity Index traded lower for a third consecutive week with major commodities such as crude oil, gold, and copper stuck within relatively narrow ranges.
Market jitters ahead of a near-certain sixth US rate hike (in this current cycle) on March 21, together with multiple geopolitical risks and political uncertainty in Washington, have sapped investor demand.
News that Trump had replaced Secretary of State Rex Tillerson with CIA director Pompeo could land the Iran nuclear deal in trouble while also emboldening the US’ hardline stance on trade.
The perception of the US moving in a protectionist direction has raised the risks of trade wars beyond steel, aluminium, and washing machines.
Ultimately, the loser of such a development would be global growth, and with that demand for growth-dependent commodities such as energy and industrial metals.
Gold traded within a relatively tight range with the metal being stuck between rate hike focus and increased geopolitical uncertainty.
One measure of geopolitical risks, meanwhile, has risen to the highest level since the 2003 Iraqi invasion.
All industrial metals, led by aluminium, traded lower as stocks in warehouses monitored by the Shanghai Futures Exchange rose to a record.
Chinese spring demand has yet to pick up while a trade war could further dampen the outlook.
The agriculture sector traded lower for a second week with profit-taking hitting earlier high-flyers such as wheat, soybean meal, and cotton.
In the grain sector the battle between ample stocks and unfavourable weather continues to play out.
Severe dryness during the past couple of months, both in Argentina and the central US plains helped trigger strong buying which is now fading due to forecasts for rain.
This has left the prices vulnerable after hedge funds during a six-week buying spree up until March 6 went from holding a combined record short in corn, wheat and soybeans of 473,000 lots to a net-long of 315,000 lots.
Gold was on track to yield its tightest weekly trading range in percentage terms since 2012 and in dollar terms since 2007.
On top of a very quiet week for the dollar, we saw Federal Open Market Committee rate hike jitters being offset by geopolitical uncertainty in the form of the Russia tensions and the continued US political uncertainty that sees Washington shifting further towards protectionism, something that ultimately could hurt global growth as the flow of goods shrink.
The FOMC will meet on March 21 and the probability of another rate hike is being priced at 100 per cent. The five rate hikes seen so far in this current cycle all resulted in the same behaviour with gold selling off ahead of the move only to rally strongly once the announcement was made.
All of these hikes were characterised as being “dovish hikes”, hence the potential negative impact this time round should new Fed chair Jerome Powell strike a more hawkish note (something recent economic data do not warrant).If the FOMC fails to deliver a hawkish hike, gold is likely to find a bid with the focus returning to safe haven and diversification demand.
Gold markets seeing one of the tightest trading ranges in six years while the geopolitical risk index sits at a 15-year high is unlikely to continue.
The Caldara and Lacoviello GPR index counts the number of articles in 11 national and international newspapers related to geopolitical risk in each newspaper for each month as a share of the total number of news articles.
Gold is currently stuck in a narrow $1,300 to $1,340/oz range and we maintain a bullish view above $1,285/oz with a break higher initially targeting $1,356/oz.
Just like gold and copper, crude oil has also increasingly been struggling to break out of its established range.
The market has become stuck with rising US production and softer term premiums being offset by a strong demand outlook and the risk of supply disruptions with particular focus on Venezuela and Iran.
Monthly oil reports from Opec, the IEA, and the EIA all saw non-Opec supply exceed demand growth this year. While highlighting the risk to global demand from a trade war, the IEA also highlighted the risk of a further deterioration in the outlook for Venezuelan production which is already at a multi-decade low.
(Ole Hansen is head of commodity strategy at Saxo Bank