The commodity sector remains in consolidation mode with the Bloomberg Commodity index trading close to unchanged for a third week. After peaking at a three-year high in late February, following a 50-per cent surge on vaccine and growth optimism, it has since seen a modest correction as the dollar and Treasury yields strengthened while extended lockdowns have prevented a further recovery.
In energy, Brent crude oil continues to consolidate in a $60 to $65 range following the March rejection above $70/b.
The prospect for stronger global economic growth, upgraded to 6 per cent by the IMF this week, currently helping to offset the impact of a resurgent coronavirus just as Opec+ prepares to add supply over the coming months.
Financial flows into commodities have as a result also slowed with hedge funds turning net sellers for the past five weeks. During this time, a record net long across 24 major commodity futures has been cut by 18 per cent and, while impacting all sectors, the bulk of the reduction has hit the metal sector, especially HG copper.
Industrial metals, which led by copper surged higher by more than 40 per cent during the past year, have also reached a consolidation phase on easing supply tightness as exchange-monitored copper inventories in London and Shanghai have risen, as well as concerns that rapidly rising factory output prices in China could see the world’s second-largest economy slam the brakes and tighten monetary policy conditions.
China’s March PPI, or factory gate prices, beat analyst expectations to rise 4.4 per cent, their fastest annual pace since July 2018. Most of the strong rise can be explained by surging commodity prices, and with this in mind we know there is more to come over the coming months.
The crude oil will continue to add upside pressure, not only to Chinese PPI but global inflation in general, as the year-on-year impact of last year’s price surge will be felt at least until next January.
These developments have raised concerns that China, despite gathering economic momentum, could see the country’s central bank tighten monetary policy and thereby dampening the flow of money into financial markets.
Metals: Investors’ confidence in precious metals received a knock during the first quarter with gold and silver being two of the worst performing commodities. Gold lost almost 10 per cent while silver managed slightly better given its link to better-performing industrial metals.
However, what became clear was the metals’ inability to find a defence against rising bond yields and a stronger dollar. Being the most interest rate and dollar sensitive of all commodities, the weakness was perhaps not that surprising as the dollar rose and bond yields spiked higher amid a stronger-than-expected recovery in global and especially US growth.
Having slumped almost 20 per cent from the August peak, gold has during the past month twice managed to find support in a critically important area below $1680, and during the past week the yellow metal, supported by a dovish US Federal Reserve, managed to recover to a five-week high and almost challenge the equally important area of resistance around $1765.
Although, in his comments Jerome Powell, the Fed chair, also played down the risk that inflation could get out of control, gold may suffer further losses if the market accepts his view and Treasury yields continue to rise on raised growth instead of higher inflation prospects.
[The writer heads Commodity Strategy at Saxo Bank]
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