By Ole S. Hansen | July 7, 2019

Dubai, United Arab Emirates -  07 July  2019:   Commodities with a few exceptions failed to hold onto the gains that were seen following the G-20 meeting in Osaka. During a holiday-shortened week the market first reacted positively to renewed hopes that the US and China would return to the negotiation table. A relief that was soon overtaken by a return to reality when weak economic data from Asia to Europe and the US continued to highlight the risks to the global economy and with that demand for key commodities from oil to industrial metals. 

To finish off a volatile week the US job report for June ended up topping all estimates with stronger than expected job growth potentially easing calls for a 50bp Federal Reserve rate cut on July 31.   

Gold traded in a 56-dollar range around $1400/oz as conflicting market news added to nervous trading from recent buyers still seeking assurance that gold has established a new low and not just another high. Crude oil jumped only to slump as demand growth concerns overshadowed a nine months extension of the Opec+ agreement to curb supply. Corn and wheat both recovered after slumping in response to the June 28 stocks and acreage report. Improved growing conditions may not be enough to revive the prospects for corn as late planting will lead to late harvest and with that the risk of early frost impacting the final yield. 

HG Copper traded lower on weak economic data but held above the recent lows after top copper producer Codelco in Chile once again delayed the return to normal operations at a major smelter.

Iron ore, the best performing commodity this year, reached a five-year high before dropping back. The near 70% year-to-date rally to $117/MT was been driven by tightening supply at ports in China due to Brazil dam disaster and bad weather in Australia, the world’s two major shippers. It was only halted when China’s top steel group stepped in and urged the government to maintain order and to investigate the rally which they believed had increasingly disconnected the price from current fundamentals. 

During the past week we, the Strategy Team at Saxo Bank, released our Q3 Outlook called “The global fiscal panic”. I began the commodity section by writing the following: The global fiscal panic that we expect to unfold over the coming quarters will drive additional gains across several key commodities. Gold seems best positioned to benefit from a renewed race to the bottom in central bank rates and bond yields, while the risk of a renewed currency war could weaken the US dollar, another positive factor for commodities.

Steen Jakobsen, our CIO, highlighted the risks that renewed monetary policy easing might be unable to move the needle and deliver the sought-after boost to global growth. As a result, we are likely to see a shift towards global fiscal expansion with a focus on infrastructure, environment and inequality. One of the sectors standing to benefit the most from the increased spending of money that governments don’t have is commodities, not least gold as inflation is likely to come roaring back just a couple of quarters after it had been pronounced dead. 

Two key events this past week related to the US Federal Reserve and the European Central Bank supported our view that a potential race to the bottom in rates is coming. In Europe, the political appointment of Lagarde to replace Draghi saw bond yields in southern European countries tumble in the belief that further support will be provided. In the US meanwhile, President Trump tapped a long-time dove and a onetime gold bug to fill the vacant slots at the Federal Reserve. Both if appointed could speed up the pace of incoming rate cuts, potentially weakening the dollar while giving gold a boost. 

Two long tails and a double top on the weekly candle chart point towards additional short-term consolidation. The key area of support can be found at $1380/oz (38.2% retracement of the 2011 to 2015 sell-off) followed by the 2016 high at $1375/oz and 2018 high at $1366/oz.  

The renewed drop in bond yields helped drive the value of the global negative-yielding debt market to a new record of $13.3 trillion. Investors in Europe are increasingly struggling to find bonds that pay a positive yield with the alternatives being property, high-risk corporate bonds and not least equities. Global stocks however, continue to defy gravity and are currently showing the biggest disconnect from global leading indicators since 2007. This as investors bet on the Fed put, low inflation, stable growth, continued company buy-backs of their own stocks and the avoidance of another major crisis. For these reasons we viewed the latest correction as healthy and needed to attract additional investors. 

Crude oil came under some renewed pressure after the Opec and Opec+ meetings, as expected delivered an extension to the current deal to keep production capped. Faced with growing demand concerns highlighted by the latest round of lower than expected PMI from around the world Opec had no other option than to maintain the supply curbs until the end of Q1 2020.

The nine months extension into 2020 was driven by necessity as the Northern Hemisphere winter tend to be a weak period for crude oil demand. Extending production cuts for another nine months the group has also resigned to the fact that further market share will be lost to non-Opec producers, especially in Brazil, Canada and not least the US.

While sending a strong signal of support to the oil market it may not support a recovery until later this year. Opec together with Russia can control supply but not demand and, on that basis, while prices may still recover further the short-term outlook may prove challenging. Post-Opec the major price movements are likely to be driven by weekly US stock data on Wednesday’s together with macro-economic data

The short-term outlook for Brent crude oil has deteriorated following the failure to move above $66.8/b to challenge the traffic jam of resistance at $67.50/b. The selling pressure from disappointed longs took the price down to $62.25/b support before pausing.