WisdomTree: The commodity complex has started 2020 with mixed performance. Precious metals were the standout winners – with gold and silver rallying in response to geopolitical concerns….
By Nitesh Shah , Director WisdomTree
in the Middle East and palladium continuing to acknowledge supply tightness (and platinum benefiting from both of these themes). Energy by contrast has performed poorly, despite an initial price spike in oil related to geopolitical concerns.
Oil and gold have traditionally responded positively to geopolitical concerns in oil producing countries, but in the past year or so, shocks in producing countries have only provided a transitory lift to oil, while for gold the gains have stuck more consistently.
That could be a reflection of the growing role of supply from shale oil in the US, which is far more nimble and price responsive than traditional oil supplies.
On Wednesday 15th January US and China signed an interim deal on trade after close to two years of fraught negotiations. It falls short of a comprehensive deal, but we believe it is likely to take market focus away from potential demand-destruction that rising trade protectionism could entail.
Avoiding new tariffs could help the cyclical commodity-complex trade on its own fundamentals rather than on fears of demand destruction that has weighed on the market in the past year. Of course, it doesn’t mean that we are out of the woods.
A vindicated US could turn its attention on its trade deficit with the European Union, possibly implementing the auto tariffs it has been threatening for the past year. That would lead to resurfacing of demand fears, that would hurt base metals and energy in particular.
However, in a Presidential election year, and with tentative signs of the green shoots of a global manufacturing recovery taking place, the US may choose not to rock the boat this year. In the latter scenario, we expect strong performance in industrial metals – most of which are in supply deficits.
2020 could be a period of monetary divergence. The US Federal Reserve is unlikely to cut rates further this year. Despite pseudo-easing coming from repo market interventions, the US is likely to be less accommodating this year than last year.
In the UK however, interest rates may fall reflecting its central bank’s response to demand weakness. The European Central Bank, after undertaking a strategic review, could also introduce new tools to stimulate an economy that increasingly seems to be suffering structurally if not cyclically.
Whether we get US Dollar appreciation on the back of these trends (which is usually seen as price negative for commodities priced in Dollars) is an open question as many look at the unsustainable growing indebtedness in the US as a source of longer-term concern. The US Dollar has largely traded flat in the past month and therefore has had little impact on price returns.
Geopolitical shocks only provided a transitory lift to oil. The energy complex continues to suffer from the market perception of excess supply and a warm winter in the US has been a particular weight on natural gas and heating oil.
Most agricultural commodities benefit from the first phase of the US-China trade deal. Short positioning on most agricultural commodities led by soybeans, corn, wheat, cotton, sugar, cocoa was trimmed underscoring the optimism towards the commodity.
The US Department of Agriculture (USDA) in its latest January monthly report surprised the market by revising its estimates for the US corn and soybean crop upwards for the 2019/20 season. However, USDA plans to re-survey farmers in five of the worst-hit states and investors will base their outlook on the final figures.
Industrial metals rebound after the signing of the phase 1 of the US-China trade deal coupled with stronger than expected Chinese economic data. The international study groups for nickel, lead, zinc and copper expect the global market balance for the respective commodities to be in surplus next year.
Precious metals posted the strongest performance amongst the commodity complex led by palladium. Strong fundamentals coupled with a boost to risk sentiment from the phase 1 of the US-China trade deal supported cyclically linked palladium prices higher. Gold and silver prices also benefitted owing to rising geopolitical uncertainty led by tension between the US and Iran.