Commodities as a group rose by 1.3% in the past month, led by Industrial Metals (4.2%) and Energy (3.8%). These two cyclically-driven sectors have benefited most from the indications that the US and China are nearing a trade pact, which will alleviate concerns about demand dropping off…..
By Nitesh Shah, Director of Research – WisdomTree
That the actual deal between the countries is likely to be delayed by several months should not be a concern unless the risk of a deal falling apart rises. The fundamentals for the two subsectors remain good.
Within the Energy sector, oil is likely to continue to benefit from tightening supply from the Organization of Petroleum Exporting Countries (OPEC). The cartel has cancelled its April 2019 policy meeting, thereby extending current policy of cutting production to June 2019 at least. Delaying the meeting will also give the group a chance to assess the impacts of sanctions on Iran and Venezuela (and any changes in waivers for consumers of Iranian oil).
The Federal Open Market Committee (FOMC) meeting this week, confirmed that the US Federal Reserve Bank (Fed) has reached the end of its rate tightening cycle for 2019. By striking a significantly more dovish tone, the US Dollar is likely to remain favourable for commodity performance.
The People’s Bank of China has been easing policy, while the National People’s Congress has opened the doors for fiscal expansion to meet the 6-6.5% economic growth target for this year. So, despite Global Manufacturing Purchasing Manager Indices falling to a 32-month low, a less tight policy setting could help demand for cyclical commodities including industrial metals and energy.
At the same, a more dovish Fed is likely to be gold-price supportive as the upward pressure on Treasury yields and the US Dollar abates.The recent pull-back in precious metals therefore could reverse as gold and silver prices rise. With Brexit uncertainty, trade uncertainty and periodic equity market corrections both gold and silver are likely to benefit from their traditional safe-haven traits.
- Supply dynamics in the oil market could potentially widen the Brent-WTI spread. As OPEC continues with its supply cuts and sanctions are imposed by the US on Iran and Venezuela, Brent prices may find further support in the near term. Meanwhile, US production continues to rise, driving a wedge between WTI and Brent prices.
- Base metals continued to benefit from a relief rally, as the US and China engage in constructive trade discussions. If a deal is delayed by several months, it could take some of the momentum away. However, with supply deficits and tight inventories on the London Metal Exchange (LME), we expect prices to rise once again when a deal is struck.
- A more dovish Fed is expected to offer further support to the gold price this year. Speculative positioning in gold has increased despite the rally in equity markets as investors remain aware of financial and geopolitical risks.
- Investors sharply turned bearish on agricultural commodities as their outlook hangs on the fruition of a trade deal. Price performance across agricultural commodities was weak except for cotton and livestock. Short positioning was built up considerably over the prior month. The supply side for most agricultural commodities, except for sugar, remains loose. So, the fruition of a US-China trade deal could serve as a turning point for further price appreciation as it bolsters the demand side.