Following the reopening of the US Government after its shutdown, the market has been operating without data from both the US Department of Agriculture and speculative positioning data from the Commodity Futures Trading Commission (CFTC). Next report by Wisdom Tree covers a period of three months about commodity markets. A lot has happened in that time frame.
Commodity markets have been volatile: After sharp declines in December 2018, there was a sharp rally in January 2019. February appears far more range-bound, but there is plenty of potential for prices to break-out if commodities can trade on their own fundamentals rather than be weighed by the constant uncertainty about trade protectionism and other geopolitical risks.
Gold seems to be a standout winner in this environment of uncertainty as investors have rediscovered its hedge potential amid market volatility in cyclical assets in December 2018. We view tightening supply in industrial metals and oil to be very constructive for commodity market performance.
Slowing economic growth in industrialised countries however cast a shadow. Global manufacturing purchasing manager indices have fallen to their lowest levels since August 2016. Italy is in recession; Germany has only narrowly escaped recession; Industrial production growth in the Euro area has been negative for two consecutive months; China has posted the lowest economic growth in 28 years. Given this background, analysts at Wisdom Tree expect economic stimulus (or at least the absence of tightening policy in the Euro area). Federal Reserve (Fed) Fund Futures place little probability in the Fed raising rates this year and—judging by recent Fed communiqué—the market may have forced the Fed’s hand. The People’s Bank of China has been lowering its Reserve Requirement and injecting liquidity into the banking system. Historically, China has stimulated its economy by sanctioning large infrastructure projects, and this infrastructure spending tends to be commodity-intensive and is likely to drive commodity prices higher.
In the short-term, commodity prices could gain momentum, according to Wisdom Tree. However, should any adverse geopolitical scenario take shape- such as another US government shutdown or any potential Brexit fallout- investors should take comfort that their gold holdings may gain in value.
- Gold has made a comeback in 2019 and we expect the metal to recover all of the losses from 2018. As speculative positioning regains, we expect the metal to trade higher. A less hawkish Fed could drive prices to close to US$1400/oz.
- Soybean prices benefit from the de-escalation of the trade war. Agricultural commodities staged a comeback with hopes pinned on the extension of the March 1 trade truce deadline. According to the latest World Agricultural Supply and Demand Estimate Report (WASDE), global grain and oilseed supplies continue to remain high and are expected to expand as trade uncertainty lingers.
- Industrial metals have been the most sensitive commodity to the tos and fros of US trade policy. As it looks increasingly likely that some sort of deal between the US and China will be reached, industrial metals prices can break-out and re-align with fundamentals.
- Although the oil price rally has plateaued in recent weeks, it has plenty of legs to keep going once the fog around trade-related demand concerns lifts. Supply is tightening as a result of Organization Of Petroleum Exporting Countries (OPEC) policy and US production growth faces infrastructure constraints.