By Ole Hansen, Head of Commodity Strategy at Saxo
Commodity markets maintain a commanding lead over asset classes, such as bonds and stocks, as we head towards the final few weeks of trading in 2022.
 Ole Hansen |
1. The depth of an incoming recession currently being priced in by the market through the most inverted US yield curve since the early 1980s
2. A recession forcing the US Federal Reserve to change its focus from rate hikes to economic support, potentially before inflation has reached a satisfactory low level, thereby supporting a reversal of the dollar and Treasury yields.
3. A reopening in China leading to a stimulus fuelled recovery in demand for industrial metals and energy.
4. The duration of the war in Ukraine and its potential impact on supply of key commodities from crude oil and gas to wheat and key industrial metals.
Cycle low in gold, silver and copper?
Following developments that have supported a strong rebound in gold, silver and copper, as well as the 170 dollar rally from what increasingly looks like a cycle low around $1615, gold spent the past week consolidating before finding support in the $1735 area. Overall, Saxo maintains its long-held bullish view on gold, and with that more so for silver. This is primarily driven by a combination of an incoming economic slowdown and major repricing as the market realises long-term inflation will settle at a higher level than the sub 3% currently being priced in.
However, with a continued lack of buying interest from ETF investor and increased competition from bonds as yields drop, a further gold extension above the important $1800 area will likely require further declines in the yields and the dollar or some other catalyst that sees a run to safety. A technical update from Kim Cramer, our Technical Analyst, can be found here.
Grains sector weakness led by wheat
At the bottom of the performance table, we find the grains sector. Grains are heading for a monthly loss, primarily driven by weakness in wheat prices in the US and Europe. The weakness is driven by a continuation of the Ukraine grains corridor and a bumper Russian crop looking for a home around the world. Speculators have responded to the general weakness by cutting the total net long across the six major grains futures contract to a three-month low at 430k contracts. According to the latest Commitments of Traders Report covering the week to November 15, speculators had the biggest one-week clear-out of corn longs since August 2019. Meanwhile, the wheat net short extended to a 27-month high at 47k contracts with soybeans and soymeal also suffering setbacks.
Crude oil troubled by China lockdowns and recession worries
Crude oil trades lower for a third consecutive week as demand fears, especially from an increasingly locked down China, weigh on sentiment. A G7-sponsored price-cap plan on Russian oil looks dead in the water as EU countries struggle to agree on a level – the result being either no cap or a level so high that it will not have any meaningful impact on supply, led alone Russia’s response. The 12-month futures spread in WTI and Brent have both weakened to the lowest backwardation since last December, reflecting a market concerned about recession and a seasonal slowdown in demand hurting the front month contracts.
In addition, the fact that the market is not pricing in a premium for oil ahead of the December 5 EU embargo on Russian seaborne crude exports highlights the impact of a sharp slowdown in China – the world’s biggest importer of crude oil. Middle East producers have seen spot premiums for key Persian Gulf graded oil, decline sharply after commanding elevated premiums since the invasion of Ukraine when many buyers started to look elsewhere than Russia, thereby lifting demand for Mideast crude.
The slowdown in demand from China will be temporary but having unsuccessfully fought Covid outbreaks with lockdowns for months, the prospect for an improvement looks month away. This is unless Chinese officials start following the 20-point plan to ease Covid Zero policies that were issued earlier this month by the health authorities. Brent trades near the lower end of its established range, but with multiple uncertainties related to demand and supply, the prospect of a downside extension seems limited in our opinion.
