ETF Securities: Supply tightness aids cyclical commodities

Commodity prices gained 1.3% last month, lifted higher by the cyclical sectors, energy and industrial metals. Meanwhile gold prices stabilised, removing a prior source of negative weight on the commodity complex.

03.10.2018 | 11:44 Uhr

The US Dollar basket has depreciated by close to 1%, aiding the commodity rebound. As Federal Reserve rate hikes appear well anticipated, we could see a period of US Dollar stability, which will help commodity prices.

Although trade wars are ratcheting higher, with the US announcing a further US$200bn of Chinese imports subject to tariffs, the market expressed relief that a less punitive 10% tariff was applied (instead of 25%). Industrial metal prices led a relief rally with the Bloomberg Commodity Industrial Metals Sub-index posting a 2.8% gain. We have long argued that trade wars will do more to damage supply chains than they will to destroy demand. We are likely seeing an upside correction take place. Palladium, one of the most industrial of the precious metals, posted a 17% increase over the month as prior pessimism was shaken off and markets paid heed to the metal’s strong fundamentals. Most metals are in supply deficit and we expect inventories to continue to decline as a result.

We believe that gold and silver have reached extreme bearishness and are ripe for a short-covering rally. These defensive metals could join the rest of the metal complex in an upside correction.

  • Polarised agricultural sector: livestock and softs rebound, while grains slump. Sugar and coffee posted a relief rally as negative sentiment has been priced in for a while. The latest World Agricultural Supply and Demand Estimates (WASDE) report has once again upwardly revised its estimates on the grains market, driving prices lower.
  • Industrial metal prices reflect tighter fundamentals. The industrial metals complex was the second-best performing sector within commodities as investors shifted focus on tighter fundamentals across key industrial metals as opposed to trade war concerns. While the sector is likely to remain volatile, given the ongoing trade spat, we expect industrial metal prices to recover, owing to stronger fundamentals.
  • Oil outlook remains positive. Oil prices are continuing to stride higher as the Organization of Petroleum a Exporting Countries refuses to expand the group’s quota. With both Brent and WTI curves in backwardation, the near-term outlook for oil appears positive.
  • Palladium led the recovery in the precious metals space, while silver remained a laggard. We expect the long term negative positioning in gold and silver futures to rebound and drive a short-covering rally.

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