A weaker dollar has generally helped support commodities at the beginning of 2017 but as the performance below shows we are seeing the outlook for some sectors, not least precious metals, being reassessed.
Ole Hansen -
Welcome to 2017 and Trump-mania, a world where tweets set the agenda randomly across the US and where being unorthodox is the new black”. These are the opening words from our chief economist in our Q1 Outlook, released this past week. In it I also give my views on commodities, especially on gold and oil.
As the inauguration day of January 20 gets closer the market has started to reassess its initial thoughts about his impact on different markets and sectors.
This week’s press conference was vintage Trump as he continued to spend more time provoking his critics and the media than showing a path to the future. This increases the belief that his tenure is likely to be experimental and at times chaotic, two things that undoubtedly is going to provide plenty of market volatility over the coming months.
The dollar sold off while bonds rallied with US 10-year real yields — a key gold driver — dropped to a two-month low. While bonds are reassessing the impact of a Trump presidency his increasingly protectionist tone has supported worries about the growth and inflation implications of his tenure.
A weaker dollar has generally helped support commodities at the beginning of 2017 but as the performance below shows we are seeing the outlook for some sectors, not least precious metals, being reassessed.
Two weeks into the new year we find that supply concerns amid strong demand have given soft commodities a very impressive start to the year. These concerns have especially been boosting coffee and sugar while cocoa has begun to see some buying interest after dropping to a near 3-year low.
The grain sector rallied this week following the monthly US government report on world supply and demand. In it they lowered planted acreage for winter wheat in the US to the lowest since 1909 as farmers respond to weak economic conditions following another year of oversupply and weak price action. Soybeans also rallied as the report lowered yields and stockpiles.
Total supplies of the three major crops, however, rose by more than 10 per cent to a record. So news about reduced planting is required to support prices while we wait to find out what weather conditions lie in store for the coming planting season.
Industrial metals received a boost from a weaker dollar and surging Chinese producer prices which is increasing the prospect of China exporting inflation. Copper led the charge with supply concerns from Indonesia (export restrictions), and Chile (strike action), taking the price to a one-month high. A near record long fund position, however, is likely to act as a drag with the metal having rallied by 20 per cent since early November.
Gold’s recovery from its December low continues with the Trump factor increasingly providing support given the uncertainty about what lies in store. The short on substance and generally farcical press conference this past week helped gold and silver to rally further. The rally was being supported by a weaker dollar and a bond rally which took US 10-year real yields — a key gold driver — down to a two-month low.
Hedge funds already began scaling back gold longs last July and following November 8 this traffic turned into a rout. During the week ending January 3 bullish bets had seen an 88 per cent reduction from the peak while gross shorts had risen by 150 per cent during the past eight weeks.
Investors using exchange-traded products to gain exposure tend to react much more slowly than hedge funds. While only beginning to scale back exposure following November 8, some three months later than hedge funds, we are yet to see any pickup in demand. Gold is currently challenging $1,205/oz which is the 38.2 per cent retracement of the Trump dump. Gaining a foothold above this level is likely to force a buying response from funds not positioned for this changing outlook. Especially form those holding short positions, most of which will now be under water.
Crude oil was trading lower on Friday following a two-day rally driven by optimism about production cuts being carried out. Especially the news that Saudi Arabia is cutting by more than expected cheered the bulls currently defending a record long position. With overall compliance expected to be around 60-80 per cent and with Libya’s production rising someone has got to cut by more and that is what Saudi Arabia has said it’s doing.
Libya, which is exempt from cutting, has seen its oil production rise rapidly since August. Last week production exceeded 700,000 b/d compared with just 260,000 b/d during August. The rise results from the recent reopening of oil production and export facilities in the eastern part of the troubled country.
Overall the market is settling into range while we wait for confirmation about the cutting process. A clear overview is unlikely to emerge until Opec release its Monthly Oil Market Report for January on February 13. At that point we should get a full picture of what Opec countries said it had been pumping compared with third-party estimates. (Ole Hansen is Head of Commodity Strategy at Saxo Bank)
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