The commodities sector has started March on a firm footing with broad gains supporting the best weekly performance since October, and while obesity drugs and AI continue to receive a lot of bandwidth in the stock market, this week in commodities belonged to precious metals, not least gold which was heading for its strongest two-week gain since July, in the process racing higher to reach a record high. Supported by a softer dollar and lower Treasury yields after Federal Reserve Chair Powell said the central bank is “not far” from having the confidence to ease policy and that rate cuts can and will begin this year.
As mentioned, these remarks helped send the dollar broadly lower - and risk appetite broadly higher - not least the Japanese yen, which got multiple boosts, which, apart from a dovish Powell included a strong wage growth print which raised chances the Bank of Japan will finally exit the world’s last remaining negative-rates regime and hike rates, perhaps as soon as this month. The USDJPY retreated and may have further to go as speculators reduce exposure to one of the most favorite short trades in the past three years.
All sectors except energy, traded higher on the week with broad gains seeing the Bloomberg Commodity Total Return Index trade back in black on the year. Despite all the focus on gold, silver was the top performer after enjoying a trifecta of support from rising gold and copper prices as well as the softer dollar.
The Bloomberg Softs index remains the best-performing sector this year, despite emerging signs of profit-taking, not least cocoa which has witnessed a parabolic surge amid a substantial drop in supply from West Africa. However, with buying pressure from producers closing short positions, put in place to hedge exposure, and starting to ease, it was coffee and cotton’s turn to shine. Arabica coffee futures enjoyed the tailwind from surging Robusta coffee futures which surged to a new high on mounting concerns over weak supplies from Vietnam and Indonesia, two of the world’s top three producers.
*Gold focus shifts*
Last week, the gold market showed signs of strength, trading flat on the month despite seeing US Treasury yields shoot higher after US data strength earlier in the month, which further delayed the expected timing of the first and depth of subsequent US rate cuts. Towards the end of February, the yellow metal was increasingly behaving like a coiled spring, wanting to trade higher despite yield headwinds but held back by worries about continued data strength. However, after an in-line US PCE core deflator print was followed by a weaker ISM manufacturing print, buyers threw caution to the wind. They rushed into the yellow with momentum buying giving it additional strength once a key band of resistance, which is now support, between USD 2075 and USD 2088 was broken.
*Crude can’t get a break*
Crude oil’s current lack of momentum continues to support our view that Brent and WTI will likely remain rangebound for a while longer, an outlook that was given additional credence this past week with WTI trading softer following several failed attempts to break above 80 while Brent has yet to challenge key resistance near USD 85. Overall, we see the risk of a breakout skewed slightly to the upside with focus on disruption risks in the Middle East and prolonged OPEC+ production restraint.
Biggest short-term challenge potentially being the risk of selling from hedge funds scaling back exposure amid profit-taking in response to crude oil’s current struggle to break higher. Especially after their net long in Brent and WTI futures reached a four-month high at 430,000 contracts or 430 million barrels.
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