It has been a relatively quiet week in commodities with the different sectors trying to weigh the impact of several key developments such as the weaker dollar, rising equities, trade talks as well as Brexit developments. The IMF downgraded global growth to the lowest level since the global financial crisis while China, the world’s biggest consumer of raw materials, saw its Q3 GDP slow to 6 percent, the weakest since the early 1990’s.
A combination of a weak demand at home and lower exports due to the ongoing trade war with the US has taken its toll on Chinese growth, although recent economic data point to signs of green shoots beginning to emerge.
The USD weakness was spearheaded by GBP and EUR strength. The potential for a Brexit deal helped drive Sterling to a five-month high while the euro, the favourite short among speculators, reached a seven-week high.
The potential for a mini-trade deal between the US and China, which could be signed in November at the Apec summit in Chile, helped support those agriculture commodities that may receive a boost from increased Chinese demand.
Crude oil traded lower but overall it looks as if both WTI and Brent crude oil continue to settle into relative tight ranges around $55/b and $60/b respectively. The global outlook for demand remains challenging with the current weak sentiment not being helped by a recent IMF global growth downgrade and uncertainty surrounding trade negotiations between the US and China. Opec and Russia may, given the current demand outlook, be forced to maintain and potentially cut production even further in 2020. Whether that can be achieved or not is likely to refrain the market, barring any renewed geopolitical event, from rallying anytime soon.
Perhaps reducing the need for Opec+ action is the fact that US shale production growth has slowed in 2019 and look set to slow even more over the coming years. Lower crude oil prices and increased scrutiny from investors looking for a return instead of rapid growth have led to an almost continued reduction in the weekly rig count since last November. The XLE ETF which tracks the performance of US crude oil and natural gas producers has underperformed the S&P500 by close to 20 percent so far this year. An indication of lower investor confidence and one that may hamper future growth through lack of investments.
Gold has now spent more than two months trading sideways around $1500/oz. From a chart perspective the lower highs point to fading momentum. The same formation however could also signal the emergence of a bull-flag which, if broken above $1510/oz, could see it resume its rally. A deeper correction to $1450/oz or even $1415/oz would do little to remove the long-term bullish view many, including us, currently hold on gold. Only a break below $1380/oz, the old range top and 61.8% retracement of the June to September rally could change this view.
Gone for now is the roaring bond engine which back in June and July helped the yellow metal break above $1380/oz and with that outside of its multi-year range. But despite seeing bond yields stabilize following their rapid descent, US stocks near record high and the outline of a trade deal emerging, gold has nevertheless managed to avoid a major correction.
This indicates that it remains in demand, not only from short-term speculative players – who otherwise would have tried to send the market lower to squeeze out longs - but also from real money investors looking for diversification amid a slowing global growth outlook and various geo-political risks.
Total holdings in bullion-backed, exchange-traded funds have seen a relentless rise since May and they are currently just 26 tons below the December 2012 record. Hedge funds maintain a near record net-long through futures and it is the potential reduction from this category of traders that currently poses the biggest challenge.
