31.05.21 - The Commodity Report

Chinas announcement to strengthen commodity price controls only had a minor impact on the market. Here are the latest developments.

May 31, 2021

Top/Worst Performer Of The Week

In the last week of trading, we saw more gratifying results for commodities across the board. Among the winners were Energy and Meats but also Grains and Precious Metals. On the losing side we saw Industrial Metals. However this negative performance was only due to the enormous price drop at Iron Ore. On a broad front, it was a pleasant trading week for commodities.

The whole Metals sector was solid on the winning side, with the exception of Iron Ore.

China continues to take the initiative to slow down the sharp price increases in commodities. This caused an enormous price slump at iron ore, especially in the last week.

From a neutral perspective, I remain somewhat skeptical of the announcements and the ability to suppress prices on a sustained basis, as China is the largest importer of commodities. First of all, we have to wait for further developments. In this article you can read more about the regulatory initiatives by the Chinese Government.

Oats stood out in the grains sector. In my opinion the relatively strong price increase was only a correction after the massive selling pressure in the last few weeks. (Oats Futures still 10% below last high)

In the Softs sector we saw high price increases at Coffee, based on the fact that Brazilian plantation owners want to enforce higher prices for contracts that have already been negotiated. We also saw high selling pressure at lumber again. (further down below you will read why) Feeder Cattle jumped on strong sales data.

The Energy sector had a consistently positive week.

Financial Conditions

If we take a closer look at the change of financial conditions, we saw the USD was unchanged last week. The USD is still in a key position and is being closely monitored by me. If the Dollar Index is able to fall below the lows of early 2018 it could (and I believe it will) happen that we see a prolonged selloff, which, if it came to that, would support especially commodity prices. (USD sensitive Emerging Markets equities would also benefit)

If you are interested in the further development in this area, I can only recommend this interview with the macro strategist Julien Brigden. Of all the macro strategists I know, this one is most likely to represent my current market assessment for the US dollar, interest rates and bond yields.

For those of you who don't follow my tweets more closely, I also expect 10Y Treasury yields of around 2% by the end of the year, but clearly above the current level of about 1,58%.

My thoughts - Asking for a friend…

Oil seems still to be an interesting play with the reopening of the economy and the higher demand of fossil fuels.

Momentarily the focus remains on the Iranian nuclear talks and whether sanctions on its oil exports are lifted. Because higher supply of between 1-1,5 million barrels per day, could cause the oil price to drop a bit. In addition, statements about possible increases in production volumes by OPEC are to be observed. (Meeting on Tuesday)

I believe that a lot in this regard has already been priced in. Oil is most likely to remain volatile for the next few weeks due to this uncertain news flow. However, the upside with crude oil currently seems more attractive to me than the downside risk. In my opinion 75$ are still reachable in the current cycle.

An interesting court ruling, which should also affect the Oil market, was passed in the Netherlands last week.

Here the Dutch Court ordered the Oil giant Shell to reduce their carbon emission footprint by 45% till 2030, from 2019 levels. This is worth mentioning because Shell was already the Oil giant with the most ambitious emission reduction targets and measures (-20% till 2030 and -100% till 2050)

What is currently bad news for Shell could mean good news for the Oil price in the medium term. Oil companies would have to adjust their business models even faster. Because if other oil companies should follow, this can have an impact on the entire market supply of Oil. So I see the court ruling as a driver for a higher Oil price in the medium term, because I still believe that the demand for Oil will stay high for several more years. Here you can read more about that topic.

I also would like to talk about Copper.

In my opinion Copper seems to be the play of the future. We see massive infrastructure spending and also the industry shift from ICE to EV as the electric vehicle demand for Copper is huge and the demand will stay on elevated levels for the next few years.

If we look at the fundamentals for Copper I definitely think that this is a commodity where investors should go and buy the dip. Currently there are only a few commodities with those strong fundamentals in the precious metals segment, only Gold would be one of them in my opinion. You can read more about that topic in this article by The Economic Times, where they discuss the question about a sustained Commodity Super Cycle.

Elsewhere In The Macro World

In last weeks episode is was talking about the housing market an the effects of the latest developments on the Lumber price. Last week we got new housing numbers which all came short of the consensus expectations. (both New Home Sales as well as Pending Home Sales)

So it actually looks as if the housing market is cooling down a bit, or rather has formed its provisional top. These developments are currently also lowering the Lumber price. But what in my opinion resembles a healthy correction is referred to by some experts as the bursting of the Lumber bubble.

If you look at the fundamental data situation at Lumber, we see further strong buying pressure from commercials. In addition, the forward curve is still in backwardation, so there is less supply than is currently needed. Therefore, I see the current sale as an opportunity to buy. I explain the exact trading setup in the Premium edition.

This week I will keep an eye on the OPEC meeting which will be hosted on Tuesday, as well as the Manufacturing PMI numbers, to see if there is more pricing pressure for producer ahead. Service PMI numbers will follow on Thursday. On Friday we’ll receive the latest update about the US job market, with the labor market report. Both the labor market and the PMI figures will again be discussed intensively with the Fed's stance on tapering.

Weekly Opportunities In The Premium Section

In this report, I present and analyze those commodities that are currently sending a clear buy or sell signal, based on the MACS model, which I developed to spot trends early on.

This is where the money is made and should be worth 23$ a month.