Stagflation warnings gain standing – real physical assets are the ideal hedge
Global commodities
Stagflation’s silent anxiety is lumbering closer on tracks smeared with sticky inflation, goaded on by a rocky global recovery. A precondition for stagflation is the presence of factors that limit supply growth – for instance, COVID was a stagflationary shock with disruptions to global supply chains leading to shortages of many goods. With COVID abating, it is becoming increasing clear that some stagflationary forces are however longer lasting – namely, the forces that underpin our long-held commodities supercycle – structural underinvestment in carbon-intensive sectors, deglobalisation, decarbonisation and the social re-distribution (see here). Given that commodities are real physical assets which perform best when they are tight – as corroborated by most commodities in backwardation (supply tightness with demand above supply), they historically have performed well in a stagflationary environment. We acknowledge that commodities are down -4% year-to-date, but as the complex is driven by fundamentals (not expectations), the sheen glistens as stagflation warnings gain standing.
Energy
Better-than-expected Q1 2023 GDP data from China, alongside other strong Chinese activity readings, has not been sufficient to deliver the positive catalyst to oil prices this week given lingering concerns over the broader demand outlook and weaker refinery margins. Meanwhile, natural gas prices in the EU (TTF) and the US (Henry Hub) are rising (albeit from low levels) on colder-than-usual weather leading to higher inventory draws.
Base metals
As with oil, the positive Chinese data prints have yet to filter through to base metals demand. Yet, at this stage in the macro cycle, it is important to reinforce the unparalleled narrative for base metals against other commodities. We have long emphasised the distinctive structural fundamental trajectories that both copper and aluminium possess (see here and here), tied to underinvestment of supply but also the ESG-induced positive demand-side leverage to green transition technologies. We believe that beyond the cyclical China rebound that is set to gain traction, such structural drivers are set to increasingly become spot drivers for base metals, in our view.
Precious metals
Gold is holding on gains to stay north of USD2,000/oz, buoyed by a weakening US dollar as traders weigh the prospects for rates after the Fed’s Bostic and Bullard reiterated views that they need to keep climbing. Gold has seldom traded above USD2,000/oz, but if recent history is any guide, it needs to close above this level into next week to cement its upward momentum – the longest it has managed to consecutively stay above USD2,000/oz was for five trading days in 2020.
Bulk commodities
Iron ore prices have extended the slump as Chinese authorities have continued their pledge to curb “unreasonable” price gains in the key steelmaking ingredient. Meanwhile, G7 countries have pledged to accelerate a gradual phase-out of fossil fuels but failed once again to set a firm timeline for phasing out coal-fired power plants.
Agriculture
Ukraine’s Black Sea grain shipments resumed on 19 April, following another brief halt that sparked fresh angst about future cargoes from the key exporter. Wheat prices fell on the news alongside data signalling that Russian production. Russian Foreign Ministry spokeswoman, Maria Zakharova, said the issues with the corridor arose “solely as a result of actions by Ukrainian representatives, as well as UN officials, who are apparently unwilling or unable to stand up to them”.
Core indicators
Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.
CHART OF THE WEEK: EU GAS INVENTORIES WELL-PLACED FOR WINTER
