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Commodities slump carries plenty of messages

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: soojin.kim@ae.mufg.jp

 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Commodities have shed all of their gains this year. The Bloomberg Commodity (BCOM) index – which tracks 24 traded commodities across energy, metals and agriculture – is now the most underperforming cross-asset class in 2024. Part of this is technical, driven by low summer volatility, thin trading and bearish positioning. Part of this is also fundamentals-led, with investors processing a slowing global growth readings for the second quarter, tepid signs of Chinese policy stimulus post-Third Plenum, more dovish central bank expectations and rising policy uncertainty into the US elections. Going forward, as we draw closer to Fed cuts, we hold conviction that investor appetite for the commodities complex will rebound. As we have regularly articulated, historical Fed cutting cycles have been supportive for commodities as long as growth was strong. Critically, in the first six months following the first Fed cut, commodities tend to rise irrespective of subsequent growth, as commodities (unanticipatory assets) driven by demand “levels” outperforming. This is in sharp contrast to financial assets, such as equities (anticipatory assets), which are more forward-looking and driven by demand “rates”, which historically decline well ahead of weaker growth. Thus, we continue to see merits to own commodities during late cycle dynamics (where demand outstrips supply, and the output gap is positive), which can support diversification against rate cuts and policy hedging into the US elections.

Energy

After drifting ~USD10/b lower in July, Brent crude has bounced back north of USD81/b, as traders justifiably add geopolitical premium over heightening tensions in the Middle East. Brent call volumes have jumped to the highest since early June and a gauge of market volatility is also tracking the highest since the start of the summer. Yet, whilst the market is on tenterhooks in gauging what next steps look like, absent a (low probability) of an actual supply disruption, the geopolitical-led pop in oil prices historically tends to ebb out of the equation.

Base metals

Copper has nosedived back below USD9,000/MT given a lack of material Chinese easing, weakening global PMIs and soft physical copper indicators. Copper’s second quarter rally clearly moved too swiftly and investors are losing patience, reversing positions. Going forward, we believe copper’s pullback offers good entry given the structural bullish outlook via grid greenification, vehicle electrification, AI (vital for catalysing datacentres) and in the base metal’s role in military spending (in a deglobalised world).

Precious metals

Gold was one of the few commodities that rose in the month of July, with levels north of USD2,400/oz, with Middle East tensions, a noticeable uplift in gold-backed ETF inflows and Fed easing coming into view. As with the start of 2024, gold remains our most bullish call on a trifecta of Fed cuts, supportive central bank demand and bullion’s role as the geopolitical hedge of last resort.

Bulk commodities

Iron ore has fallen sub-USD100/MT, as global supply runs ahead of demand. A vibrant mining industry in Brazil and Australia (with some of the majors exporting record volumes and other planning to bring significant low-cost volumes online), alongside an ailing Chinese property crisis, is keeping prices subdued.

Agriculture

Grains – corn, soybeans and wheat – are under pressure from forecasts for cooler US weather spurring supplies. This contrasts with conditions in Europe are expected to see a decline in their wheat output on unfavourable weather hampering output.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.