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Trifecta week is testing commodity traders

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

Global commodities

The most decisive trading week of the year is here with a trifecta affairs that marries the highest US political theatre, central banking drama as well as stop-and-go Chinese stimulus. In this choppy environment, investors can earn their stripes if they get this week’s calls correct on the US elections, the Fed’s rate decision on 7 November and a key legislative meeting in China concluding on 8 November that’s set to cement new fiscal support. Top of mind thus far this week has been the US dollar’s Trump-trade ascent, that’s driven a move lower in the aggregate Bloomberg Commodities (BCOM) index, with across-the-board losses in energy, base metals, precious metals and agricultural sub-indices. Whilst the US election remains today’s mood music, attention is turning to the Fed rate decision and further Chinese for the rest of this week. Taken together, these three dimensions are set to raise commodity price volatility markedly over the coming weeks – two-side risks in oil (geopolitics vs looming oversupply into 2025), European natural gas (ample inventories vs LNG competition) and base metals (Chinese fiscal stimulus vs US-driven tariffs). We lean short oil rallies, wait to go long near-term dips in gold and await the scale as well as timing of tariffs on China to determine base metals positioning. Given such elevated volatility levels today, we reiterate our year-long constructive conviction for precious metals, led by gold, as a barometer for “fear” (geopolitical hedge of first resort in a challenged confidence era of the US dollar backed international monetary system) and “wealth” (accelerated gold accumulation by EM central banks and Asian retail demand, led by China, over concerns over economic stability and currency depreciation).

Energy

Oil’s rally earlier this week on renewed geopolitical tensions in the Middle East and an additional one month delay to OPEC+ production increases has been tempered as traders zero in on the realities of a Trump 2.0 administration – which brings with it marginal oil price tailwinds through (1) crude production supportive policies, (2) weaker crude demand through higher tariffs, and (3) a stronger US dollar. We have been advocating that whilst there may be value in long oil positions into year-end given portfolio hedging benefits against lingering geopolitical shocks – especially during the lame duck US presidential period – investor attention remains centred on the bearish price (oil and natural gas) Trump-trade.

Base metals

Significant tariff escalation risks undercutting bullish fundamental base metals set up in 2025 under Trump 2.0 but sequencing of policy priorities (tax cut extensions, deregulation vs tariffs) would become much more important under a Red Wave. While a bearish reckoning on Chinese tariffs would still remain a major risk throughout a Trump 2.0 presidency, a Red Wave majority that prioritises other growth supportive initiatives first could still present a wider runway for further base metals outperformance in 2025.

Precious metals

Gold has slumped post-US elections owing to a surge in the US dollar and yields, with further near-term selling risks likely – akin to the 2016 post-US election period. Looking through the noise, gold is a natural Trump trade to hedge against bear steepening that reflects restoked inflation pressures, fiscal deficit spending concerns as well as tariff-driven geopolitical tensions. More broadly, we believe gold’s unshakable bull market remains intact, reinforced by a combination of “fear” and “wealth” dimensions into 2025.

Bulk commodities

Uncertainty in China’s outlook continues to drive iron ore price volatility with traders’ attention squarely focused on the highly anticipated Standing Committee of the National People's Congress (NPC) meeting that concludes on 8 November, wherein the long-awaited fiscal package may be unveiled.

Agriculture

The prices for grains – wheat, soybeans and corn – have edged lower with traders digesting the return of Trump as president. For agricultural markets, under a Red Wave, the return to tariffing may be emboldened, we look for stronger US growth, lower on-farm input costs and an eventual cease fire in Ukraine, which will take time to materialise into a normalisation of export flows.

Core indicators

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