HomeResearch and NewsCommodity market Report - July 2019

Commodity market Report - July 2019

EXECUTIVE SUMMARY

Trade war risk is by far the most significant problem for commodities and more than able to compensate for ultra dovish expectation from the Fed (market priced in 3-4 rate cut in just one year) and softer USD. Overall risk conditions switched to risk-off mode with equities and commodities leading the way to be oversold. Oil and Gasoline overvaluation resulted in violent correction over the last two weeks – the reversed has happened with Agri commodities that jumped from deep undervaluation toward more neutral stance. Metals kept on suffering from Trade War and economic slowdown especially in Auto

Macroeconomic drivers lack momentum as China stimulus effect has faded and Fed dovishness helps only financial markets but not the real economy. Other EM is still in stagnation with Turkey, S.Africa, Argentina and Venezuela are even closer to crisis. We think that Fed could reduce rates this year but only in case of significant financial crisis like the one we’ve seen in 2007-08, 2011 or 2015-16.

Chinese economy is facing threefold risk of capital flight (requires higher interest rates to protect Yuan below 7.0 per USD) and economic slowdown (needs softer monetary policy) and Trade War escalation. Moreover there are signs of overheating in housing market and stress in banking sector (first bank seizure in 10 years)

Investors’ interest in commodities was stable in May but will slide in June as sell off in Energy. There is no excess in overall commodity universe with net long in Energy and net short in Agri corrected toward less extreme levels. Palladium is still overvalued with deficit in physical market but positioning in futures has already balanced

Weather conditions are moving toward El Nino that is negative for prices of most grains and natural gas, but a little bit positive for cocoa and coffee. Political risks are for downside for most commodities except Gold as Trade War, recession risks and dovish Fed are positive for haven demand

TOP TRADING IDEAS:

  • Add Short in Palladium at 1500 $/oz and 1100 $/oz target. Hold Long in Platinum and ad at 800 $/oz

  • Long trade in Oil has already played out (from 60 to 66 $/bbl); wait for 60 $/bbl to re-enter Long in Brent

  • Buy Gold at 1350 $/oz with long term target of 1500 $/oz

  • Play the range in Cocoa: long at 2150-2200 and short at 2450-2500 $/mt.

  • Add to long Coffee at 102-105 cents/lb for Dec futures with target above 120 cents/lb

  • At 250 c$/lb Copper could be a good contrarian buy with expectation for the end of Trade War

  • Long Sept Nat Gas futures at 1.9-2.1 $/MMBtu for hurricane season and target 2.8-3.0 $/MMBtu

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