HomeResearch and NewsCommodity market Report - May 2019

Commodity market Report - May 2019

EXECUTIVE SUMMARY

Trade war risk resurfaced and now is the main talking point for commodities as previous impulse from dovish Fed and China micro-stimulus has faded completely. Overall risk conditions are ready to switch to risk-off mode as equities and commodities have already switched. Oil and Gasoline overvalued (sanctions on Iran and Venezuela) with +30% YTD, followed by Nickel and Palladium (bubble is bursting). Agri commodities and Nat.Gas made new lows early May and is recovering since then. Metals are suffering from strong USD, Trade War and Auto slowdown

Macroeconomic drivers lack momentum as China stimulus effect has faded and Fed dovishness helps only financial markets 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. But the next few month will be tough with strong USD, reduced dollar liquidity (QT program expires only in September) and huge US fiscal deficit

Chinese economy rebounds only temporarily and it’s not able to return to 6.5-7% growth even without Trade War. Govt wouldn’t allow for new bubbles to inflate and will have to protect Yuan (7.0 per USD is a critical level). Thus it is not like add liquidity to the markets. Commodity intensity of its economy is going to be further reduced

Investors’ interest in commodities is not growing further with futures open interest modestly rebounded. There is no excess in overall commodity universe but palladium is still overvalued due to short squeeze in physical market, grains and coffee are extremely oversold, but gasoline pumped up by hedge funds buying

Weather conditions are moving toward moderate 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 and strong dollar will negatively influence demand

TOP TRADING IDEAS:

  • Play the bubble burst game in Palladium with short term trading in the range 1300–1400 $/oz. Can be hedged with long Platinum at 800 $/oz

  • Use probable supply shocks to enter short position in Oil with entry range for WTI at 63-65 $/bbl

  • Buy Gold at 1250 $/oz where we could drop on dollar strength

  • Play the range in Cocoa: long at 2150-2200 and short at 2400-2450 $/mt.

  • Depressed Coffee is close to exhaustion the downtrend – accumulate long in 90-92 cents/lb range

  • At 1800 $/mt Aluminum could be a good contrarian buy with expectation for supply response

 

commodity;

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