5 min read.Updated: 27 Jun 2020, 11:55 AM ISTGrant Smith,Ranjeetha Pakiam and Yvonne Yue Li, Bloomberg
Global gold prices have rallied 17% so far this year, hitting the highest level in more than seven years
The global coronavirus crisis has prompted a sustained flight to safe-havens like gold amid unlimited quantitative easing led by the Federal Reserve
Commodity markets face very rocky terrain over the second half after their trial by pandemic in the opening six months. With the third quarter starting next week, What to Watch runs the slide rule over a clutch of the major raw materials -- including oil, copper, iron ore and gold -- to assess pitfalls and prospects. The mixed picture suggests being selective is key.
With the global coronavirus case count nearing 10 million, the half will start with investors weighing the odds of a resurgence in some nations, especially the U.S. The period will also be marked by the battle for the White House between Donald Trump and Joe Biden, as well as central bank action. China’s recovery will be critical, with the International Monetary Fund now seeing 1% growth for the full year.
Among set-pieces next week that could sway prices, especially of bullion, there are several linked to the Federal Reserve. Chair Jerome Powell testifies before the House Financial Services Committee on Tuesday, and Federal Open Market Committee minutes are released the next day. U.S. markets will be closed on Friday to observe the Independence Day holiday.
After the Tumult
Oil saw the most turbulent period in the market’s history during the first half of 2020: crashing during the brutal OPEC+ price war that erupted in March, sinking further as coronavirus coursed through the world, and then staging a cautious recovery. In the U.S., traders paid to give their crude away when futures plunged to minus $40 a barrel in April, then watched the market swing to plus-$40 two months later.
The second half will hinge on whether the post-lockdown revival in fuel consumption persists or gets derailed by a resurgence in infections. It will also be dominated by supply: to clear the billion-barrel glut of inventories that coalesced during the slump, OPEC and its partners will need to show enough discipline in keeping output restrained. And their efforts could be scuppered if their rivals in the U.S. shale patch, who’re already resuming operations, once again prove resilient in the face of adversity.
Haven on a High
Gold was the stand-out winner in the first half, rallying 17% and hitting the highest level in more than seven years, and it’s widely expected to add to gains through to the year-end. The global health crisis prompted a sustained flight to havens amid unlimited quantitative easing led by the Federal Reserve. Holdings in bullion-backed exchange-traded funds have swelled to a record, with net inflows of more than 600 tons already dwarfing last year’s additions.
While investment demand remains robust amid negative real U.S. interest rates, physical consumption has been dented and the recovery is expected to be slow. Still, Australia & New Zealand Banking Group Ltd. says prices may hit a record above $1,900 an ounce in the second half and Goldman Sachs Group Inc. sees $2,000 over 12 months. There is some caution, though: Capital Economics Ltd. expects prices to ease as haven demand ebbs, and UBS Group AG is “skeptical of a sustained move toward fresh record highs for now."
Room to Run
Benchmark copper prices have risen by a third in London from a March low and are set for the best quarter since 2010. Even with signs of a resurgence in virus cases rattling markets, analysts say there’s more room to run. Among them, Jefferies LLC says the market “has been undersupplied despite lockdowns" in major economies. On the supply side, this week saw more Covid-related disruptions, with Chile’s Codelco halting smelting at Chuquicamata.
Many mines are still operating with reduced staff amid the pandemic, inventories are falling and scrap is scarce. The tight supplies are coming alongside stimulus measures globally and improving demand in top consumer China. That’s all helping make the industrial metal used in everything from automobiles to electronics a favorite among analysts including those at Goldman, Bank of America Corp. and Morgan Stanley.
The Tide’s Turning
Iron ore’s trajectory in 2020 is shaping up to look like 2019’s roller-coaster ride, when prices soared in the first half driven by disruptions in Brazil before easing off in the second. Despite the pandemic and global recession that’s roiled the prices of most industrial commodities, iron ore has pushed well above $100 a ton this year on supply glitches coupled with robust demand in China, where steel output is at a record. Now the tide’s seen turning.
Morgan Stanley predicts a return to a surplus in the second half as Vale SA manages to revive supplies, prompting prices to fall back to average $80 in the final quarter. The bank -- whose view is similar to other recent forecasts -- put iron ore close to the bottom of its preferences for the half. Investors will track Brazil’s coronavirus outbreak in case that hurts mine output, as well as port holdings in China, and flows from Rio Tinto Group and BHP Group in Australia.
Dark Clouds, Then a Silver Lining
Natural gas’s bad year could get worse before it gets better. The cleanest-burning fossil fuel has endured a brutal first half in just about every corner of the world as the pandemic sapped demand from power plants just as a wave of new supply hit the market. That’s wreaking havoc for U.S. firms eager to join the shale export game, like Tellurian Inc. and NextDecade Corp.
The good news is that the start of the northern hemisphere winter is just a few months away, when home heating drives a surge in demand. Unfortunately, that timeline is the bad news too as storage capacity in Europe is already 78% full and analysts have flagged the risk of running out of space, potentially sending prices toward zero or below. While producers from the U.S. to Malaysia are expected to continue curbing supplies until the market is balanced, Qatar has said that it aims to keep exporting even in a low-price environment.
Against the Grain
While parts of Europe’s grain belt were hit by drought this year, growing conditions have been stellar in many crop-producing regions of the world. Global wheat supplies are forecast to reach an all-time high and the U.S. is expected to reap a record-large corn crop. With coronavirus still limiting economic activity, the bountiful harvests should have supplies outpacing demand -- and Chicago corn and wheat futures have been easing on that expectation.
Canceled sporting events, fewer car trips and slow-recovering restaurants have all hit demand for flour, animal feed and grain-based biofuel. With uncertainty mounting over the pace of recovery from the coronavirus in the second half, growers are waiting to see whether they should scale back plans for plantings next year.
This story has been published from a wire agency feed without modifications to the text.
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