- The commodity sector ended last week in the red, largely due to declines in the energy and industrial metals segments.
- The greatest losses were noted in the energy sector, particularly due to the persisting weakness of natural gas prices associated with warmer weather.
- The record rally of gold has slowed, and a minor correction appeared ahead of the US elections.
The commodities sector ended the week with losses, mainly caused by declines in the energy and industrial metals segments. Investors and traders adjusted their positions in anticipation of the US elections on November 5 – a key event that introduces significant risk due to high uncertainty about the results. This pre-election repositioning highlights attempts at a complex balancing act between market moods and potential economic consequences. The Bloomberg Commodity Total Return Index, valued for its diversified exposure to energy, metals, and agriculture, has increased its value by about 5% since the beginning of the year. Gains in the segments of precious metals, soft goods, and industrial metals offset losses in the grains and energy sectors, with the latter suffering mainly from a deep, 41% drop in natural gas prices.
Energy
The largest declines were noted in the energy sector, mainly due to persisting low prices of natural gas amid forecasts of warmer weather in the US and Europe, indicating a decreased demand for heating fuels. Oil prices fluctuated under the influence of news from the Middle East – after Israel’s retaliation against Iran, there was a drop, followed by a rise before the weekend when Iran threatened further actions that could be carried out by groups it supports in Iraq. In addition, speculation about another delay in OPEC+’s plans to restore limited production, better-than-expected economic data from the US, and China’s stimulus actions helped to stabilize prices before a key support level.
Currently, hedge funds have adopted a sell-on-rallies strategy for oil prices. Combined with an already weak position in fuel products, especially distillates, and global worries about demand and an excess of refining capacity, investment risk increasingly concentrates on potential price rises, which may occur with any favorable change in technical or fundamental analysis.
Precious Metals
This sector recorded a small weekly drop after the record rally of gold stopped and headed towards a minor correction ahead of the US elections. It has recently been a key factor influencing price rises, which took place despite solid US economic data and increasing yields, aspects that could quicken the pace and depth of future interest rate cuts. We currently see the risk of a correction of over $100, which may occur this week. This, of course, will depend on the election results, but this risk may gain importance especially if the results prevent one of the parties from taking control of the White House and Congress, where fears of excessive government spending could emerge, potentially leading to a rise in the debt-to-GDP ratio and heightening inflation concerns.
However, overall, we still maintain our long-standing optimistic outlook for gold, based on fears of fiscal instability, demand for safe assets, geopolitical tensions, the process of dedollarization, which fuels strong demand from central banks, and the fact that Chinese investors are turning to gold amid record low savings rates. Additionally, as mentioned, uncertainties related to the implications of the US presidential election have increased. Despite a less dovish tone after the publication of numerous good economic data, it is expected that the Federal Reserve will cut interest rates on November 7, which may support additional demand for gold-based ETFs.
Industrial Metals
The BCOM Industrial Metals Index posted its fifth, albeit small, weekly drop, led primarily by zinc and aluminum. After a September rally driven by Chinese stimulus and expectations of rate cuts in the US, these metals weakened amid fears that stimulus measures would not be enough to meet China’s significant challenges, especially in the context of the potential introduction of tariffs on Chinese exports should the Trump administration be established. Support appeared after Chinese industry activity unexpectedly rose in October, suggesting an improvement in sentiment. Besides the US election, traders will focus on this week’s key meeting of China’s highest legislative body and the upcoming Federal Reserve meeting.
HG copper continues to find support around $4.30 per pound, and upcoming events may determine if this level will still attract buyers. Our optimistic long-term outlook remains unchanged. We base it on solid demand, especially in the context of the energy transition, which could lead to a supply shortage. This is happening as miners struggle to increase production in the face of rising commodity costs, declining ore quality, climate change, and increasing regulatory costs and government interventions. The overall upward trend from the pandemic low in 2020 seems well established and would require a weekly close below $4 for the situation to change.
Comment by Ole Hansen, Director of Commodity Market Strategy at Saxo.
Source: https://ceo.com.pl/rynek-surowcow-widoczne-oslabienie-przed-kluczowym-tygodniem-wyborczym-16811
