The metals complex retreated on concerns about the escalating trade war and slowing demand given the latest data coming out of China, such as the Q3 GDP slowdown, and decelerating industrial production. Nevertheless, while remaining neutral, we are adopting a more positive stance on the industrial metals complex, as we feel that China will continue to respond to the trade dispute by loosening its liquidity approach as it did recently by reducing its reserve requirement ratio for banks, and with the announcement of a tax cut designed to boost disposable household income and kick start domestic demand. We also expect an increase in infrastructure spending. Furthermore, a resolution of the trade dispute between the US and China and some respite from US dollar’s multi-month high could benefit commodity prices.
Gold is a particularly interesting case. Since the beginning of the year, gold barely managed to generate any kind of safe-haven appeal from either the trade turmoil, or from Europe’s woes (i.e. the Brexit negotiations and the Italian budget). Gold prices only took off recently, due in the first instance to the global equity market sell-off, driven by expectations of more aggressive US monetary tightening, and concerns about the escalation of trade tensions. These concerns have in particular risked slowing emerging market growth, which in turn will weigh on global metal demand. Following the recent market turmoil, some investors have speculated that the Fed could slow the pace of its interest rate increases. However, a much stronger market correction would be needed for the Fed to re-evaluate its rate-hike path, despite president Trump’s criticism of the US central bank for being “far too stringent” in its approach to interest rates.
Despite its current rebound (which is also due to short-covering), gold will see limited upside and remain range-bound, as the strength of the US economy (Q3 GDP growth is likely to be between 3–3.5%) and the Fed’s resultant monetary tightening will keep a lid on gold prices in the months to come. The US economy is firing on all cylinders, being more a more “closed” economy than Europe’s, for example, which is more dependent on foreign trade.
As for oil, the market is taking a cautious approach while it assesses the impact of the tensions between the US and Saudi Arabia following the killing of journalist Jamal Khashoggi. This geopolitical crisis, as well as the official start of US sanctions on Iran, is forcing hedge funds to adopt a “wait-and-see” approach and cut their long and short positions to their lowest in two years. WTI oil prices were up 8% in September as investors were concerned about OPEC’s ability to replace falling Iranian exports and declining Venezuelan production. Oil prices were down a further 10% in October as Saudi Arabia gave assurances that it had no intention of using oil as a political tool, and as US crude stockpiles continued to rise.
Oil exports from Iran fell to their lowest levels in two and a half years in September – a 39% drop since April. The declines are expected to accelerate further once the sanctions take effect. Despite Iran’s deepening losses, OPEC increased its production, as did Russia, which broke a post-Soviet record in terms of barrels-per-day production. The decline in Iranian crude exports is also being countered by Donald Trump, who has been giving the impression that he is working with the Saudis to cap oil prices and thus protect Americans from higher prices at the pump.
On the demand side, an agreement between Washington and Beijing would assuage the fears of investors who recognise that global demand growth in the next couple of years will primarily come from China and India. Demand estimates remain stable for now at an average growth of 1.5 million barrels per day, but this could change if the effects of the trade war start to impact Chinese demand.
Pierre Melki
Equity Analyst Advisory Services
Névine Pollini
Equity Analyst Advisory Services