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Generally speaking, commodity prices at the level of last week had a positive correction, like precious metals, agricultural commodities, and even industrial metals. Only energy prices had more or less stagnation, meaning they neither rose nor fell. All of this seems more like a technical correction than a change in trend. The week ahead will show what is really happening.
The S&P 500 index is above the level of 4,100 points, the fear index VIX is below 18, and the dollar index DXY is below 102 points. The Goldman Sachs Commodity Index (GSCI) starts the week above the level of 590 points, while the Bloomberg Commodity Index (BCI) is above 108 points. General market movers remain geopolitics, China and their demand, as well as inflation and interest rates. So let’s go in order.
Geopolitics has heated up again, and we are in a situation of increased stress between China and Taiwan due to Chinese military exercises around Taiwan. Meanwhile, the U.S. tested China by flying a U.S. Navy plane near China, but remained in international airspace. At the end of the day, it is positive that during the exercises, there was no major incident that would irreversibly take things in the wrong direction. The IMF warns that the fragmentation of the global economy into rival trade blocs risks triggering a new Cold War.
BRICS calls for a reduction in dependence on the dollar, believing that reducing the dollar’s influence on regional and international trade will diminish the West’s dominance in the global economy. Some countries outside of BRICS support this stance, and even France believes it must make an effort to reduce its dependence on the dollar and limit its reliance on the U.S. Last week, the meeting between the Chinese Prime Minister and the Brazilian President further strengthens BRICS’s position, and now we have Algeria, Iran, and Argentina all wanting to join BRICS. I wonder if the U.S. knows what is happening here and why there is no reaction on this matter. The reduction of dollar hegemony on the global stage favors the introduction of CBDCs, state digital currencies. This is a convergent interest of all major debtors because we must not forget that the ratio of global debt to GDP is approaching 400 percent!
China’s CPI continues to disappoint, confirming the lowest CPI reading in the past 1.5 years, indicating that China is struggling to revive its economy after its zero-tolerance policy on Covid. In 2021, China was the leader in the market with 9 percent of global gold production. Now it is one of the largest importers of gold, but also the largest consumer of gold in the world. The People’s Bank of China has been buying and increasing its gold reserves for five consecutive months. China’s crude oil imports rose by 22.5 percent in March compared to the same period last year, and on a monthly basis, we are at the highest level since June 2020. At the same time, U.S. strategic oil reserves are at their lowest level since 1983.
Will the FED raise interest rates just one more time?
The CPI in March in the U.S. was below market expectations, at 5.0 percent compared to the expected 5.2 percent. This provided an additional boost to financial markets, which reacted positively last week. Furthermore, thoughts about the expected pivot of the FED sooner rather than later have intensified, but the reality is that the FED at least plans one more increase in May of 25 basis points. Will this be the last time? The cycle of rate increases is indeed nearing its end, which should weaken the USD over time.
Likewise, the fact that crude oil remains above $80 fuels the debate about whether inflation will continue to be present amid the significant impact of energy prices on inflation readings. This makes the FED’s job a bit harder, and $100 crude oil would make it even more difficult. FED notes from the last meeting show that many members expect a recession in the second half of this year. Larry Fink, CEO of BlackRock, the world’s largest asset manager, believes that inflation will not fall below four percent anytime soon.
From Frankfurt, they are talking about raising rates from 25 to 50 basis points at the next meeting. The ECB Vice President stated that the institution is not optimistic about the trajectory of core inflation, which is confirmed by inflation data in Germany. Markets expect another 75 basis points of growth during the current tightening cycle in the Eurozone. The USD/EUR ratio dances around the level of 1.10. Inflation data opened the way for the dollar to fall to the level of 1.12. However, the dollar has recovered thanks to expectations of further rate hikes by the FED, solid retail sales in the U.S., and increased short-term inflation expectations and extraordinary results from the banking sector on Wall Street. If the ratio falls below 1.10, it will return the EUR/USD ratio back to a neutral position.
“Universal Currency Unit,” also known as “Unicoin,” is a digital currency of the international central bank, designed to work alongside all existing national currencies. The IMF introduced this digital currency at an important meeting earlier last week. The Digital Currency Management Authority (DCMA) announced the official launch of the international digital currency for central banks (CBDC), which strengthens the monetary sovereignty of participating central banks and aligns with the recent policy recommendations on crypto assets proposed by the IMF.
The Universal Monetary Unit (UMU) is legal monetary property, can conduct transactions in any currency for the settlement of legal tender, and functions as a CBDC for enforcing banking regulations and protecting the financial integrity of the international banking system. Back in 2021, it was decided that the transition from FIAT to digital currencies (CBDC) is an ideal tool, but to achieve this, two things are needed: to create a blockchain suitable for replacing SWIFT and modern and very extensive adoption.
Visionary decision or one of the dumbest moves?
Germany shut down its last three active nuclear power plants on Saturday. It is a bet that it will succeed in achieving its ecological ambitions without nuclear energy, despite the energy crisis caused by the war in Ukraine. The future will show whether this was a visionary decision or one of the dumbest things they have done. From today’s perspective, it seems to be the latter, but let time show what was right. Brent crude oil futures prices remained above $86/bbl at the beginning of the new week after rising more than one percent last week as the International Energy Agency warned that a sudden reduction in production by OPEC+ would tighten the market more than expected and increase oil prices. The IEA also projected that global oil demand will rise by two million barrels per day in 2023 to a record 101.9 million barrels per day.
In addition, markets remain concerned about declining crude oil inventories at a key U.S. storage facility, disrupted flows from Iraqi Kurdistan, and signs of slowing Russian oil exports. Moreover, investors remain optimistic about Chinese demand as data showed that the world’s largest crude oil importer delivered the most oil last month in nearly three years. European natural gas futures traded at around €42/MWh, close to relatively low levels from June 2021, all due to weak demand and a large supply of LNG. Natural gas prices have already fallen 14 percent in the first two weeks of the month, as the heating season has ended and cooling demand has not increased.
At the same time, storage levels are rising, currently at 56 percent in the EU, 65 percent in Germany, and 85 percent in Spain, where most of the LNG terminals in Europe are located. LNG deliveries from the U.S. reached a record in March, and Europe attracted more than 70 percent of all cargoes. On the other hand, storage inventories in France were about 29 percent full as natural gas terminals have been largely blocked by strikes since early March. Although the worst energy crisis is over for now, there are risks for the next winter, namely a hot summer that could reduce hydroelectric power generation, a cold winter, and a recovery in Asian demand for LNG.
In March, the FAO index for food products reached 126.9 points, a decrease of 2.1 percent compared to February. We are entering a period when increasing emphasis will be placed on weather forecasts and the impact of weather (un)favorable conditions on production. In the U.S., drought continues in the Great Plains areas, which will affect wheat production. In Brazil, favorable weather conditions are expected for most of the second corn crop production areas. In Argentina, rains are forecasted in the northern agricultural areas and snowfall in the Cordillera, in northern Patagonia and southern Pampas.
In Western Europe, in many areas, the weather after Easter has been colder and wetter than average, which is positive. In France, the overall condition of autumn crops is excellent, and now high temperatures are expected. In Spain and Portugal, there are no signs of rain coming. In North Africa, moisture deficiency and drought continue. The El Niño effect is expected to develop in the coming weeks, which should be less beneficial for future Australian production. In addition to weather conditions, grain and oilseed prices are supported by lower estimates of soybean and corn yields in Argentina, drought in the U.S., rising export uncertainties from Ukrainian ports, increasing soybean imports to China, and higher estimates of wheat imports from Maghreb countries.
As a result, the price of new and old wheat on the CBOT at the beginning of the week is in the range of $6.8/bu to $7/bu, while corn is around $6.6/bu, and soybeans are again above $15/bu. On MATIF, wheat is around €252/t, while corn is €10/t cheaper. From October to today, physical grain prices have fallen every week. A year ago, the rise seemed endless, and now there is no light at the end of the tunnel. Simply put, supply exceeds demand. The fundamentals are unchanged compared to before the war, but grain prices have lost value.
Copper prices are rising
In addition to everything, the market at this moment ignores all positive news. How will it end? We are faced with a clear desire to curb food inflation. This situation can change in a month or last a long time. Russia has announced that there will be no extension of the Black Sea agricultural products agreement after May 18 unless the West removes numerous obstacles to the export of Russian grain and fertilizers. It seems to me more like a reoccupation of negotiating positions since the export from the Black Sea is needed by both sides.
Hungary, Romania, and Slovakia plan to block the use and import of Ukrainian agricultural products, but not transit. It is a marketing measure to calm domestic producers penalized by falling prices, but the question is whether it can be implemented. Australia has reached an agreement with China to resolve the dispute over barley imports. A sign of improvement in relations between the two main trading partners of goods. Relations between the two countries have been tense for years and worsened after Australia called for an investigation into the origins of Covid, which triggered trade reprisals from Beijing, including anti-dumping duties on Australian wine and barley.
Copper has risen to its highest value in six weeks at $4.12/lbs amid a weakening dollar, expectations of increased demand, and ongoing concerns about low supply. Strong credit growth in China has emphasized the authorities’ intentions to stimulate infrastructure construction. Meanwhile, data from the London Metal Exchange showed that inventories fell to 56,000 tons, the lowest amount since 2005. This development was accompanied by inventories on the Shanghai Futures Exchange, which have lost more than one-third from their peak in February. Additionally, the Chilean state company Codelco stated that production in 2023 is expected to plunge by as much as 7 percent, following a decline of 10.6 percent in 2022.
Such supply-side disruptions must be reflected in price, especially if demand does not experience a similar negative correction. Iron ore prices were at $120/t, moving close to the lowest quarterly level. As concerns about supply have eased and investors have assessed demand expectations in China, the pressure on price growth has diminished. Tropical cyclones in Australia missed iron ore export hubs, reducing concerns that the world’s largest producer would have to halt deliveries. Meanwhile, projections of lower steel production in the largest producer, China, have kept pressure on prices. Recent data from Mysteel showed that rebar and rod production fell by 1 percent, while apparent demand fell by nearly 7 percent.
