Most Commodity Prices Decline, Markets Await FED’s Decisions on Interest Rate Hikes

—

—

The last two weeks of April end in a strong bearish trend for most commodities. Thus, this week, energy prices, precious and industrial metals, as well as most agricultural commodities have generally fallen on a weekly basis. In the trading world, the English phrase ‘don’t try to catch a falling knife‘ is often used in such situations. This phrase can best be translated in our context as ‘wait for the price to fall before buying.’

A falling knife can bounce back quickly – in what is known as a striking saw – or a security can lose all its value, as in the case of bankruptcy. Markets are looking for a signal that will turn the trend on the exchanges, and that could be something like a change in monetary policy, geopolitics, China, or some new ‘black swan.’

Mixed Month

At the beginning of the new week, the dollar index (DXY), which shows the value of the dollar against the other six major world currencies, is currently above 101 points. The S&P 500 index is in an upward trend on a weekly basis, currently above the level of 4100 points, while the fear index VIX is in the opposite weekly trend, currently below 17. The Goldman Sachs Commodity Index (GSCI) starts the week in decline, slightly below the level of 560 points, while the Bloomberg Commodity Index (BCI) is also in a downward trend and starts the week below 104 points.

Overall, April has been a mixed month for commodity markets, where some commodities have achieved double-digit percentage growth, while others have fallen. Hogs, sugar, and coffee stand out as commodities with the highest price growth for the month, while prices of oats, wheat, and corn have fallen the most for the month.

Looking ahead, commodity traders will focus the market in the coming month on weather conditions, central bank decisions, Chinese demand, tensions between Russia and Ukraine, and South American export prices of agricultural commodities.

Flight to Safety?

Another interesting week lies ahead, with an emphasis on macroeconomics, which will certainly impact the movement of commodity prices. On Wednesday, we await the decision of the American FED on further interest rate hikes. Expectations are for an increase of 25 basis points, but this could also be the last interest rate hike for some time. Or will the FED risk everything just to bring inflation down to the targeted 2 percent?

On Thursday, the same thing, just on the other side of the Atlantic. The ECB will also decide on further interest rate hikes, and here too, expectations are for an increase of 25 basis points. We will see if there will be surprises on Wednesday and/or Thursday as this will reflect on the DXY index, i.e., on the strength of the dollar against other global currencies, including the euro.

Until then, the euro-dollar exchange rate is around 1.10 with the risk of further decline. Fears of recession continue to circulate in the markets. Now the markets fear new orders from the Biden administration for further restrictions on American investments in China, which is a slightly different approach from Trump’s. If fears of a global recession persist, when it comes to dollar and gold, we could see a typical flight to safety. For now, this does not seem to be the case as the FED’s activities are now forcing the rest of the world to catch up with the US and raise their interest rates.

Oil and Gas Prices Decline

Brent crude oil futures prices have fallen below $80/bbl, continuing a two-week trend of price decline as surprisingly weak Chinese data raised concerns about demand in the world’s largest crude oil importer. Data released over the weekend showed that Chinese manufacturing activity unexpectedly decreased in April, marking the first decline since December amid weak global demand. Growth in service activities in the country also slowed in April, although it remained expansive for the fourth consecutive month.

Investors are now awaiting key economic data and monetary policy decisions from major economies this week, due to concerns that persistent inflation and tightening financial conditions could slow global growth and harm energy demand. Meanwhile, OPEC+ is ready to cut production this month to strengthen market stability, offering some support to oil prices.

Natural gas futures prices in Europe have fallen below €39/MWh, the lowest since July 2021, and after a loss of nearly 20 percent in April due to reduced demand and ample supply. European producers have restrained production after last year’s record energy price increases, and the reduction in industrial demand could be permanent due to slowing growth. Looking ahead, demand is likely to improve in the energy sector during the summer.

In Search of the FED’s Decision

Funds continue their strategy of exiting agricultural commodities and sold a lot of various agricultural futures last week due to expectations of favorable weather conditions, weak Chinese demand, and cheap Brazilian exports. We will see if they want to close some of their positions this week, which could lead to a short-term correction on a weekly basis. All those who are long on wheat, corn, oils, or crude oil want to see the so-called ‘Dovish Hike‘ from the FED on Wednesday (an interest rate hike of 25 basis points), which would lead to a decline in the US dollar and an increase in the prices of risky assets and commodities.

According to MARS, the average yield of winter wheat for the EU is estimated at 5.96 t/ha, which would be 3 percent higher than the five-year average. This optimism is based on current favorable weather conditions, excluding Spain and northern Italy, which are suffering from a water shortage.

Average yields of rapeseed would be 7 percent higher than the five-year average of 3.31 t/ha, while the average yield for barley is estimated at 4.92 t/ha, slightly lower than last year.

The European Commission has estimated future wheat production for the EU-27 at 130.2 million tons and exports to third countries at 32 million tons, with carryover stocks at the end of the 2023/2024 campaign at 22.3 million tons. Corn imports are estimated at 17 million tons, and production at 64.4 million tons.

Agricultural Commodities Also Decline

Negotiations on extending the Black Sea corridor continue. Russia is seeking the lifting of banking restrictions, especially through the SWIFT system. To date, only JP Morgan has been authorized by the US to conduct banking exchanges with Russia.

To date, Ukraine has managed to export 28.8 million tons of grains, including 14.6 million tons of corn and 7.8 million tons of wheat. The European Commission has agreed to ban the import of goods from Ukraine to Romania until June 5, as ample stocks are pushing local prices below the profitability threshold for Romanian farmers.

Wheat exports from the EU have so far reached 25.02 million tons, compared to 22.81 million tons last year at this time. Barley exports from the EU currently stand at 5.09 million tons compared to 6.65 million tons last year. Corn imports, on the other hand, have risen sharply compared to last year, to 22.65 million tons. The same goes for rapeseed, with current imports of 6.47 million tons, compared to 4.31 million tons last year.

Prices have sharply fallen on the CBOT for all commodities due to China’s cancellation of corn purchases. The competitiveness of Brazilian corn (which is expected to increase in the coming weeks with the arrival of a bountiful harvest in Brazilian ports) is affecting prices. Consequently, corn has fallen to its lowest level in 8 months.

In wheat, funds remain in a significant net short position. The USDA has again lowered the rating of the winter wheat crop to only 26 percent good/excellent, which is the lowest for this time of year since 1989. However, this was not enough to support prices, as improved prospects for beneficial rains emerged. Additionally, the supply situation is easing with prospects for larger areas in Canada. This should also be added to the Russian export forecast of around 45 million tons for the current campaign, likely for the future as well, regardless of the outcome of negotiations regarding the corridor. Weather conditions remain generally favorable in the Northern Hemisphere, increasing pressure on prices.

Gold, Copper, and Steel Also Decline

Gold prices have fallen below $1990/t.oz as investors prepare for another interest rate hike this week. In April, gold prices rose for the second consecutive month due to increasing speculation that the FED might soon end its cycle of aggressive monetary tightening.

Concerns about a possible recession and worries about the American banking sector have also spurred demand for safe assets. Given that gold is very sensitive to rate outlooks, higher interest rates could increase the opportunity cost of holding non-yielding bullion and vice versa.

Copper futures prices extended their decline to $3.8/lbs at the end of April, the lowest in nearly four months. The market remained dissatisfied with purchases from Chinese manufacturers after the reopening of the country. The premium for copper in Yangshan has more than halved since mid-March to $23/t, indicating that supplies were sufficient amid subdued demand for physical deliveries. Meanwhile, slow growth in the US and expectations of tighter FED policy have harmed demand projections. Holding a lower price, data from the London Metal Exchange shows that stocks have decreased to 56 thousand tons, the lowest since 2005.

Futures for rebar have fallen to 3600 CNY/t at the end of April, the lowest in over five months due to increased concerns about weak demand in China. The recovery of construction and infrastructure activities in China has not materialized despite the reopening of the country and a series of government incentives and PBoC liquidity injections.

According to the latest data, new construction starts fell by nearly 20 percent year-on-year in the first quarter of 2023, as the change in government towards strengthening the services sector led to a 5.8 percent reduction in real estate investment despite an 11.8 percent increase in credit during that period. Demand levels have prompted the Chinese industrial group to urge producers to cut production, while reports have indicated that the government may reduce production by 2.5 percent in 2023.

—

photo Peak Trading Research

—