Inflation Data in the U.S. Causes Sharp Decline of the Dollar and Subsequently Growth in Almost the Entire Commodity Sector

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Due to new fears of an economic tsunami on the horizon, gold has once again demonstrated its status as the world’s number one safe haven. According to Invesco, central banks worldwide achieved a record amount of gold purchases last year and are breaking another record in the first quarter of this year. Concerned about the sanctions imposed by the U.S. and EU on Russia and their seizure of Russian gold (about 50 percent of Moscow’s $640 billion in gold and foreign exchange reserves is frozen along with about $300 billion in cash), more countries are bringing their gold reserves home instead of keeping them in other countries.

The CEO of the Hong Kong Stock Exchange predicted that China will attract $1 to $2 trillion in investments from Middle Eastern sovereign funds by 2030. Sovereign wealth funds in the region have about $4 trillion to invest. Currently, only about 1-2 percent of them is allocated to Asia, particularly China. Given the rapid transformations in the Middle East and the imminent rise of BRICS, we are gradually seeing a global redistribution of finances. IMF has hinted that it may accept the Chinese yuan as a currency for countries to settle their obligations to the IMF following Argentina’s recent debt repayment in yuan. Specifically, Argentina repaid part of its debts – amounting to $1.1 billion out of $2.7 billion it accumulated last month – to the IMF in Chinese currency.

Fed Still Has Work to Do

The U.S. national debt has exceeded $32 trillion. We can safely say it is out of control. Interest payments on this debt totaled $652 billion over the past nine months, which is 25 percent more than last year. The dollar has fallen to its lowest level in 15 months against a basket of major currencies. Inflation and the corresponding Chinese economy remain in focus for the markets, while the U.S. is doing quite well. There are still arguments about a ‘soft landing’ for the U.S. According to the latest data, inflation (CPI) in the U.S. has been declining for the 12th consecutive month and is currently 3 percent. Just as a reminder, in June 2022, inflation was 9 percent! However, CPI readings are largely a result of falling energy prices. When energy is excluded, goods and services continue to set new records for the month of June, and therefore the FED still has work to do in the broader picture. PPI data shows the same trends as CPI.

Oil Prices Rising, Gas Prices Falling

Saudi Arabia is importing a record amount of Russian diesel and oil while exporting its reserves to Europe. So much for the effectiveness of imposed sanctions. Oil prices have risen for the third consecutive week, the first time since April, due to supply issues in Libya and Nigeria, as well as hopes for increased demand related to falling inflation in the U.S. Currently, Brent oil is below $79/bbl. Two of the three Libyan oil fields that were closed last week resumed production on Saturday evening, bringing a total production capacity of 370,000 barrels per day back to the market. The latest data for the second quarter shows that the Chinese economy grew by 6.3 percent (which is below expectations) compared to the previous year, with the post-pandemic recovery facing challenges due to reduced demand from domestic and international sources. However, when it comes to oil, China has reversed the decline in domestic oil production that began in 2015, raising production this year to nearly the highest level ever. This poses another problem for Saudi Arabia and its OPEC+ allies as they try to tighten the oil market. From the lowest point in 2018 to the peak in 2023, China has added more than 600,000 barrels per day of additional production – more crude oil than some OPEC+ countries produce daily. Pumping around 4.3 million barrels per day, China is once again the fifth-largest oil producer in the world, just behind the U.S., Saudi Arabia, Russia, and Canada, and ahead of Iraq. The recovery reflects the high priority that Beijing places on energy security. In addition to China, Russian oil exports from western ports are expected to fall by about 100-200k barrels per day next month compared to July levels as Russia fulfills its promise to reduce supply in tandem with OPEC leader Saudi Arabia.

Futures natural gas prices in Europe fell to €25 per megawatt-hour in the third week of July, approaching levels not seen since May 2021, following a 22.5 percent drop in the previous week, which was the largest weekly drop so far this year. The Nyhamna facility in Norway continued operations on July 15 as planned. Despite the heatwave affecting southern countries and the presence of warnings about extreme weather conditions in countries like France, demand for natural gas remains weak, particularly in the industrial sector. Additionally, natural gas storage in Europe is currently 80 percent full, and reduced demand in Northeast Asia has also contributed to lowering prices.

Weather (Un)certainties Bring Volatility

Last week, market prices of agricultural products rose. The main factors influencing this were extended weather forecasts indicating that the end of July will be warmer and drier, a macroeconomic environment showing improvement, with better prospects for a ‘soft landing’, and uncertainty around global trade flows as the Black Sea grain corridor agreement expired today. Prices of agri products reacted to these bullish inputs, with 24 out of 26 major agri commodities experiencing price increases since the beginning of the month.

Weather (un)certainties continue to dominate the market, so it is not surprising that there is significant volatility. July has been confirmed as the most volatile month of the year. The sea we sail is full of mines. The grain market is reflexive, weak, and only a geopolitical or financial factor can give it momentum. But at these levels, the potential for further decline is limited. On the other hand, canola shows renewed strength, both due to palm oil, whose stocks in Malaysia are disappointing, and Winnipeg canola, whose yield potential is threatened by the current drought.

Futures copper prices have plummeted to the $3.8/lbs threshold, as weaker-than-expected data from China highlighted the country’s struggle for economic recovery and temporarily diminished demand for resources. China’s industrial production for June exceeded estimates and reduced hopes for significant government stimulus. Strong industrial production consolidated signals from Beijing that all stimulus measures this year will be of limited scope as the government seeks to prioritize growth in a more sustainable service sector and limit its dependence on manufacturing and construction. Nevertheless, supply relates to limited losses. Copper production in Chile plummeted 14 percent year-on-year in May, among the latest signs that the decline in global supply signals an impending shortage amid essential use of the metal in the global transition to sustainable energy sources.