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Big Wednesday, in trading terms, is behind us. The data that the market eagerly awaited has been published. Chinese economic indicators are still slightly better than last year’s, but still lag behind the desired figures. In the U.S., CPI is at 3.3% (compared to the previous 3.4%), which the market interpreted as a continuation of the trend of decreasing inflation.
At the same time, the FED has kept interest rates unchanged and is likely to continue doing so, but Powell seems to be trying to signal a slightly looser stance. PPI was at 2.2%, also a continuation of the downward trend from 2.3% in April. However, given that inflation in the U.S. remains significantly above the central bank’s target levels, FED leaders indicated last week that they expect only one rate cut this year, whereas they previously expected three cuts. High borrowing costs over a longer period may hinder economic activity and demand for key exchange commodities, primarily oil.
The U.S. dollar strengthened last week as a result of political turmoil, primarily in France, following the European elections. A strong dollar, a weak Brazilian real, bearish sentiment among Chinese investors, and French political chaos are sending warning signals to commodity investors. In this context, the ECB states that the role of the euro as a reserve currency has diminished in favor of the dollar and yen, while gold has surpassed the euro in international reserves. Some analysts expect Singapore to become a major hub for gold as trade shifts eastward, with the country’s proximity to central banks actively accumulating gold being the main reason for this. This is in addition to the increased gold consumption by major emerging market economies, most of which are concentrated in Asia.
It seems we are opening a new chapter, now in trading terms, of the polarization of the world, namely the West and China. After the introduction of tariffs on imports of electric cars from China to the EU, China is now announcing the introduction of tariffs on imports of pork from the EU. It seems we are at the beginning of a new spiral of trade disputes, where politicians take the lead, and the economy pays the bill. Cheers!
The fifty-year petrodollar agreement has expired
After three consecutive weeks of falling futures prices for oil, last week they rose. We enter the new week at levels slightly below $83/bbl (Brent) and slightly above $78/bbl (WTI). The reason for the reversal of the short-term downward price trend is optimism that demand for oil will grow in the second half of the year. This is how the market currently sees it, both OPEC+ members and Goldman Sachs. OPEC has confirmed that it expects demand to grow by 2.25 million barrels per day this year, and Goldman Sachs predicts solid demand in the U.S. during the summer and a market deficit in the third quarter of 1.3 million barrels per day.
U.S. authorities have also slightly raised their demand estimates, so they also expect a supply deficit at least until the beginning of winter. All these estimates are based on expectations that the growth of Western economies will accelerate after central banks cut interest rates, which should also stimulate demand for oil. Additionally, demand from China, the world’s largest oil importer, is expected to strengthen, as local authorities are trying to accelerate the recovery of the economy through various measures. Now, one thing is expectations/desires, and another is reality, but that is precisely what drives markets and increases volatility. Another interesting point. The fifty-year petrodollar agreement with the U.S. has come to an end, and Saudi Arabia will now be able to sell oil in several currencies, including RMB, euro, yen, and yuan.
Futures prices for European natural gas TTF have fallen below €35/MWh due to forecasts of warmer temperatures reducing demand, while supply has remained stable. Temperatures in Northwestern Europe are above normal and are expected to remain so, with an even warmer week ahead. Additionally, fears of gas supply disruptions from Russia to Europe via Ukraine have diminished as Gazprom announced it would increase gas deliveries. Norwegian gas supplies have also remained stable.
Unlike oil, the price trend in the agri world did not change last week. The USDA report is behind us, and we can say it was generally neutral. Estimates of global stocks at the end of the new 2024/25 season were slightly higher than market expectations. Notably, the wheat crop estimate in Russia is 83 million tons, the corn crop in Argentina is estimated at 53 million tons, and the Brazilian soybean crop is at 153 million tons. Weather in the U.S. is wet in the Northwest and dry in the Southeast, but forecasts are moderate until the end of June. Physical commodity markets are sending promising signals.
In general, funds are waiting for new fundamental signals from the market, i.e., from the macro environment to decide on their next steps. The quarterly report on stocks and planted areas in the U.S. Department of Agriculture on June 28 is expected to be quite important for defining the future direction of agri commodity prices. Until then, we can expect price movements similar to the last two to three weeks. It should be noted that funds are generally still in a short position, approximately 23.5 million tons of commodities, but are long on certain commodities (for example, soybean meal or MATIF wheat). This short position could further increase in the coming weeks.
Copper prices have further declined
The weather is not ideal, but generally favorable for crops in the Northern Hemisphere. The rains that fell in Russia have slightly helped in pressuring prices, and the production of Ukrainian agricultural products has been revised upwards. Planting in the U.S. for all crops is ahead of the five-year average, and crop conditions are better than the five-year average. So, everything is excellent in the U.S. Regarding the price of physical commodities, prices in Italy are falling, as prices in Hungary and on a CIF parity have dropped due to supply from Ukraine. Additionally, weak demand from Italian buyers is also penalizing prices.
We mentioned earlier in analyses that the difference between futures prices for wheat and corn had been disproportionate for several weeks and that some kind of correction would have to occur, either corn prices would rise or wheat prices would fall. The latter has happened, so this imbalance has now been rebalanced. The futures price of wheat on the CBOT fell last week by 2.4%.
Futures prices for copper have further fallen below $4.45/lbs, the lowest in the last two months, erasing the May increase that had pushed prices to a record $5.2/lbs amid evidence of low short-term demand. Industrial production in China in May slowed more than expected, while faster declines in real estate prices, a slowdown in fixed asset investment, and a contracting official manufacturing PMI in the world’s largest consumer have heightened concerns that demand will not recover.
Consequently, Chinese copper inventories have remained near their highest level since 2020, surpassing seasonal factors that favor declines. As a result, the price of deliveries from customs warehouses in Shanghai has remained depressed compared to the LME for a month. Nevertheless, prices are 10% higher than a year ago amid speculative bets on looming shortages.
