Volatility in natural gas prices yet again
21 Jan 2021Front-month natural gas prices rebounded strongly in the last few days of December but have pulled back again since the middle of January. According to the US Energy Information Administration, US exports of liquefied natural gas (LNG) set a record in December after record-breaking exports in November. This has been driven by a colder than normal winter in many Asian LNG consuming countries as well as unplanned outages at LNG export facilities in Australia, Malaysia, Qatar, Norway, Nigeria, and Trinidad and Tobago. US domestic consumption of gas, however, remains below average for this time of year due to many parts being above average temperature. Therefore, export via LNG is the key to positive price movement for natural gas and volatility may be expected as prices respond to demand data.
Copper continues its electrifying run
13 Jan 2021Copper has been the standout performer among industrial metals since the group started its recovery in March last year. According to the International Copper Study Group (ICSG), copper’s supply deficit became wider in the third quarter of last year (with the end of September being the latest data point available). The encouraging thing is that this has been driven by an increase in demand rather than a reduction in supply. Sentiment towards the metal, as observed through net speculative positioning on futures exchanges, has generally trended upwards since the second half of last year. Copper’s use in growing technologies including 5G, electric vehicles, and renewable energy is gaining traction among investors.
US equities look beyond near term challenges to remain positive
13 Jan 2021Equity markets have started the new year on a positive note continuing to build on their momentum from last year. US equities, in particular, have largely brushed aside political unrest in the US and rising covid cases in many countries. Equities continue to price in a positive outlook for the year pinning hopes on a vaccine-led recovery. Risk assets have found further buoyancy from expectations of a potentially larger US fiscal stimulus now that Democrats have control in both houses of the Congress as well the White House. In terms of sectors, energy is leading the way so far in January within the S&P 500 Index in line with the recent strength in oil prices.
US fiscal stimulus hopes take the shine off precious metals
13 Jan 2021Gold ended 2020 with positive momentum in December as continuous weakness in the US dollar supported the precious metal. Gold has, however, retreated at the start of January. US Treasury yields have risen, and dollar weakness has eased slightly on renewed hopes of additional fiscal stimulus in the US now that Democrats have established their control in both houses of the Congress as well as the White House. While a larger fiscal stimulus is expected to provide a lifeline to the US economy, ongoing policy accommodation as inflation rises is expected to be dollar negative. Moreover, while vaccines have given buoyancy to risk assets, there is always the risk of markets realising that the underlying economic reality hasn’t improved as much as the equity market rally. This realisation could potentially be triggered by fourth-quarter economic or corporate earnings data. A combination of these forces could help lift gold prices yet again.
US Treasury yield curve steepens on stimulus hopes
13 Jan 2021The US Treasury yield curve has steepened relative to one month ago as long term rates have risen due to the increased likelihood of a larger US fiscal stimulus. While 10 year Treasury yields have gathered attention after rising to 1.12% on 13th January 2021 - their highest level since March last year, they remain meaningfully below where they were at the start of 2020. The real curve has also steepened over the last month but rates at the front end of the curve have fallen while long term rates have remained largely unchanged. This means that inflation expectations in the near term have risen while markets expect interest rates from the Federal Reserve to remain low.
10-year US Treasury yield rises above 1% for the first time since March
06 Jan 202110-year US Treasury yields fell below 1% in March 2020 for the first time and have since then stayed persistently low. An uptick above 1% at the start of January comes amid expectations that Democrats might end up controlling both houses of Congress giving the Biden administration more power to push their plans forward. This especially raises the prospect of a potentially larger fiscal stimulus – something the Democrats are in favour of. Markets are also developing optimism about the global economy in the second half of the year as vaccines get rolled out and the pandemic is reined in. An improvement in the economic outlook can cause yields to rise further.
Emerging markets build on recent positive momentum
06 Jan 2021Emerging market (EM) equities have started the new year strongly adding to their gains from last year. The MSCI Emerging Markets Index is up around 74% from its lows in March 2020 (in USD terms) and has even outpaced the S&P500 Index. In addition to the positive risk sentiment in global equity markets recently, emerging markets are benefiting from a persistently weak US dollar. A weak dollar makes it easier for emerging markets to service their dollar-denominated debt. Strength in Chinese stocks is also helping the emerging markets more broadly on account of their weight in EM equity indices.
Gold finding its shine back
06 Jan 2021Gold prices fell to around $1776/oz at the end of November – their lowest level since July. Gold has bounced back strongly since then trading around $1956/oz (as of 06 January). Gold’s price behaviour since December resembles its behaviour in March last year when gold bounced back strongly alongside equities. This means that despite the risks faced by economies and markets in the short term due to the spread of the virus, markets appear to be bullish on equities, but investors are possibly mitigating the risks to their portfolios by adding historical safe-haven hedges like gold. This new dynamic of gold rising alongside equities is becoming less puzzling in a world faced with risks but fuelled by highly accommodative monetary policy.
Markets are pricing volatility to remain low in the coming months
06 Jan 2021The CBOE Volatility Index (VIX) futures curve has come down meaningfully compared to 6 months ago. This means that markets’ expectation of volatility in the first quarter of this year is much lower now than it was back then. It can therefore be posited that markets are not necessarily pricing in major disruption in the handover from Trump to Biden. Markets are also largely unfazed by the rapid rise in virus cases in many places including Europe and the US. This creates a short-term risk of disappointment if economic activity gets stunted in the first quarter.
Copper remains on the charge as industrial metals shine bright
10 Dec 2020The Bloomberg Industrial Metals Subindex is up around 12.5% since the start of November as positive risk sentiment in equity markets from vaccine news permeated across to cyclical commodities. Ongoing weakness in the US dollar and improving economic data – particularly from China – are also key factors driving the industrial metals basket. Copper prices made further gains of over 15% since the start of November continuing their charge from recent months on account of strong fundamentals. Copper has benefitted this year not just from Covid-related supply disruption, but strong demand from China. China’s manufacturing Purchasing Managers’ Index (PMI) has continued to improve over the fourth quarter signalling a robust recovery for the world’s second-largest economy. New export orders PMI also presents an encouraging picture for the economy as it has continued to improve after it started signalling an expansion in activity in September – for the first time this year. This points to an improvement in the global economy – which is as important for China as the state of its domestic economy.