The general market turbulence took its toll on commodities in August
with cyclical commodities like energy and base metals struggling while
investors ran for cover into gold. The agricultural sector showed solid
returns with seven products figuring among the top ten best-performing
commodities.
The Reuters Jefferies CRB index ended August almost unchanged, having
lost nearly 8 percent during the early part of the month when S&P's
downgrade of US debt and a deteriorating economic outlook took hold.
Coffee on top
A general scarcity of coffee beans among European roasters ahead of the new harvest in October triggered a strong rally in August. Brazil, the world’s largest producer of high quality Arabica coffee, has seen temperatures in the production areas well above levels that could cause frost damage while Vietnam, the world’s largest producer of the Robusta variety, is potentially heading for a record production. On that basis prices should stabilize once fresh supplies begin to reach the roasters. Further upside seems limited.
Gold has stabilized but for how long?
The yellow metal received most of the headlines last month as the year-long rally shifted up a gear with the one month return exceeding 12 percent and, in the process, moving within striking distance of 2,000 dollars per troy ounce. Safe havens from global turmoil were also cut to one from 3 as fear of central bank intervention in Swiss Franc and Japanese yen left gold as the beacon.
A general scarcity of coffee beans among European roasters ahead of the new harvest in October triggered a strong rally in August. Brazil, the world’s largest producer of high quality Arabica coffee, has seen temperatures in the production areas well above levels that could cause frost damage while Vietnam, the world’s largest producer of the Robusta variety, is potentially heading for a record production. On that basis prices should stabilize once fresh supplies begin to reach the roasters. Further upside seems limited.
Gold has stabilized but for how long?
The yellow metal received most of the headlines last month as the year-long rally shifted up a gear with the one month return exceeding 12 percent and, in the process, moving within striking distance of 2,000 dollars per troy ounce. Safe havens from global turmoil were also cut to one from 3 as fear of central bank intervention in Swiss Franc and Japanese yen left gold as the beacon.
In a couple of moves the CME Group raised the margin for trading gold
futures from 4,500 to 7,000 dollars. The move came as a response to
increased volatility after the unprecedented strong rally, not as an
attempt by the exchange to dictate the direction, but mostly in order to
keep some integrity in the market. Speculative involvement from hedge
funds has been reduced as margin increases make an impact on the
position size they are allowed to hold.
The potential for further stimulus signaled last Friday by Ben Bernanke, Chairman of the US Federal Reserve, continues to support gold. The 200+ dollar sell-off recently, however, was a reminder that nothing ever goes in a straight line. After having consolidated earlier this week renewed stock market weakness and squabbles over Greece (again) saw buyers return. Will traders have a strong enough conviction to take it much higher beyond 1,900 remains to be seen? Resistance above the recent high at 1,913 will be 1,965 while support can be found at 1,770 ahead of 1,700.
The potential for further stimulus signaled last Friday by Ben Bernanke, Chairman of the US Federal Reserve, continues to support gold. The 200+ dollar sell-off recently, however, was a reminder that nothing ever goes in a straight line. After having consolidated earlier this week renewed stock market weakness and squabbles over Greece (again) saw buyers return. Will traders have a strong enough conviction to take it much higher beyond 1,900 remains to be seen? Resistance above the recent high at 1,913 will be 1,965 while support can be found at 1,770 ahead of 1,700.
Grain and soybean complex
The DJ-UBS grains index rose 10.7 percent in August as wheat, corn and soybeans continued to rally with the outlook for this year’s production deteriorating further. Heat and dought across the main producing regions have played havoc with crop prospects. The price of November soybeans reached a new high of 14.65 per bushel after trading sideways for seven months. Hedge funds added 10 percent to existing long positions as the fundamental outlook favoured the sector over others like energy and base metals.
The DJ-UBS grains index rose 10.7 percent in August as wheat, corn and soybeans continued to rally with the outlook for this year’s production deteriorating further. Heat and dought across the main producing regions have played havoc with crop prospects. The price of November soybeans reached a new high of 14.65 per bushel after trading sideways for seven months. Hedge funds added 10 percent to existing long positions as the fundamental outlook favoured the sector over others like energy and base metals.
Wheat prices recovered strongly on a spillover effect from higher
corn prices, despite continued strong Russian exports having increased
competition in the global market. This resurgence in exports, helped by
aggressive undercutting of competitive bidders, has now caused problems
on Russia's rail system. The railway authority has banned the
transportation of grain to the main shipping port as more than 3,600
railway cars are clogging up the North Caucasus branch of the railway
system. This, in return, triggered a rise in domestic prices this week
as exporters scrambled to find alternative sources of wheat to cover
established contracts.
Brent crude oil firm despite slowdown
Oil markets continued to recover with Brent crude, in particular, moving back up towards the higher end of its month-long trading range. August was a month of serious volatility which impacted the energy sector as a whole. Risk aversion early on triggered a substantial sell-off before signs of physical tightness kicked in. Brent crude recovered back to almost unchanged.
Libyan oil could begin to flow before long, albeit in small quantities, but so far this has had limited impact on prices as traders have been more concerned about bottlenecks stemming from production problems at the UK’s largest North Sea production field. Meanwhile, the prospects of EU sanctions against Syria could increase an already tricky situation for European refineries who have been struggling to find supplies after the loss of high quality Libyan oil.
Oil markets continued to recover with Brent crude, in particular, moving back up towards the higher end of its month-long trading range. August was a month of serious volatility which impacted the energy sector as a whole. Risk aversion early on triggered a substantial sell-off before signs of physical tightness kicked in. Brent crude recovered back to almost unchanged.
Libyan oil could begin to flow before long, albeit in small quantities, but so far this has had limited impact on prices as traders have been more concerned about bottlenecks stemming from production problems at the UK’s largest North Sea production field. Meanwhile, the prospects of EU sanctions against Syria could increase an already tricky situation for European refineries who have been struggling to find supplies after the loss of high quality Libyan oil.
While Brent crude is troubled by bottlenecks on the production side,
WTI crude continues to have to opposite problem with too much supply at
Cushing, the delivery hub for WTI crude. This is causing a complete
opposite forward curve shape compared to Brent, as seen below, and also
shows why the spread between the two benchmarks are its widest at the
front end of the curve.
Lower Hog prices
The price of lean hog futures dropped more than 7 percent during the month after a strong run up the previous month. Supplies have been rising steadily on a seasonal basis and continue to outpace demand. At the beginning of August hedge funds held near record long positions which have subsequently been reduced by 25 percent thereby adding to the downside pressure. Further long liquidation is feared should the active contract for delivery in December break out of the established trading range below 81 cents per pound. Support comes from the fact Futures prices are currently trading at a discount to cash with the two eventually needing to converge.
The price of lean hog futures dropped more than 7 percent during the month after a strong run up the previous month. Supplies have been rising steadily on a seasonal basis and continue to outpace demand. At the beginning of August hedge funds held near record long positions which have subsequently been reduced by 25 percent thereby adding to the downside pressure. Further long liquidation is feared should the active contract for delivery in December break out of the established trading range below 81 cents per pound. Support comes from the fact Futures prices are currently trading at a discount to cash with the two eventually needing to converge.
Firm demand for coal and steel
Asian coal and steel demand increased dramatically in August. The number of shipments of iron ore, a key steelmaking ingredient, increased in August with 52% more vessels being hired than in July. The average price for iron ore delivered to China, the world’s largest consumer, rose by 2.5% from July to 177.45 dollars per ton with spot prices now at 180.40 dollars per ton. The average price of Chinese wire rod for August reached $784/ton, the highest level since July 2008 and a 29% increase year-on-year.
Asian coal and steel demand increased dramatically in August. The number of shipments of iron ore, a key steelmaking ingredient, increased in August with 52% more vessels being hired than in July. The average price for iron ore delivered to China, the world’s largest consumer, rose by 2.5% from July to 177.45 dollars per ton with spot prices now at 180.40 dollars per ton. The average price of Chinese wire rod for August reached $784/ton, the highest level since July 2008 and a 29% increase year-on-year.
Meanwhile in Japan, coal imports are rising as the percentage of
coal-fired electricity increases while the nuclear reactors undergo
maintenance (coal-fired electricity production increased 36% in July
compared to April and 16 nuclear reactors remains idle). Likewise, coal
for cement production has also increased as the reconstruction efforts
pick up.
Finally – a tricky month ahead
As the timeline below shows financial markets have entered a month with many important political events which will undoubtedly determine direction going into the final quarter and beyond. The global worries which caused all the panic over the summer have not gone away and how politicians meet those challenges will have a major impact on the direction of anything from stocks and bonds to commodities - stay tuned.
Finally – a tricky month ahead
As the timeline below shows financial markets have entered a month with many important political events which will undoubtedly determine direction going into the final quarter and beyond. The global worries which caused all the panic over the summer have not gone away and how politicians meet those challenges will have a major impact on the direction of anything from stocks and bonds to commodities - stay tuned.
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