By Ole S. Hansen*

GLOBAL markets, including commodities, spent the week closely monitoring the eb and flow of news from the US – China trade negotiations in Washington. Reports that the two sides were discussing a light version of a deal sparked a rally in growth dependent commodities such as oil and copper, while gold suffered a setback. Not least due to renewed stock market strength, rising bond yields and a weaker yen.

Brent crude oil returned to $60/b after receiving a fresh geo-political boost. The impact of this ongoing uncertainty highlighted the upside price risks at a time when the market is focused on the negative price impact of slowing demand growth.

High grade copper touched a three-week high as speculative short sellers were forced to cut back positions while awaiting news from the trade talks. The metal has been stuck within a $2.5/lb to $2.7/lb range since August with the focus alternating between weakening economic data and hopes that the slowdown can be arrested by a trade deal.

Grain markets were mixed with Chinese buying and a tightening supply outlook driving soybean futures to a three-month high. Corn meanwhile, suffered another post-WASDE sell-off after the US Department of Agriculture’s estimates for production this 2019-20 season topped analysts’ forecasts. The weakness was quickly halted as concerns about the final yield outcome linger. A historical late planting season due to flooding has left the harvest behind schedule, thereby exposing the crop to yield-threatening cold blasts.

The soft commodity sector was the worst performing, with profit taking hitting both sugar and cocoa following a recent run of strong gains. Coffee hit a four-month low on the combination of a weaker Brazilian real and the prospects for ample supplies from Brazil, the world’s biggest grower and exporter.

Gold softened to trade below $1500/oz with the market struggling to rekindle the support that propelled it higher during the third quarter. However, the negative impact on gold of a trade-deal related rally in stocks and bond yields are now being off-set by a weaker dollar and geo-political risks.

The appetite for gold as seen through demand for bullion backed exchange-traded funds remains strong. During the past two months, when gold traded sideways, total ETF holdings jumped by 167 tons to reach 2,545 tons, less than 30 tons below the December 2012 record.

While we maintain a bullish outlook for gold into 2020 the need to change focus may create a challenging short-term outlook. The bond engine has stopped providing support as the US Federal Reserve concentrates on the front end of the yield curve while in Europe protests about negative yields continue to grow. Instead, we remain unconvinced that the current strength in stocks can be maintained and that the dollar will continue to remain strong, not least should Brexit and trade talks succeed.

In our recently published Q4 Outlook called “The Killer Dollar” we highlighted the reasons why the world can ill afford a strong dollar. And with the Fed offering the bigger easing potential compared with other central banks operating close to their limits, the dollar may trade lower sooner rather than later.

From the helicopter perspective the outlook for gold remains strong as long the price stays above $1380/oz, the old ceiling that provided resistance from 2014 to June this year. We maintain our end of year target at $1550/oz and higher in 2020.

Brent crude oil rallied back to $60/b with demand worries being off-set by the intense focus on US – China trade talks. In addition, a small risk premium re-emerged after quickly disappearing following the Saudi Aramco attack last month.

Monthly oil market reports from the US Energy Information Administration (EIA), OPEC and the International Energy Administration (IEA) all highlighted the risk to demand from trade wars and slowing global growth. While seeing shale oil growth slow in 2020 and 2021, the EIA also said that US production could exceed 13 million barrels/day by December. On geopolitical risks the IEA said it should not be ignored but that “For now, though, there is little sign of this with security fears having been overtaken by weaker demand growth and the prospect of a wave of new oil production”.

In our monthly commodity deep dive held earlier this week I highlighted the reasons why we believe that the downside risk, despite economic angst, looks limited from here. The geopolitical risk premium following the September attack in Saudi Arabia has been removed but events this past week shows why it could suddenly re-emerge. So, while the pendulum continues to swing between demand and supply worries, we suspect that WTI and Brent over the coming weeks will stay range bound around $55/b and $60/b respectively.

* The writer is Head of Commodity Strategy at Saxo Bank