One of the most hilarious juxtapositions in markets these days is the extent to which a whole helluva lot of people seem to believe that crude is going to rocket higher any day now, despite what I’ll cynically call a “stockpile” of evidence to the contrary:
As I put it earlier this week: “how about some deflation with your reflation?”
Well as WSJ notes on Sunday, positioning seems to suggest that some folks are expecting a veritable inflationary tsunami. To wit, from the Journal:
Bullish bets on oil, copper and cotton futures all hit record levels in January, according to data from the Commodity Futures Trading Commission that goes back to 2006. That was the first time in nearly a decade that this cross section of materials and resources established new highs simultaneously.
The Materials Price Index, which tracks oil, metals, lumber and other commodities, closed higher for a record 17 straight weeks before finally falling in the last week of February.
“There’s a lot of optimism coming back into the market,” said John Caruso, senior trader at RJ O’Brien & Associates LLC.
You’ll note that this is essentially a reflection of the ubiquitous reflation narrative that’s gripped markets since America elected the ideological equivalent of a Latin American demagogue in November.
That of course means that the extent to which this trade actually plays out depends largely on whether or not Trump has actually ushered in a period of sustainably higher growth. Needless to say, that’s a contentious subject and indeed the fact that tax reform is moving at a snail’s pace and fiscal stimulus isn’t likely to become a reality until late 2017 (at the earliest) suggests that bets on an upturn in global growth may be premature.
And then there’s the dollar. “While the currency declined for most of the first two months of this year, it has rallied in recent days on stronger indications that the Federal Reserve could raise rates at its mid-March meeting,” the Journal writes, adding that “that could put pressure on commodities.”
As you reflect on this, consider the following out late last month from Goldman, whose analysts are taking a “show the money” approach.
A year has now passed since commodity markets reached historical lows, which erased all of the investment gains of the 2000s, and started a rebound that has resulted in a doubling of many commodity prices to current levels. This leaves open the question of what next? Market positioning is now extremely long across the commodity complex, as markets have priced in robust expectations on forward demand and inventory draws that have yet to materialize. At this point, we would argue that commodity markets are likely to remain in a holding pattern as they wait for hard data to confirm the most recent leg up. Markets need to see that the OPEC supply cuts generate real inventory draws and the strong manufacturing survey and Chinese credit data create real activity. In other words, ‘show me the activity’; real demand, real stock draws and empty warehouses.
Without a follow through into real activity and inventory draws, commodity markets and broader financial markets more generally would be poised for a significant correction given the strong correlation between speculative positioning and the survey data such as the PMIs.
Where we go from here is anyone’s guess, but as I documented in “Bacon Bubble Suddenly Bursts, BLT Demand In Serious Jeopardy,” hogs haven’t been feeling the reflationary love of late…