Somebody get Jeff Currie and Damien Courvalin on the phone, because we’re going to need more reassurances from Goldman on the commodities bull thesis.
June was the worst month in nearly two years for the Bloomberg commodities index, and the slide in raw materials marked a rather abrupt reversal of fortunes for an asset class that had been one of the year’s top performers in an environment where solid returns have been hard to come by.
Amid the downturn, Goldman stuck by their Overweight call, insisting that June was just a “pause” and that momentum in the space would return with oil leading the way.
Between the trade war concerns and Donald Trump’s ongoing efforts to badger Saudi Arabia into engineering a deep and sustained drop in crude prices, you’d be forgiven for questioning the outlook and indeed, some folks are skeptical.
Morgan Stanley, for instance, has suggested that a side effect of the trade war could be demand destruction. “As well as the direct hit to steel and aluminum, tariffs on end markets such as electronics, machinery and autos risk weakening demand for the commodities that feed them,” the bank wrote last month.
Goldman’s upbeat outlook is based on a number of factors, some of which we discussed here earlier this month. This is the gist of it:
We maintain Overweight commodities, with a 12-month expected return of 10%, and view the current weakness as a buying opportunity. The pillars of our view remain: 1) strong late-cycle commodity demand that depends on demand levels rising and not slowing growth rates 2) supply disruptions in key oil and metal markets which are exacerbated by recent sanctions 3) depleting inventories which create increasing positive carry in nearly all energy and metal markets.
While all of that sounds reasonably compelling, commodities came under immense pressure on Wednesday following the latest escalation in the trade wars.
Soybeans are of course on the front lines with one contract falling to a new low. Futures for November delivery dove as much as 2.4% to $8.51 a bushel in Chicago. That would be the lowest since the contract began trading in November of 2014.
Meanwhile, wheat was crushed, down more than 4%.
Copper plunged to its lowest levels in more than a year:
With U.S. futures now down more than 16% since early June:
Oil was down sharply as well despite EIA data that showed the largest crude draw (12.63 million barrels) since 2016. It was the worst day for WTI in more than a year.
Prices have recently been supported by supply concerns emanating from the Trump administration’s hardline stance on Iran and disruptions in Venezuela. Generally speaking, that’s been enough to negate production hikes from the Saudis, but on Wednesday, the threat of a downturn in global growth from the trade tensions was seemingly all that mattered. News that Saudi Arabia pumped the most in June since late 2016 probably didn’t help the bulls either.
More broadly, this was the worst day for the Bloomberg commodity index since 2014:
Earlier this month, the Bloomberg agriculture subindex fell to a record low, a notable development irrespective of whether it could be attributed to trade tensions. On Wednesday, it hit a fresh nadir.
Bottom line, it looks like the threat to global growth and the prospect of demand destruction is outweighing the late-cycle bull thesis and the potential for sanctions on Iran to put a floor under crude.
“Within commodities, industrial metals and soybeans declined the most month-over-month, suggesting that trade tensions may have had a disproportionately large impact on metals”, Goldman wrote, in an update dated Monday, adding that “while the near-term outlook has no doubt turned cloudier with China credit tightening and trade frictions escalating” sharp declines in metals including copper “seem overdone”.
In a note out last week, BofAML flagged “on-going trade disputes” as the “most immediate concern” for raw materials.
You’ve been warned.