Updated: Jan 12
Central banks continue to focus on inflation with the Fed in particular the most aggressive, having raised rates a further 75bps at their last sitting, and indicating another 50 to 75 bps for July. Updated quarterly projections of the 18 Fed policy makers show the median participant on the FOMC sees rates rising to 3.4% at year end and 3.8% by next year. These moves, together with other indicators are flashing the recession warning loud and clear. To my mind current inflation is a symptom of energy prices and supply chain disruptions following on from Covid and the war in Ukraine, and rate hikes serve better to cool excessive demand, not supply issues. It won’t be the first- or last-time central banks get it wrong. Market fears for a recession weighed heavily on commodities in June with most counters ending in the red.
A rampant USD and continued growth concerns battered the energy complex, but tight supply issues remain intact, and we are likely to experience further price surges over the remainder of 2022. Brent has broken convincingly below both its 50DMA of $114.18 and its 100DMA of $110.53 but supply problems out of Africa and OPEC+’s inability to meet its quotas remain in force. Russian exports may also decline further as a local court has halted Black Sea oil loadings for 30 days due to environmental issues. Further Covid issues in China will continue to impact oil demand, whereas any further supply issues will prove supportive.
June culminated in the busiest hedging activity seen in many years, suggesting corporates are anticipating further price surges. International emergency oil reserves have been heavily drawn and are critically low.
Fed rate hikes and global recession fears have resulted in a sea of red for base metals. Copper, an indicator of industrial activity has continued to fall, dropping almost 13% in June and 20% over the past 52 weeks. This came after US data showed that consumer confidence had fallen to a 16-year low. Changing priorities from green issues to stable energy supplies in the wake of the Ukraine invasion has reduced the demand for copper stockpiles to be used in greener technologies. Aluminium billets, a cornerstone industrial product used in the manufacture of extruded parts for buildings, cars and machinery, are slumping and could be signalling a broad-based industrial slowdown.
Gold continues to take a back seat to rising US Treasury yields, with investors content to buy the dips. Speculative anticipation of further Fed rate hikes, and the aggressiveness of the Fed’s response to inflation will keep gold on the back foot, with further selling if the technical support level of $1,730 breaks. Platinum demand may increase in coming months as green hydrogen’s use in the aviation industry gathers pace and Palladium may enjoy a boost as Russia looks to limit production in retaliation against Western sanctions.
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