Source: Wall Street News
Analysts said that commodity prices may disrupt the Federal Reserve's efforts to fight inflation, or will be forced to maintain high interest rates for a longer period of time, making expectations for mid-year interest rate cuts more and more vague.
Data shows that global economic recovery has led to a rapid rise in commodity prices since this year. From copper to oil and gasoline to gold and silver, commodities have started off high since the beginning of the year, and prices for some commodities have soared to levels not seen in years.
The rally helped fuel fears among investors in financial markets that inflation would rise again. Analysts said that this may disrupt the Fed's efforts to fight inflation, or it may be forced to maintain high interest rates for a longer period of time, making expectations for mid-year interest rate cuts more and more vague.
The commodity index BCOM, which tracks the 24 most actively traded futures contracts in the energy, metals and crops sectors, remained high on Thursday after rising to its highest level since November, and energy and gold prices drove the index higher.
Despite the strengthening of the US dollar and the rise of precious metals at the same time, iShares Silver Trust SLV continued to rise on Thursday after recording its best single-day performance since May 2023 on Wednesday.
Analysts said that now the market is sensing the possibility that global growth may be better than expected. More global inflation and higher commodity prices will follow, making it “more difficult” for the Federal Reserve to achieve the expected three interest rate cuts in 2024. According to a series of strong economic data, US factory activity increased in March for the first time since September 2022, while China's industrial recovery also added impetus to the global economic recovery.
These developments raise doubts as to whether the Federal Reserve will start cutting interest rates in June. Against this backdrop, US Treasury yields rose on Wednesday, and 10-year Treasury yields were close to their highest level since November, and fell slightly on Thursday.
Mine production cuts, demand recovers, copper prices rise
Copper prices have been rising since the beginning of February this year due to a recovery in global demand. Federal Reserve Chairman Powell spoke on Thursday and reiterated that interest rate cuts within this year are still very likely, stimulating copper prices to rise by as much as 1.5% on Thursday, to the highest level in 14 months.
Currently, production disruptions at major mines have forced smelters to pay high prices, and Chinese smelters, which account for more than half of the world's refined copper production capacity, are getting closer and closer to implementing joint production cuts. Meanwhile, initial signs of a return to growth in the global manufacturing sector are raising hopes that market austerity conditions may help copper prices reach new highs.
On the supply side, although there are still doubts about whether Chinese smelters will drastically cut production, production risks continue to accumulate in mines around the world. On Wednesday, Ivanhoe Mines (Ivanhoe Mines) reported a 6.5% drop in quarterly production at a mine in the Congo, while neighboring Zambia is also putting the country's plans to drastically expand production at risk due to a drought.
Oil is once again the dominant force in the market
Oil and energy stocks have returned to a dominant position in the market, and international oil prices rose to around $90 per barrel on Wednesday. It fell below $90 on Thursday.
Analysts believe that Israel's attack on Iran's embassy in Syria has heightened concerns about the escalation of the conflict in the Middle East region, and OPEC+ ministers made no changes to current production cuts at Wednesday's meeting, all of which have driven up prices.
Other analysts say that strong economic growth in the US and other regions may boost oil demand. This may be a key factor driving up oil prices rather than geopolitical conflict in the Middle East.
The energy sector of the S&P 500 index recorded its first record close since 2014 on Wednesday and continued to rise on Thursday. The energy sector was also the best performer among the 11 sectors of the S&P 500 index this week, rising 2.8%, while the overall index fell 0.8%.
Analysts believe that the significant positive correlation between oil prices and energy stocks indicates a “structural shift” in oil supply and demand dynamics. Generally speaking, the S&P 500 energy sector usually does not fluctuate with oil prices. Since 2001, the correlation between WTI crude oil prices and the 100-day lag of the energy sector's selected SPDR ETF XLE is only 0.55, which means that the price usually only explains 30% of the daily fluctuations in the energy sector.
“Only when oil prices rise in a sustainable way is the time to increase energy stocks. The big energy sector being the big winners this year shows that the market thinks this is happening.”
The US dollar, gold and silver are rising
Although central banks around the world are still maintaining austerity policies, and the dollar is likely to strengthen further, precious metals have maintained their foothold in rising physical demand.
The most active gold contract reached its 12th record settlement of the year on Wednesday, while the most active silver contract closed at its highest level in nearly three years on Wednesday and continued to rise on Thursday.
Analysts said that the rise in precious metals prices was mainly driven by safe-haven demand, including increased tension in the Middle East region, uncertainty surrounding the Federal Reserve's upcoming interest rate cuts, and strong central bank purchases and de-dollarization trends.
However, some strategists believe that it is worth noting that although the macro background supports the rise of gold, the continuous cycle of interest rate hikes still leaves many investors on the sidelines. The strategist found that the long-standing positive correlation between the price of gold and ETFs backed by physical gold has broken down, and the scale of asset management of these instruments has declined, proving that retail investors still have piles of cash waiting to be put into use.
Meanwhile, the rise in gold and oil prices has to some extent overlooked the continued strength of the US dollar. The ICE dollar index DXY traded as high as 105.1 on Tuesday morning, the highest level since November 14, according to FactSet data. The index fell to around 104 intraday on Thursday.
What investors want to know is whether this suggests a shift in the relationship between the dollar and commodities. Traditionally, there is a negative correlation between gold and the dollar, and the strength of one usually means the weakness of the other. However, this relationship has recently weakened, and the two assets have experienced safe-haven deals amidst global economic and geopolitical uncertainty.
On the other hand, oil prices also showed an inverse relationship with the US dollar. Crude oil prices around the world are denominated in dollars, so when the dollar is strong, oil prices should be lower in dollar terms, which means investors need less dollars to buy the same amount of oil.