• News
• Comment(164)
• 2024-11-23

Global Sell-off Sparks Commodity Bull Run

The global financial landscape is experiencing turbulent shifts, driven by a mixture of cooling interest expectations and escalating geopolitical tensions. Last week, risk assets around the world faced a significant sell-off, surprising many market participants who had previously exhibited optimism.

The Nikkei 225 index saw a staggering decline of up to 5%, while the US markets were not spared either, with the S&P 500 and NASDAQ 100 indices dropping nearly 3% and 4% respectively. This downturn marked a surprising pivot for US stocks, which had been on a remarkable upward trajectory over the past year, culminating in three consecutive weeks of losses.

The fallout from conflict in the Middle East has sent shockwaves through international markets, pushing gold prices above $2400 per ounce and Brent crude prices nearing the $90 per barrel mark. Speculation about US monetary policy has also added to the volatility, as investor sentiments fluctuate with the ebb and flow of economic indicators and corporate performance.

According to Fawad Razaqzada, a senior analyst at a prominent financial group, “The recent weeks have seen US and global indices losing appeal as investors grapple with risk. It isn’t surprising to see profit-taking before the upcoming earnings season, particularly after the record-breaking performance observed in the first five months leading to April.”

Advertisement

The primary concern driving investor anxiety appears to stem from the escalating tensions in the Middle East. Israel's quest for retaliation against Iran has injected a layer of uncertainty, sending US stocks into an unusual five-day slump. Traders remain unconvinced that the current market reset has reached its end.

Adding further pressure to risk assets is the expectation of prolonged high-interest rates. Recently released March reports on the Consumer Price Index (CPI), retail trends, and non-farm payrolls surprised economists, leading to diminished expectations of interest cuts from the Federal Reserve. Jerome Powell, the Fed chair, indicated that persistent inflation is hindering the central bank's confidence in cutting rates soon, asserting that elevated rates may persist longer than anticipated.

While the market largely expects a first interest rate cut from the Fed in September, there remains uncertainty surrounding the potential for a second cut later in the year. This contradicts the earlier fervent bets made during the first quarter for at least three rate cuts within the year.

“It makes sense that investors are locking in profits after an unprecedented rising trend in the first five months before April,” Razaqzada elaborated. He underscored that any potential market recovery largely hinges on forthcoming corporate earnings reports. Last week, major US banks kicked off the earnings season, with technology giants set to follow suit. If the market witnesses more earnings surpassing expectations, it could ease the pressure on stock indices.

Moreover, concerns surrounding rising government debt and the associated financing costs are increasingly weighing on investors. This explains the continued increase in gold prices despite higher yields in other asset classes. The International Monetary Fund (IMF) criticized US policymakers for pursuing unsustainable fiscal policies, which, while contributing to recent economic successes, could lead to inflation and global financial instability if left unchecked.

“These macroeconomic factors, along with profit-taking tendencies, have prompted leading indices to breach key technical thresholds,” Razaqzada observed. “If the S&P 500 falls below the 5000 mark, we may need to begin considering longer-term targets to identify where the next support levels may lie. In that case, the monitoring range to watch would be between 4795 and 4817, which correspond to previous high points over the last two years.”

The Japanese stock market has also not escaped unscathed, with the Nikkei 225 index seeing a decline of over 2.5% to approach the critical 37000-point threshold. The yen has faced persistent depreciation against a strong dollar, which saw the dollar/yen exchange rate dip below 154 briefly before bouncing back, coinciding with a joint press release from Japan, Korea, and the US expressing concern over their currencies' ongoing weakness.

However, due to the typical negative correlation between the yen and Japanese stocks, coupled with rising global risk aversion, there has been stronger profit-taking pressure on Japanese equities. Since last year, the Nikkei 225 index has surged over 40%, nearing the significant milestone of 41000 points at its peak.

David Scutt, a senior strategist at StoneX, conveyed to reporters that the ongoing decline of the yen raises the possibility of intervention from the Bank of Japan. A stronger yen could exacerbate the already climbing pressure on the Nikkei 225 index, especially given the spillover of weakness from US tech stocks. Should the index fall and close below the threshold of 37000, the next downside targets are projected at 35700 and 35280.

In the Chinese markets, the Shanghai Composite Index halted at 3100 points, finishing down 0.29% at 3065.26 points due to external market influences. With generally lower valuations, the overall index's reaction has remained muted. Analysts commonly believe that there might still be some pressures ahead following the quarterly earnings reports, with the effectiveness of overall policy being relatively weak, resulting in a choppy market sentiment. However, as price indicators like the Producer Price Index (PPI) stabilize, a potential improvement in performance is expected to unfold in the second quarter, leading to a resonance between underlying fundamentals and institutional advantages.

In contrast to the ailing global stock markets, the precious metals and commodity sectors have exhibited remarkable strength, with gold, silver, copper, and crude oil witnessing significant rallies. Amid rising demand for safe-haven assets, gold prices soared above $2400, hitting a 1.3% rise for the night, marking the fifth consecutive week of gains. Strong demand from central banks around the globe, coupled with a notable rise in consumer purchasing in China, underpins these bullish trends, as evidenced by a report indicating Swiss exports to China surged by 31% in March compared to the previous month.

On the swinging oil market front, prices surged toward $90 per barrel under the influence of geopolitical uncertainties. However, Brent prices have been oscillating around $87 per barrel, causing debate among institutions about the continuation of this upward trajectory. Investment firms like Goldman Sachs maintain that without geopolitical disruptions to supply, the height for Brent crude prices is likely to hover around $90 due to excessive surplus capacity that could prompt OPEC+ to increase production in the third quarter.

Further, despite the instability, oil is acknowledged to possess significant “geopolitical hedge value,” making long-term positions still appealing. Goldman Sachs has adjusted its forecast for Brent crude prices in the latter half of 2024 to $86 per barrel (from $85) and $82 for 2025 (up from $80).

Copper has also seen a fruitful ascent as of late. On April 18, the A-share non-ferrous metal sector rallied, with Northern Copper Trading hitting circuit breakers on gains. The LME copper contract for March surpassed $9700 per ton in intraday trading, while the COMEX copper contract for May reached $4.44 per pound, nearing a two-year high.

Goldman Sachs points to several core principles behind the bullish sentiment for copper—sustained demand for green metals from China and a cyclical rebound in Western manufacturing. Research shows that since mid-2022, overseas metal demand had been in a continuous retraction phase, driven by a slowdown in manufacturing activity as well as high interest rates and inventory destocking until late last year. Historically, industrial metal prices have performed positively following the industrial cycles of global manufacturing PMI bottoming; copper and aluminum have averaged increases of 25% and 9%, respectively, within a year post the PMI nadir.

Xiao Fu, the commodities strategist at Bank of China International, indicated to reporters that market participants are shifting their positions from net short to net long in copper, while speculation remains distanced from historical extremes per the Bank of China International position index. Should market sentiments elevate persistently, speculators still have ample room to expand their net long positions.