Tag: trade

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Commodities

Unlikely Tariff Rollback Deflated Commodities in November

The broad commodities were tepid in November. The S&P GSCI was flat for the month and up 9.9% YTD. The Dow Jones Commodity Index (DJCI) was down 2.1% in November and up 4.5% YTD. Gains were driven by the energy complex, while both precious metals and industrial metals detracted from headline performance.

The S&P GSCI Petroleum was up 2.0% in November. Oil prices were poised to end the month near two-month highs on expectations of an extension of OPEC+ production cuts, but on the last trading day of the month prices fell by over 4% due to fresh concerns over U.S.-China trade talks and a record high U.S. crude output of 12.5mm barrels per day. OPEC and Russia are likely to extend existing production cuts by another three months to mid-2020 when they meet in early December. In the physical oil market, traders are paying near-record premiums for sweeter crude barrels, as new marine fuel regulations from the start of 2020 have encouraged refiners to use crude oil grades that produce less high-sulphur fuel oil.

The S&P GSCI Nickel was in freefall in November, down 18.1%, with the largest move by far within the industrial metals space. This was due to the market focusing attention on current subpar demand, even with Indonesia cutting back exports. Prices for stainless steel, of which nickel is a component, have continued to decline due to record inventories. With a technical drop in support of its 200-day moving average and market participants’ bullish positions exited, the environment was ripe for a big move lower. In spite of these conditions, the S&P GSCI Nickel was still up 29.5% YTD and was one of the better-performing commodities overall. The S&P GSCI Lead and the S&P GSCI Zinc fell about 10% and 8% respectively, while the S&P GSCI Iron Ore rose 7.71% after falling 5.9% the prior month.

The S&P GSCI Gold lost some of its luster in November, down 3.1% on the back of an overall better risk sentiment, with equity markets continuing to post new all-time highs and VIX® near multi-month lows. However, gold’s loss was palladium’s gain. The S&P GSCI Palladium continued to add to its impressive YTD performance, reaching another new high on the last day of the month to close November up 3.4% and up 55.55% YTD.

The S&P GSCI Agriculture was down marginally in November. As harvest in the U.S. comes to an end, both the corn and soybean markets have continued to be weighed down by the protracted U.S.-China trade talks and plentiful domestic supplies. Improving weather for planting in Brazil and Argentina also added pressure to the markets. The S&P GSCI Coffee ended the month up 13.4%; Arabica coffee supplies have  tightened from recent record levels, with a global deficit now forecast for the 2019-2020 season, an off-year for top producer Brazil’s biennial crop cycle. Certified stocks on the Intercontinental Exchange (ICE) also fell to their lowest level in nearly 18 months.

It was another mixed bag for the livestock sector in November; the S&P GSCI Lean Hogs was down 11.0%, while the S&P GSCI Live Cattle rose 2.8%. Despite the fact that the U.S. sold more pork this year to international buyers than ever before, the S&P GSCI Lean Hogs was down 22.9% YTD, reflecting a significant increase in pork supply. U.S. pork production is on a record pace for 2019.

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Commodities

Commodities in October – Waiting Patiently for a U.S.-China Trade Deal

The broad commodities market rose modestly in October. The S&P GSCI was up 1.2% for the month and up 10.0% YTD. The Dow Jones Commodity Index (DJCI) was up 1.9% in October and up 6.7% YTD. Gains were spread surprisingly evenly across the individual commodity markets

As has been the case all year, the star performer in the petroleum complex in October was gasoline; the S&P GSCI Gasoline was up 5.2% for the month, driven by unscheduled refinery outages in the U.S. as opposed to particularly strong consumer demand. Despite a brief pick up in prices in October (S&P GSCI Natural Gas up 3.6%), the natural gas market remains mired in oversupply, with production growth continuing to outpace domestic consumption and export opportunities. U.S. natural gas stocks have pushed above the five-year average despite lower prices and a sharp drop in the number of rigs drilling for gas.

As the annual LME Week in London came to an end, the majority of metals across the industrial complex ended higher in October on the back of trade war resolution hopes and labor strikes in Chile. The two exceptions were S&P GSCI Iron Ore and the S&P GSCI Nickel, which were down 5.9% and 2.1%, respectively, but both were still up near 60% YTD. Nickel mines in Indonesia agreed on Oct. 28, 2019, to stop nickel ore exports immediately, pulling forward the already expedited January 2020 deadline. After nickel prices moved higher by 24% in August, a period of consolidation is understandable.

Palladium outperformed in the precious metals space in October on the back of a glaring supply shortfall. The platinum to palladium ratio is at the lowest in the last 25 years, reflecting the strength of the palladium market; the S&P GSCI Palladium was up a solid 6.7% in October and up 50.4% YTD. The S&P GSCI Gold continued its slow march higher, adding 3.0% on the month and up 17.6% YTD, driven higher by catalysts such as the U.S. Fed’s third rate cut and the Diwali festival in India.

The agriculture complex continues to wait patiently for positive news on the U.S.-China trade war front. The S&P GSCI Agriculture was up 1.4% in October. China has been back in the U.S. soybean market, although to a lesser degree than before the trade war, but the two countries are still finalizing a “Phase 1” trade pact that many expect will boost U.S. agriculture exports to China, particularly soybeans. The S&P GSCI Cotton ended the month up 6.1% on concern regarding the condition of the U.S. crop due to poor weather during harvest. The newly launched S&P GSCI Skim Milk Powder also ended the month in positive territory, up 5.1%, continuing to benefit from strong global milk powder demand.

It was a mixed bag in the livestock sector in October; S&P GSCI Lean Hogs was down 9.0% while S&P GSCI Live Cattle rose 6.4%. Volatility in the lean hog market continues, as market participants flip between focusing on the devastating supply cuts caused by African swine flu in China and the export-depleting drag of the ongoing U.S.-China trade war.

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Commodities

Commodities Performance Highlights – June 2019

Commodities markets resumed their upward trajectory in June. The S&P GSCI was up 4.4% for the month and up 13.3% YTD. The Dow Jones Commodity Index (DJCI) was up 3.1% in June and up 6.9% YTD, reflecting its lower energy weighting. A recovery in petroleum prices and an impressive rally in gold were the main drivers of the broad commodities indices’ performance over the month.

In the oil markets, bearishness regarding the state of the global economy was tempered by fears regarding a possible disruption of oil exports from the Gulf region and prospects for a renewed production deal from OPEC. Tanker attacks in the Strait of Hormuz and the Gulf of Oman over the course of June undermined global shipping security and escalated the dispute between the U.S. and Iran over its nuclear program. The S&P GSCI Petroleum ended the month up 7.2%. At the start of July, a deal was reached between members of the OPEC Plus group to extend the existing oil output cuts of 1.2 million barrels per day for nine months.

The S&P GSCI Industrial Metals reversed its course from the prior two months, rising 2.0% in June. Over the first six months of the year, the S&P GSCI Nickel rose an impressive 19.1%; the rally was largely attributed to the long-term prospects for the use of nickel in electric vehicles and falling exchange-held inventories, and was in spite of the fact that the well-documented supply gap in the refined nickel market is expected to shrink over the second half of the year. The S&P GSCI Iron Ore moved significantly higher, by 14.9% in June, due to another drop in port inventories and additional Chinese government stimulus. An agreement between Trump and Xi Jinping to restart trade talks following a meeting at the G20 Summit also contributed to the strong performance.

The other metal to record double digit percentage gains was the S&P GSCI Palladium, which jumped 15.7% in June due largely to investor demand and is now close to reaching an all-time high. The S&P GSCI Gold increased 8.0% for the month. The exhilaration that was associated with the strength of the global economy a year ago has been replaced with growing financial market turbulence, a plethora of geopolitical flashpoints, and a string of economic releases that have fallen short of expectations. It would appear that few central banks wish to find themselves on the wrong side of the U.S. Fed, suggesting that lower interest rates are on the horizon. Gold tends to perform well in these circumstances.

The S&P GSCI Agriculture ended the month up only 0.3%, with some of the recent weather-induced exuberance taken out of the grains market on the last day of the month, following the release of the USDA’s Acreage Report. The S&P GSCI Coffee was up 2.2% in June, with prices buoyed by the threat of a cold snap in Brazil, which could pose a threat to crops.

The rollercoaster ride continued in the lean hogs market, with the S&P GSCI Lean Hogs down 10.0% in June. The latest U.S. hogs and pigs report indicates that pig and pork supplies in 2019 will be well above last year’s levels. The June 2019 hog inventory was up 4% year-over-year and the breeding herd expanded by 1%. This is the highest June 1 inventory of all hogs and pigs in the U.S. since estimates began over 50 years ago. At the same time, U.S. pork exports to China have been lackluster due to the ongoing trade spat between the two nations, and despite the devastation caused to the Chinese domestic industry by African swine flu.

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Commodities

Commodities Performance Highlights – May 2019

There was a notable reversal of fortunes across the commodities complex in May. The S&P GSCI was down 8.2% for the month but remained up 8.5% YTD. The Dow Jones Commodity Index (DJCI) was down 3.6% in May and up 3.7% YTD, reflecting its lower energy weighting. A sharp correction in petroleum prices combined with ongoing weakness in industrial metal prices weighed on the broad commodities indices’ performance over the month. The U.S. Administration’s penchant for utilizing trade restrictions as a negotiation tool for everything from lowering illegal immigration, to penalizing the unauthorized use of intellectual property, to reestablishing dominance over its closest neighbors has undoubtedly muddied the fundamental supply and demand dynamics of the majority of commodities markets.

Oil prices fell abruptly in May, as trade wars fanned fears of a broad economic slowdown. The S&P GSCI Petroleum dropped 13.8% in May, when the supply issues that had preoccupied the energy markets for much of the year gave way to concerns regarding the resilience of demand and the long-term implications of the reinvigorated trade dispute between the world’s two largest economies, the U.S. and China. Oil market participants will now turn their attention to the upcoming OPEC meeting, scheduled for June 25, 2019, where it is becoming increasingly likely that there will be an agreement among the OPEC+ members to continue, or even deepen, production cuts with the lofty goal of maintaining global oil market stability.

The S&P GSCI Industrial Metals gave back all of its YTD gains in May, falling 5.5% for the month. The S&P GSCI Copper and S&P GSCI Zinc led the way down, falling 9.1% and 9.2%, respectively, in May. These two metals are highly correlated with trade war sentiment, which deteriorated markedly over the month. Zinc continued to fall from its highs in Q1 2019 after revised expectations for a supply surplus this year, with China’s zinc output forecast rebounding by 5.3%. Associated with the trade war, heightened risks of a global growth slowdown also weighed on industrial metals, with China’s manufacturing PMI reading below expectations at 49.4 in May.

With the present ambiguity across commodity and equity markets, it is somewhat surprising that gold only attracted lackluster interest from investors in May. The S&P GSCI Gold was up 1.7% over the month, leaving its YTD performance only marginally positive. The U.S. dollar slowed its year-long appreciation, moving sideways in May and adding to the list of reasons why the gold market has been relatively featureless.

The S&P GSCI Agriculture rallied 9.7% in May. Having severely lagged the energy and industrial metals markets during the first four months of the year, a spark was lit under the grain markets in May. Wet and rainy conditions have severely delayed the grain planting season in the U.S., and this encouraged a level of excitement in the markets that has not been witnessed for a number of years. The most recent USDA crop report showed that only 58% of the corn crop had been planted by May 26, 2019, down from 92% last year and from the 90% five-year average. Both the S&P GSCI Corn and S&P GSCI Wheat were up 18% for the month. In contrast, the S&P GSCI Cotton fell 11.1% in May, plagued by the trade conflict between China and the U.S. China is the largest importer and user of raw cotton and the U.S. is a top buyer of Chinese textile products.

The frenzy in the grains market spilt over into the livestock markets in May, but with the opposite effect, given that grain is a major component of livestock feed. The S&P GSCI Livestock was down 6.5% in May.

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Equities

A Look at Mexican Industries and the Potential Impact of the USMCA

After more than a year of negotiations, the United States-Canada-Mexico Agreement (USMCA) is scheduled to be signed on Nov. 30 2018, at the G20 Summit in Argentina. The deal represents the new trade agreement between the former North American Free Trade Agreement (NAFTA) countries.

Market participants who want to gain more insight into the potential impact of the new agreement on the Mexican economy and capital markets can use the geographic revenue data to estimate the percentage of Mexican equities that derive their revenues domestically, and those that derive their revenues from the U.S. and Canada.

Using the constituents of the S&P/BMV IPC CompMx as of Oct. 31, 2018, we look at the revenue exposure of the constituents based on trailing 12-month figures. We found that the majority of Mexican companies derived their revenue locally (66.72%). Roughly 9.79% of revenues came from the U.S., and the remainder came from Canada or South American countries (see Exhibit 1).

Canada accounted for less than 1% of the revenues. Including Canada, approximately 10.74% of S&P/BMV IPC CompMx companies’ revenue exposure (roughly more than a third of the 32.3% foreign revenue) came from the former NAFTA countries.

Beyond the headline revenue exposure breakdown by country, it is potentially worthwhile to dive deeper into individual industries, as trade agreements tend to affect certain industries more than others.

In Exhibit 2, we present a detailed breakdown of the Mexican industries that have exposure to the U.S. and Canada. The top three industries in descending order based on revenue exposure are Materials (43.4%), Food, Beverage & Tobacco (25.2%), and Telecommunication Services (15.5%).

It is not by coincidence that the automobile industry is a contentious topic in the new trade deal. Of the 10.74% revenue coming from the U.S. and Canada, the Automobiles & Components Industry (GICS Code 2510) is the fifth-largest in terms of weighted revenue exposure. However, based on our analysis, we find it likely that Materials and Food, Beverage & Tobacco are the two industries that would be most affected in Mexico, more so than the headline-grabbing automobile industry.

It remains to be seen who will take the biggest losses and gains in the new USMCA deal, and whether this is a step forward in international trade. At a minimum, using geographic revenue provides a rough picture of Mexican industries that have the potential to be affected.

Revenue exposure[1] gives us an additional tool to have a better understanding of what´s inside the index, characteristic, and risks that are not visible at a first glance.

[1] We used the FactSet Geographic Revenue Exposure (GeoRevTM) dataset to calculate revenue exposure. It provides a geographic breakdown of revenues at the country level for all companies with available data.