Recent market turbulence in early August has been mostly overcome, as global financial markets rebounded strongly due to better-than-expected US economic data. This alleviated fears of a deep downturn in the US economy and reduced pressure on the Federal Reserve to implement significant interest rate cuts. However, China remains a concern with its ongoing property slump, rising unemployment, and weak consumption, which continue to weigh on the demand outlook for commodities.
Despite the demand concerns, supply-side factors such as geopolitical events, adverse weather, and industrial action may provide short-term support for key commodities. Additionally, hedge funds have cut their exposure to commodities to the lowest level in over a decade, potentially setting the stage for a rebound in demand and prices.
The Bloomberg Commodity Total Return Index saw a second consecutive weekly gain, driven by a recovery in copper and Arabica coffee. However, weakness in the energy sector dragged the index back to flat by week's end. The month-long correction in commodities culminated with the Bank of Japan's actions that caused a momentum crash, briefly pushing the index to a 15-month low.
Hedge funds and CTAs have significantly reduced their commodities exposure, with a notable net negative position across 26 major commodities futures for the first time in over a decade. The primary driver of this reduction has been the grains sector, where speculators held near-record short positions to capitalize on falling prices. However, aggressive selling also occurred in energy markets, leading to the lowest petroleum positions since 2011.
The grains sector, particularly soybeans, continues to struggle due to a bumper US crop forecast and weakening demand from China. The USDA projects a record-high soybean harvest, further exacerbating the global surplus. Meanwhile, copper futures have seen a resurgence due to supply disruptions, including strike action at Chile’s Escondida mine, the world's largest copper producer. This, along with the first weekly decline in warehouse stocks since May, has helped reverse the recent correction in copper prices.
Iron ore prices have been under pressure due to declining steel production in China, with futures hitting their lowest levels since 2022. The ongoing crisis in China’s property sector has significantly impacted demand for steel, leading to a sharp drop in iron ore prices.
Gold has remained resilient despite fluctuating expectations for US interest rate cuts. The metal continues to attract investors as a hedge against market instability, supported by central bank demand and concerns over high government debt levels. Meanwhile, crude oil prices have struggled to maintain momentum, with Brent crude stabilizing around USD 80. A softening demand outlook, particularly from China, has put pressure on crude prices, despite OPEC+ efforts to support the market by curbing production increases.
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