COMMODITIES BOUNCE BACK AS OIL AND GOLD SHINE

Commodities enjoyed another good month in June, with crude oil prices and gold among the best performers.

The S&P GSCI, a major investable commodity index, rose 4.4% during the month, taking its year-to-date gains to 13.3%.

“A recovery in petroleum prices and an impressive rally in gold were the main drivers of the broad commodities indices’ performance over the month,” said Fiona Boal, head of commodities and real assets at the S&P Dow Jones Indices.

The commodity markets’ upbeat performance were largely driven by prospects of the US Federal Reserve cutting interest rates, lower oil stockpiles, and investors taking another look at gold. A truce in the US-China trade war, where both parties decided to pursue more talks rather than more tariffs added to the sentiment.

Still, there are concerns about global economic growth amid clear signs that the manufacturing sector, in particular, is struggling. That was notable in the performance of industrial metals.

Steel prices continued their plunge on the back of higher US output. More broadly, the price of copper tracked the renminbi last month as both were hit by the deteriorating prospects for Chinese growth.

Last month saw another weak purchasing managers’ index (PMI) readings from China, which confirms a renewed slowdown in Asia’s largest economy. While optimism surrounding the US-China trade truce is currently buoying commodity prices, slower growth in Chinese demand will be a factor dragging prices down in the second half of this year.

The Caixin manufacturing PMI fell from 50.2 in May to a five-month low of 49.4 in June, while the official manufacturing PMI held steady at 49.4. Weak export orders weighed on business sentiment as Chinese exporters are being hit by the double whammy of slower global growth and trade tensions.

Analysts expect US-China trade tensions to resurface, but copper supply constraints should mean its price remains supported. Copper rose 2.75% in June, to takes its year-to-date gains to 2.61%.

The price of aluminium decreased 1.42% to USD 1,755.95 per tonne in June, compared to the previous month, and is expected to drop further as output from Gulf countries rises.

The latest first-quarter data from Saudi Arabian Mining Company, or Ma’aden, also highlights key developments in commodity sector.

Darren Davis, Ma’aden president and CEO, said the first quarter saw weakness in its core commodities, phosphate and aluminium, with prices continuing downward trends seen during late 2018, and there was only partial relief from lower raw material prices.

“For the aluminium sector, concerns over the global trading environment continues to weigh on prices whilst phosphate fertilisers softened in the first quarter mainly due to normal seasonal effects,” said Davis.

“Notwithstanding the market and operational challenges in the first quarter, we remain on track for record production in 2019 and are moving ahead with key strategic moves that will strengthen our business into the future.”

Brent crude oil prices, meanwhile, jumped nearly 6% to USD 65.78 per barrel in June to raise its half-yearly returns to 18%, amid a decline in US stocks and a pledge by OPEC and its allies to extend the existing oil output cuts of 1.2 million barrels per day for nine months.

Gold is enjoying a moment in the spotlight, as investors pile into the safe-haven amid worries of an economic slowdown, a weakening US dollar, and trade and geopolitical tensions in many parts of the world. Another key driver was the prospect of lower interest rates, after the US Federal Reserve hinted at cutting rates, and the European Central Bank also indicated its dovish intent.

After breaking out of a five-year trading range, the price of gold surged above USD 1,400 an ounce in June for the first time since 2013 on expectations of a US rate cut. The yellow metal rose 7.96% during the month to take its overall gains for the year to 9.91%. More crucially, the metal broke through the psychologically important barrier of USD 1,409.55 per ounce.

“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,” said Boal of S&P Dow Jones Indices.

“It would appear that few central banks wish to find themselves on the wrong side of the US Fed, suggesting that lower interest rates are on the horizon. Gold tends to perform well in these circumstances.”