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Commodity market Report - February 2020

COMMODITY MARKET REPORT

EXECUTIVE SUMMARY

Trade war is officially over but Chinese risks resurfaced from the other side - extreme quarantine measures after coronavirus outbreak in Jan-Feb resulted in significant breakdown in the industrial production chains and construction activity. However monetary and fiscal stimuli quickly reversed negative sentiment and overall risk conditions returned to the high Greed mode with only commodities market kept in risk-off mode. Energy complex was very volatile as its initial sharp drop was lately compensated by OPEC verbal interventions and renewed risk in Libya and Venezuela. Industrial metals fell sharply, but Precious shined brightly with unbelievable bubble in Palladium. Agri commodities were mostly range bound with Cocoa being top performer

Macroeconomic drivers turn to negative as positive developments after the Trade Deal signature and record financial markets levels gave the way to fears of world economic slowdown after the virus outbreak. On the other hand there were not many voices for recession as stimulative monetary policy should provide the cushion. However we think that markets overstated willingness of the Fed to keep on printing and the main risk once again turned to the hawkish surprise when it exits REPO stimulus gambit and the ECB to end QE.  

Chinese economy was moderately improving, but virus induced risks point to sharp slowdown in 1H20 with its overleveraged corporate and banking sector needed significant bailouts (airlines have already received it)

Investors’ interest in commodities was really high before quick reversal on Chinese risks. It is still concentrated in retail investors’ money flow as trading activity in commodity futures declined and net positioning moved back to undervaluation with only Precious metals and Cocoa in Greed territories

Weather conditions are gradually switching from moderate of El Nino to La Nino that is going to support grains and nat gas prices and be negative for cocoa. Political risks turned positive for most commodities as Trade War and recession risks abating, Iranian risks are less acute and electricity shortage in S.Africa is positive for Precious

TOP TRADING IDEAS:

➢    Add Short in June Palladium at 2600 $/oz (target 1800 $/oz). Add Long in July Platinum at 850 $/oz

➢    Play the range in Brent: long at 50-55 and short at 65-70 $/bbl. Now take profit in longs at $60

➢    Buy Gold at 1450 $/oz with mid-term target of 1650 $/oz; hedge with Short in Silver at 18.5-19.0 $/oz

➢    Play the range in Cocoa: long at 2300-2500 and short at 2800-3000 $/mt. Take profit in short at $2600

➢    Go long in Coffee at 110-112 cents/lb for May futures with ST and LT targets above 125 and 140 cents/lb

➢    Copper - take profit in short and turn Long at 255-260 cents/lb

➢ Long August Nat Gas futures at 1.8-2.0 $/MMBtu for better fundamentals and target 3.0-3.1 $/MMBtu

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US banks declined significantly in January after very strong performance in 2019. Thus, the broad market was underperformed substantially after 4 months in a row of leading dynamics. Thus, BKX index decreased by 7.6% MoM in January vs -0.2% MoM of SPX index. Absolute January performance on MoM basis was -1.2 std from the mean and it is in the bottom 1% of absolute MoM performance of BKX index.

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