Crude, copper, commodities may steady, if US stocks keep rising
Dead-cat bounce or more enduring bottom?
Since its Aug. 5 nadir, the Bloomberg Commodity Spot Index (BCOM) has rallied 9% to Sept. 30 as managed money (hedge funds) reversed record net shorts. It’s a question of recovery duration, and the fact that the S&P 500 has bounced 11% may suggest a top risk to broad commodities: a backup in beta. At 4.1% of open interest to Sept. 30, our graphic shows net longs on the 19 major BCOM constituents recovering from 1% net short at the start of August — the most sold out in our 13 years of data. Short covering in the grains and buying gold, copper and sugar vs. selling crude oil have dominated speculator activity since Aug. 5.
Fed easing and China stimulus are ample reasons for commodities to rise, but global fiscal and monetary incentives may be part of a typical cycle toward deflation worthy of the inflation to the 2022 peak.
Commodity bounce vs. History’s overhang
Gold up almost 45% and crude oil down around 25% year over year to Sept. 30 isn’t a good trajectory for the global economy. It’s a question of performance a year from now, and our bias is that risks are leaning toward trend continuation, with copper a leading indicator. If the metal can sustain above its end-of-3Q price around $10,000 a ton, the signal would be positive for economic growth. It’s the potential for some normal copper reversion toward its five year average of $8,228, on the back of China in decline and recession risks in the US, that we find disconcerting.
That fiscal and monetary stimulus is expected when economies deteriorate may be what gold outperforming the S&P 500 by almost 10% year over year is sniffing out. Our bias is the burden on the US stock market to keep rising and lift all boats risks reversion.
Cold energy, hot gold and implications
In the history of the Bloomberg Energy Spot Subindex (1991), only at the onset of the pandemic in 2020 has the index been lower vs. gold, with macroeconomic implications. The 2025 year in commodities will likely be about what might reverse the path of deflating energy vs. inflating gold, and a top prerequisite could be an inordinate burden on the US stock market to remain resilient. If beta backs up for a potential recession, as indicated by the uninverting yield curve and rising unemployment, the deflationary dominoes led by US natural gas, grains, iron ore, crude oil and falling government bond yields may gain companions and momentum.
The Bloomberg Industrial Metals Subindex’s gain of 12% year over year is trailing gold’s roughly 45% and the S&P 500’s 36%. Unless beta keeps rising, base metals could risk falling.