The inflection point of commodities has come, what is the reason? Where are the opportunities?
Since raising interest rates by 25 basis points in March 2022, the Fed has raised interest rates by 50 basis points and 75 basis points in May and June, respectively, and other major central banks have followed the Fed’s tightening pace. As the author has said before, even if the impact of the conflict between Russia and Ukraine is excluded, in 2020, the Federal Reserve adopted a series of policy policies such as zero interest rate, unlimited QE, buy everything, etc., and the subsequent lifting of the US blockade measures to promote rapid economic recovery .
The recovery of demand, the increase in market confidence, and the increase in the flow of funds in the market have made it easier for companies to obtain financing, which directly leads to an excessive increase in investment, followed by a large number of purchases of raw materials, employment, and ultimately rising raw materials + wages. As a result, the Fed had to adopt monetary policy to suppress demand.
However, with the further progress of raising interest rates and shrinking the balance sheet, last Friday (June 24) the International Monetary Fund (IMF) sharply lowered its forecast for US economic growth this year and next in its annual assessment report. Annual economic growth was revised down to 2.9% from 3.7% in April; growth forecast for 2023 was revised down to 1.7% from 2.3%. Federal Reserve Chairman Jerome Powell recently acknowledged the possibility of a recession in the U.S. economy, saying it would be very challenging to achieve a soft landing.
It can be considered that the “reflation” trading logic of commodity prices since 2020 has shown a turning signal with the central bank’s determination to control inflation. In particular, base metals such as LME copper are closely linked to the global economy. According to historical experience, industrial metals tend to peak before other commodities. In this context, investors can pay more attention to the possibility that the fall in commodity prices will lead to a reduction in the cost of related companies, which will stimulate the increase in profit expectations.
CICC stated that the process of overseas interest rate hikes in the second half of the year will have a significant inhibitory effect on inflation. Although the global supply-side risks have not yet subsided, the probability of extreme situations will decrease, and the impact on the fundamentals of commodities will be marginally weakened. Long-term factors will have a direct impact on market expectations and commodity price trends in the second half of the year.
On Wednesday (June 29), the market will usher in the first-quarter GDP of the United States, the core PCE price index, the OPEC ministerial meeting on Thursday (June 30), and the annual rate of CPI in the euro zone on Friday (July 1). China’s June Caixin Manufacturing PMI. Looking ahead, whether inflation further rises or economic growth slows, it is expected to further pressure commodity prices.
LME copper is currently maintained above the 8200-8300 key area support, suggesting that LME copper’s decline is expected to slow down after a continuous decline. However, considering that the mid-term decline of LME copper may have already started, once LME copper effectively breaks down the support of the lower area, it is expected to further open up the downside. In addition, if the subsequent rebound of LME copper cannot effectively recover the resistance near $9,200, it will become an opportunity to bearish copper prices again.
Gold trend analysis: subject to the downward trend line on the daily chart, be alert to the possibility of further decline
The daily chart shows that gold has important resistance near $1870, while gold is still subject to the downtrend line, suggesting that the market outlook is expected to fall further. It is worth noting that MACD needs to be alert to the possibility of a double pullback below the zero axis, which will indicate a further decline in the price of gold. In the medium term, pay attention to the gold level of 1720 and 1700, and maintain the bearish view until the effective breakthrough of the 1880 level.
