• Bond yields, US stocks tumbled on post-Comey Trump crisis
• HG copper recovers as Chinese tightening prospects recede
• Soybeans, sugar and coffee all hit by Brazilian real's tumble

Coffee plantation, Brazil: The political crisis in Brazil has impacted soybeans, sugar and coffee prices.

By Ole Hansen

The uncertainty related to the political future of US president Trump and his ability to pass his growth-friendly agenda continues to impact global markets. The latest storm engulfing his presidency was triggered by the sacking of FBI head Comey and the subsequent appointment of a special council to investigate potential links between Trump's presidential campaign aides and Russia. 

Bond yields dropped while US stocks tumbled the most since September before recovering on stronger US economic data. Adding to this an emerging corruption scandal in Brazil which rattled emerging market bonds, stocks and currencies. 

The Bloomberg Commodity Index traded higher on the week but remains down by 4% year-to-date. It has now been rangebound for the past year (green line). During this time hedge funds nevertheless first increased bullish futures and options bets to a record back in February before the lack of price response helped trigger a two-thirds reduction that was primarily driven by selling of crude oil, copper, sugar, and grains.

Safe-haven demand for precious metals, not least gold, ebbed and flowed while oil found support ahead of a key Opec meeting on May 25. HG Copper recovered with iron ore and steel as China deleveraging fears eased after PBoC slowed the pace of monetary tightening by boosting cash injections.  

Soybeans, sugar and coffee were all adversely impacted by the tumble in the Brazilian real while cocoa surged on fund short-covering driven by a lack of rain in key growing regions in West Africa.

Gold together with the Japanese yen and bonds rallied on renewed safe-haven demand related to the ongoing and this week heightened political uncertainty created in Washington. It broke back above its 200-day moving average at $1,245/oz only to find technical resistance at $1,265/oz, the 61.8% retracement of the April to May selloff. 

The downside risk seems limited to $1,245/oz. but much depends on the direction of yields and the dollar as shown below.  

Source: Saxo Bank 

The focus is divided between continued US rate hikes and the renewed demand for safe-haven assets. The Federal Open Market Committee remains on track to hike again when it meets on June 14 but with little hope of calm returning to the political scene in Washington anytime soon, gold continues to attract demand. 

Growth concerns in both China and potentially also the US may limit the need for a succession of US rate hikes and with European growth picking up, the dollar is unlikely to recover its former strength. 

These developments are likely to keep the selling interest in gold subdued, thereby skewing the risk reward to the upside. 

Gold's medium term outlook still hinges on whether it will manage to break the six-year downtrend which is currently providing resistance at $1,280/oz (using weekly observations). 

Silver once again showed off its high-volatility credentials, slumping after posting the biggest gain seen in more than a month. Overall, it struggled to keep up with gold given that this week's rally was safe-haven driven – a category silver sometime struggles to be included in given its industrial use and the current growth worries in China. 

The gold-to silver-ratio, which shows the cost of gold measured in ounces of silver, trades close to the highest since last June. Support however has come from a recent surge in demand through exchange-traded products while funds have cut bullish futures bets from a record to a 15-month low during four weeks of heavy selling. 

Crude oil traded higher for a second week with support being re-established following two consecutive supportive US inventory reports and a rising belief that Opec and non-Opec producers, meeting in Vienna on May 25, will agree to extend current production cuts by at least another six months.

Given expectations for a seasonal pick-up in demand during the second half, a reduction in the global overhang of stocks should start to become more visible thereby supporting the price. Against this, however, oil will still be challenged by a further rise in production from the US and potentially also Libya and Nigeria. 

During the past six months since Opec made the agreement to cut, we have seen US production increase by almost one million barrels compared to expectations back in November. 

On that basis, Opec's ambitions are likely to have been reduced from previous meetings with the main objective at this stage being to buy more time and support the price until the expected recovery kicks off later in the year. 

WTI crude returned to $50/barrel on Friday after retracing 61.8% of the April to May selloff. Support ahead of the Opec meeting is likely to support the price. In the aftermath of the meeting, and unless Opec goes more aggressive than is currently expected, further upside is likely to be limited. 

A deal to extend production cuts may be met by scepticism as it could see some producers (with Saudi Arabia being the most important) yield further market share. Rising domestic demand during the peak summer months will eat into available supplies for export. 

However, if adhered to these developments should finally mean that output cuts are matched by supply cuts through lower exports.    

Source: Saxo Bank

Ole Hansen is head of commodity strategy at Saxo Bank