Global Commodities set to Harden amidst Rate Cuts

March 29, 2024

Global financial markets are experiencing a wave of optimism over signals of a shift towards looser monetary policies coming from the US Fed as well as other central banks. Chairman Jerome Powell seeking more evidence of inflation easing towards the target 2% before starting to cut rates came amidst reports of inflation moving up in January and February posing some upside risks to earlier projections. However, the markets took it in their stride and responded positively in the hope of rate cuts starting soon with US Futures contracts indicating a 67% chance of such a move at the Fed’s meeting in June.

Elsewhere, the surprise rate cut by the Swiss National Bank and a dovish stance from the Bank of England reignited investor confidence as did the positive economic indicators from the US. Reports of existing home sales surging to a year-high of 4.38 million and improvement in the US jobs market further bolstered global sentiment. Major stock indices in Europe and the US rebounded and the Dollar bounced back from a dip to 103.17 following the FOMC (Federal Open Market Committee) projections based on the economic resilience of the US and the rate gap between the Fed Reserve and other central banks.

The Goldman Sachs Group is bullish1 on the global commodities markets and expects it to advance in sync with the anticipated fall in benchmark interest rates that would help support industrial demand as well as consumer purchasing power. While raw materials could grow by 15% over the year amidst declining borrowing costs, copper and aluminum could witness a steeper hike, not to mention bullion and crude. Already, the commodities markets have advanced moderately over the first quarter of 2024, with crude and gold strengthening and copper topping $9000 a ton.

Crude oil holding fort despite Gaza tensions easing

In the commodity markets, WTI crude surged to its highest levels since November over a fall in the US inventories as well as the growing expectations of a rate cut. However, prices softened marginally (to around $81 a barrel) over the easing of geopolitical tensions after US Secretary of State Antony Blinken’s optimism around the ceasefire in Gaza between Israel and Hamas. Market analysts are now expecting crude to rise above the current consensus levels of between $70 to $90 a barrel if the Fed does start cutting rates in June and follows it up with at least two more during the second half of 2024. Thus far crude has risen close to 14%, supported by OPEC+ supply cuts and the rising geopolitical risks, both at Gaza and the Ukraine-Russia conflict. Additionally, broadly positive growth data from China in the second week of March also drove the gains. Overall, the analysts expect some short-term profit booking ahead of the Fed meeting in June, but these could be short-lived.

Base metals have their eyes on US manufacturing

The metals market could well have their eyes glued to the US PCE price index as well as the potential of liquidity boosts in China, which is considering a reduction in cash reserve requirements for banks. The latter could provide a cushion to the metal markets. Goldman Sachs isn’t the only one cautiously bullish about commodities. The Carlyle Group too expects consistent gains as does of JP Morgan Chase. Analysts perceive copper at 10,000 a ton, and aluminum at $2,600 a ton. The base metals traded around $8,884 a ton and $2,306 a ton respectively on the London Metal Exchange recently. However, the sentiment was markedly bearish around other metals such as nickel, cobalt, and lithium, with these analysts holding that it was too early to call a decisive end to the current sentiment.

The El Nino effect and rising disruptions around the Red Seas

Global forecast for agricultural commodities2 continues to be robust with demand for wheat, coarse grains, rice, sugar, and oilseeds all expected to grow over 2024. According to the World Agriculture Supply and Demand estimates released by the US3, production estimates are higher and so is the spike in demand, which may not be widespread as some regions make up for sluggishness in others. However, a crucial factor that market experts have highlighted relates to the continued disruption around the Red Sea shipping lines foisted by the growing geopolitical uncertainties in the region. As millions of people across the world hit the middle class that traditionally fuels demand in agri-commodities, the current challenge could emerge from higher costs of shipping and not from the producers. However, most analysts also warn of extreme weather conditions being a major agricultural commodity market risk. Even if one were to seek solace from the US National Weather Service claiming a 79% probability of the current El Nino phenomenon ending by mid-2024, the fact remains that the damage already inflicted on seasonal harvests could continue to dampen overall annual output, especially for food such as sugar, coffee, cocoa, rice, and wheat.

All in all, the markets are buoyant4 over the commodities market amidst expectations of a series of rate cuts in the US as well as by other central banks across the world, which they fell, would buttress demand across the board and result in an overall firming up of prices.