Commodities: “America First” agenda late in the cycle spells good news – TDS

Bart Melek, Global Head of Commodity Strategy at TDS, explains that one year into its mandate and the Trump Administration keeps on giving to the commodity bulls.

Key Quotes

“The gifting started back in November 2016, when the newly minted President-elect Trump promised America a massive infrastructure spending program. More recently, the President followed up by delivering massive corporate and individual tax cuts, without triggering concerns the Fed will aggressively hike rates. The US tax cut package is also credited with lifting global growth to nearly four percent over the next two years, which is very positive for commodities.”

“But it seems that the unrelenting decline in the USD since the Trump Administration took the reins of power, which accelerated in recent days, was one of the biggest factors driving commodities higher. In combination with a gentle Fed tightening cycle, at a time the ECB and other central banks are gearing up to remove the current outside monetary accommodation, the administration's America First agenda has precipitated a sharp correction in the greenback. A weakening US currency, along with late -cycle commodity optimism driving spec long positioning—which is driven by weak capacity growth and steadfast demand expectations— propelled the commodity complex some 18 percent since the end of 2016.”

“The fact that US crude inventories have dropped a very sharp 124 million bbls from the record 536 million bbls held in storage nine months ago is perhaps one of the most conspicuous developments supporting the optimistic crude oil price outlook. But of course, the growing US exports, the lack of expected US drilling activity growth, OPEC discipline and spectacular demand are the reasons behind this rebalancing. Rising geopolitical tensions in the Middle East are also very important factors, as they represent a supply risk and attract a premium to crude at a time excess supply is waning.”

“The "America First" agenda and late-cycle dynamics have continued to create a bid for gold. The yellow metal has recently rallied to as high as $,1,366/oz after Treasury Secretary Steven Mnuchin mused that a weak dollar is good for America as it helps trade competitiveness. The idea that US official policy will try to attempt to depress the greenback likely prompted traders to take outsized gold bets as protection. And while the President tried to walk back the idea that the administration wants policies to lower the USD, the market did not react much as he has made such statements before which reminded everyone of US actions in the Plaza Accord. The recent tax cut legislation and lofty equity markets are also helping to keep investor interest in gold.”

“Base metals should also attract a bid due to the US growth agenda. The possibility of strong US infrastructure spending, synchronized with US growth which is augmented by US tax policies are the demand factors making the sector attractive late in the cycle. With the mining industry experiencing chronic underinvestment in new projects due to risk aversion and tightening regulatory hurdles, the market is likely correct to project tightness into 2018. Zinc, copper and lead are likely to face the most investor interest and could see prices at significantly higher levels than they are today.”