BCA Indicators/Model
Highlights Gold is – and always will be – exquisitely sensitive to Fed policy and forward guidance, as last month's "Dot Shock" showed (Chart of the Week). Its price will continue to twitch – sometimes violently – as the widening dispersion of views evident in the Fed dots keeps markets on edge and pushes forward rate expectations in different directions. Fed policy is important but will remain secondary to fundamentals in oil markets. Increasingly inelastic supply will force refiners to draw down inventories, which will keep forward curves backwardated. OPEC 2.0's production-management policy is the key driver here, followed closely by shale-oil's capital discipline. Between these market bookends are base metals, which will remain sensitive to Fed policy, but increasingly will be more responsive to tightening supply-demand fundamentals, as the pace of the global renewables and EV buildout challenges supply. The one thing these markets will share going forward is increasing volatility. Gold volatility will remain elevated as markets are forced to parse sometimes-cacophonous Fed forward guidance; oil volatility will increase with steeper backwardation; and base metals volatility will rise as fundamentals continue to tighten. We remain long commodity-index exposure (S&P GSCI and COMT ETF) and equity exposure (PICK ETF). Feature Gold markets still are processing last month's "Dot Shock" – occasioned by the mid-June move of three more Fed bankers' dots into the raise-rates-in-2022 camp at the Fed – and the sometimes-cacophonous forward guidance of post-FOMC meetings accompanying these projections. Following last month's meeting, seven of the 18 central bankers at the June meeting now favor an earlier rate hike. This dot dispersion fuels policy uncertainty. When policy uncertainty is stoked, demand for the USD typically rises, which generally – but not always – contributes to liquidation of dollar-sensitive positions in assets like commodities. This typically leads to higher price volatility.1 This is most apparent in gold, which is and always will be exquisitely sensitive to Fed guidance and the slightest hint of a change in course (or momentum building internally for such a change). This is what markets got immediately after the June meeting. When this guidance reflects a wide dispersion of views inside the Fed, it should come as no surprise that price volatility increases among assets that are most responsive to monetary policy. This dispersion of market expectations – as a matter of course – is intensified by discordant central-bank forward guidance.2 Fundamentals Reduce Oil's Sensitivity To Fed Policy Fed policy will always be important for the evolution of the USD through time, which makes it extremely important for commodities, since the most widely traded commodities are priced in USD. All else equal, an increase in the value of the USD raises the cost of commodities ex-US, and vice versa. Chart of the WeekGold Still Processing Dot Shock Chart 2Oil Market Remains Tight... The USD's impact is dampened when markets are fundamentally tight – e.g., when the level of demand exceeds supply, as is the case presently for oil (Chart 2).3 When this occurs, refiner inventories have to be drawn down to make up for supply deficits (Chart 3). This leads to a backwardation in the oil forward curves – i.e., prices of prompt-delivery oil are higher than deferred-delivery oil – reflecting the fact that the supply curve is becoming increasingly inelastic (Chart 4). This backwardation benefits OPEC 2.0 member states, as most of them have long-term supply contracts with customers indexed to spot prices, and investors who are long commodity-index exposure, as it is the source of the roll yield for these products.4 Chart 3Forcing Inventories To Draw... Chart 4...And Backwardating Forward Curves Copper's Sensitivity To Fed Policy Declining Supply-demand fundamentals in base metals – particularly in the bellwether copper market – are tightening, which, as the oil market illustrates, will make prices in these markets less sensitive to USD pressures going forward (Chart 5). We expect the copper forward curve to remain backwardated for an extended period (Chart 6), which will distance the evolution of copper prices from Fed policy variables (e.g., interest rates and the USD). Chart 5Copper USD Sensitivity Will Diminish As Balances Tighten Chart 6Expect Persistent Backwardation In Copper Indeed, our modeling suggests this already is occurring in the metals markets, as can be seen from the resilience of copper prices during 1H21, when China's fiscal and monetary stimulus was waning and, recently, during the USD's recent rally, which was an unexpected headwind generated by the Fed's June meeting. If, as appears likely, China re-engages in fiscal and monetary stimulus in 2H21, the global demand resurgence for metals, copper in particular, will receive an additional fillip. Like oil, copper inventories will have to be drawn down over the next two years to make up for physical deficits, which have been a persistent problem for years (Chart 7). Capex in copper markets has yet to be incentivized by higher prices, which means these physical deficits likely will widen as the world gears up for expanded renewables generation and the grids required to support them, not to mention higher electric vehicle (EV) demand. If, as we expect, copper miners do not invest in new greenfield mine projects – choosing instead to stay with their brownfield expansion strategies – the market will tighten significantly as the world ramps up its demand for renewable energy. This means copper's supply curve will, like oil's, become increasingly inelastic. At the limit – i.e., if new mining capex is not incentivized – price will be forced to allocate limited supply, and may even have to get to the point of destroying demand to accommodate the renewables buildout. Chart 7Supply-Demand Balance Tightening In Copper A Word On Spec Positioning We revisited our modeling of speculative influence on these markets over the past couple of weeks, in anticipation of the volatility we expect and the almost-certain outcry from public officials that will ensue. Our modeling continues to support our earlier work, which found fundamentals are determinant to the evolution of industrial commodity prices. Using Granger-Causality and econometric analysis, we find prices mostly explain spec positioning in oil and copper, and not the other way around.5 We do find spec positioning – via Working's T Index – to be important to the evolution of volatility in WTI crude oil options, along with other key variables (Chart 8).6 That said, other variables are equally important to this evolution, including the St. Louis Fed's Financial Stress Index, EM equity volatility, VIX volatility and USD volatility. These variables are not useful in modeling copper volatility, where it appears fundamental and financial variables are driving the evolution of prices and, by extension, price volatility. We will continue to research this issue, and will continue to subject our results to repeated trials in an attempt to disprove them, as any researcher would do. Chart 8Oil Volatility Drivers Investment Implications Gold will remain hostage to Fed policy, but oil and base metals increasingly will be charting a path that is independent of policy-related variables, chiefly the USD. There is no escaping the fact that gold volatility will increasingly be in the thrall of US monetary policy – particularly during the next two years as the Fed attempts to guide markets toward something resembling normalization of that policy.7 However, as the events of the most recent FOMC meeting illustrate, gold price volatility will remain elevated as markets are forced to parse oftentimes-cacophonous Fed forward guidance. This would argue in favor of using low-volatility episodes as buying opportunities in gold options – particularly calls, as we continue to expect gold prices to end the year at $2,000/oz. We also favor silver exposure via calls, expecting price to go to $30/oz this year. In oil and base metals, we continue to expect supply-demand fundamentals in these markets to tighten, which predisposes us to favor commodity index products. For this reason, we remain long commodity-index exposure – specifically the S&P GSCI index, which is up 6.8% since inception, and the COMT ETF, which is up 8.7% since inception. We expect the base metals markets to remain very well bid going forward, and remain long equity exposure in these markets via the PICK ETF, which we re-entered after a trailing stop was elected that left us with a 24% gain since inception at the end of last year. Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Commodities Round-Up Energy: Bullish US crude oil stocks (ex SPR) fell 6.7mm barrels in the week ended 25 June 2021, according to the US EIA. Total crude and product stocks were down 4.6mm barrels. Domestic crude oil production was unchanged at 11.1mm b/d over the reporting week. Total refined-product demand surpassed the comparable 2019 reporting period, led by higher distillate consumption (4.2mm b/d vs 3.8mm b/d). Gasoline consumption remains a laggard (9.2mm b/d vs 9.5mm b/d), as does jet fuel (1.4mm b/d vs 1.9mm b/d). Propane and propylene demand surged over the period, likely on the back of petchem demand (993k b/d vs 863k b/d). Base Metals: Bullish Base metals prices are moving higher in anticipation of tariffs being imposed by Russia to discourage exports beyond the Eurasian Economic Union, according to argusmedia.com. In addition to export tariffs on copper, aluminum and nickel, steel exports also will face levies to discourage material from leaving the EAEU (Chart 9). The tariffs are expected to remain in place from August through December 2021. Separately, premiums paid for high-quality iron ore in China (65% Fe) reached record highs earlier this week, as steelmakers scramble for supply, according to reuters.com. The premium iron ore traded close to $36/MT over benchmark material (62% Fe) this week. Precious Metals: Bullish Gold prices continue to move lower following the FOMC meeting on June 16. The yellow metal was down 0.6% y-o-y at $1762.80/oz as of Tuesday’s close after being up a little more than 13% y-o-y before the FOMC meeting earlier this month (Chart 10). We believe the USD rally, which, based on earlier research we have done, could be benefitting from safe-haven demand arising from global concern over the so-called Delta variant of COVID-19, which has spread to at least 85 countries. Public-health officials are fearful this could cause a resurgence in COVID-19 cases and additional mutations in the virus if vaccine distribution in EM states is not increased. Ags/Softs: Neutral Widely disparate weather conditions in the US west and east crop regions – drought vs cooler and wetter weather – appear to be on track to produce average crop yields for corn and beans this year, according to agriculture.com's Successful Farming. In regions where hard red spring wheat is grown, states experiencing low rainfall likely will have poor crops this year. Chart 9 Chart 10 Footnotes 1 We model gold prices as a function of financial variables sensitive to Fed policy – e.g., real rates and the broad trade-weighted USD – and uncertainty, which is conveyed via the Global Economic Policy Uncertainty (GEPU) index published by Baker, Bloom & Davis. 2 Please see Lustenberger, Thomas and Enzo Rossib (2017), "Does Central Bank Transparency and Communication Affect Financial and Macroeconomic Forecasts?" SNB Working Papers, 12/2017. The Swiss central bank researchers find "… the verdict about the frequency of central bank communication is unambiguous. More communication produces forecast errors and increases their dispersion. … Stated differently, a central bank that speaks with a cacophony of voices may, in effect, have no voice at all. Thus, speaking less may be beneficial for central banks that want to raise predictability and homogeneity among financial and macroeconomic forecasts. We provide some evidence that this may be particularly true for central banks whose transparency level is already high." (p. 26) 3 Please see OPEC 2.0 Vs. The Fed, published on February 8, 2018, for additional discussion. 4 Please see The Case For A Strategic Allocation To Commodities As An Asset Class, a Special Report we published on March 11, 2021 on commodity-index investing. It is available at ces.bcaresearch.com. 5 The one outlier we found was Brent prices, for which non-commercial short positioning does Granger-Cause price. Otherwise, price was found to Granger-Cause spec positioning on the long and short sides of the market. 6 Please see BCA Research's Commodity & Energy Strategy Weekly Report, "Specs Back Up The Truck For Oil," published on April 26, 2018, in which we introduce Holbrook Working's "T Index," a measure of speculative concentration in futures and options markets. It is available at ces.bcaresearch.com. Briefly, Working's T Index shows how much speculative positioning exceeds the net demand for hedging from commercial participants in the market. 7 Please see How To Re-Shape The Yield Curve Without Really Trying published by our US Bond Strategy group on June 22 for a deeper discussion of the outlook for Fed policy. Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades
Weekly Performance Update For the week ending Thu Jun 24, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio Total Weekly Return BCA US Portfolio S&P500 TRI 1.19% 1.08% Top Contributors TX:US SCCO:US DE:US UHAL:US TGT:US Weekly Return 28 bps 19 bps 19 bps 17 bps 12 bps Top Detractors MPLX:US HE:US PEG:US STX:US FLO:US Weekly Return -10 bps -10 bps -9 bps -8 bps -7 bps Top Prospects BRK.A:US ANAT:US ESGR:US TX:US MPLX:US BCA Score 98.55% 98.15% 97.91% 97.86% 93.55% BCA Canada Portfolio Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 2.34% 0.38% Top Contributors TOY:CA AUP:CA CS:CA TOU:CA IFP:CA Weekly Return 43 bps 38 bps 36 bps 19 bps 16 bps Top Detractors EMP.A:CA TCL.A:CA CCA:CA QBR.A:CA ELF:CA Weekly Return -23 bps -7 bps -7 bps -5 bps -3 bps Top Prospects CS:CA IFP:CA RUS:CA CFP:CA LNF:CA BCA Score 99.28% 98.50% 98.21% 97.43% 97.22% BCA UK Portfolio Total Weekly Return BCA UK Portfolio FTSE 100 TRI 0.23% -0.53% Top Contributors ROSN:GB CVSG:GB KNOS:GB BIFF:GB NFC:GB Weekly Return 20 bps 14 bps 14 bps 14 bps 14 bps Top Detractors NLMK:GB DEC:GB BAKK:GB TEP:GB LXI:GB Weekly Return -19 bps -15 bps -15 bps -12 bps -11 bps Top Prospects SVST:GB NLMK:GB GLTR:GB BPCR:GB RMG:GB BCA Score 99.67% 98.62% 98.47% 95.23% 95.08% BCA Eurozone Portfolio Total Weekly Return BCA EMU Portfolio MSCI EMU TRI -0.86% -0.52% Top Contributors MMT:FR WUW:DE FSKRS:FI MS:IT UN01:DE Weekly Return 13 bps 13 bps 11 bps 10 bps 9 bps Top Detractors CNV:FR GTT:FR ADL:DE PHA:FR US:IT Weekly Return -53 bps -19 bps -16 bps -10 bps -8 bps Top Prospects STR:AT POST:AT CNV:FR SOLV:BE HLAG:DE BCA Score 99.42% 98.85% 98.74% 97.65% 96.86% BCA Japan Portfolio Total Weekly Return BCA Japan Portfolio TOPIX TRI -0.58% -0.84% Top Contributors 7860:JP 6676:JP 7958:JP 8117:JP 5930:JP Weekly Return 13 bps 12 bps 12 bps 9 bps 7 bps Top Detractors 9543:JP 8595:JP 7994:JP 3132:JP 8922:JP Weekly Return -17 bps -17 bps -13 bps -10 bps -8 bps Top Prospects 4966:JP 6345:JP 8133:JP 9543:JP 7994:JP BCA Score 99.33% 98.60% 98.49% 98.45% 98.11% BCA Hong Kong Portfolio Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI 0.47% 1.23% Top Contributors 990:HK 316:HK 1798:HK 857:HK 1258:HK Weekly Return 121 bps 36 bps 23 bps 21 bps 14 bps Top Detractors 3600:HK 1919:HK 43:HK 743:HK 323:HK Weekly Return -73 bps -28 bps -20 bps -18 bps -12 bps Top Prospects 990:HK 2232:HK 811:HK 1606:HK 323:HK BCA Score 99.11% 98.28% 97.72% 97.55% 97.08% BCA Australia Portfolio Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 1.52% -0.80% Top Contributors AGI:AU GRR:AU RUL:AU CAJ:AU PDN:AU Weekly Return 85 bps 18 bps 16 bps 13 bps 12 bps Top Detractors STX:AU AST:AU SDG:AU SGF:AU EVT:AU Weekly Return -27 bps -15 bps -15 bps -6 bps -6 bps Top Prospects PIC:AU GRR:AU AGI:AU SGF:AU BFG:AU BCA Score 98.36% 98.09% 97.54% 96.84% 96.80%
Highlights Entering 2H21, oil and metals' price volatility will rise as inventories are drawn down to cover physical supply deficits brought about by the re-opening of major economies ex-China. As demand increases and oil and metals supply become more inelastic, forward curves will backwardate further. This will weaken commodity-price correlations with the USD and boost commodity-index returns. Going into next week's OPEC 2.0 meeting, the Kingdom of Saudi Arabia (KSA) and Russia likely will hold off on further production increases, until greater clarity around US-Iran negotiations and the return of Iran as a bona fide exporter is available. Chinese authorities will release 100k MT of copper, aluminum and zinc into tight domestic markets in July. A two-day rally followed the news. Since bottoming in March 2020, the XOP and XME ETFs covering oil and gas producers and metals miners are up ~ 218% and ~ 196%, respectively, following the ~ 230% move in crude oil and the ~ 100% rise copper prices. Higher volatility will present buying opportunities for these ETFs (Chart of the Week). We remain long commodity index exposure – S&P GSCI and COMT ETF – expecting steeper backwardations. We will go long the PICK ETF at tonight's close again, after being stopped out last week with a 23.9% return. Feature Heading into 2H21, industrial commodity markets will continue to tighten. In the case of oil, this is caused by OPEC 2.0's production-management strategy – i.e., keeping supply below demand – and capital discipline among producers in the price-taking cohort.1 Base metals, on the other hand, are tightening because demand is recovering much faster than supply.2 Re-opening of major economies will boost refined-product demand in oil markets – e.g., gasoline and jet fuel – which will leave refiners little choice but to continue drawing on inventories to cover supply shortfalls in the near term (Chart 2). Chart of the WeekResources ETFs Follow Prices Higher Chart 2Refiners Will Continue Drawing Crude Investments Base metals – particularly copper and aluminum – will remain well bid in the face of constrained supply and higher consumption ex-China. Despite China's widely anticipated decision to release strategic stockpiles of copper, aluminum and zinc next month into a tight domestic market – which we flagged last month – continued inventory draws will be required to cover physical deficits in these markets, particularly in copper (Chart 3).3 Chart 3Copper Inventories Will Draw As Demand Ex-China Rises Chart 4Steeper Backwardation, Higher Volatility Higher Vol On The Way As demand for industrial commodities increases and inventories continue to draw, forward curves will become more backwardated – i.e., material delivered promptly (next day or next week) will command a higher price than commodities delivered next month or next year: Consumers value current supply above deferred supply, and producers and merchants have to charge more to cover inventory replacement costs, which increase when prompt demand outstrips supply. The steepening of forward curves for industrial commodities will lead to higher price volatility in oil and metals markets, particularly copper: Demand will confront increasingly inelastic supply. In this evolution, prices will be forced to allocate inelastic supply as demand increases. Sometimes-sharp changes in price are required to equilibrate available supply with demand when this happens. This can be seen clearly in oil markets, but it holds true for all storable commodities (Chart 4).4 Investment Implications Industrial commodity markets are entering a more volatile phase, which will be characterized by sharp price movements up and down over the short term, as demand continues to outpace supply. Our analysis suggests this is the beginning of a more volatile phase in industrial commodity markets. The balance of risk in industrial commodity prices will remain to the upside as volatility increases. In the short term, fundamental imbalances can be addressed over a relatively short months-long horizon – i.e., OPEC 2.0 can release spare capacity over a 3-4 month interval to accommodate rising demand – so that price increases do not destroy demand as oil-exporters are rebuilding their fiscal balance sheets. Base metals markets will have a tougher time in the short run finding the supply to meet surging demand, but it can be done over the next year or so without prices getting to the point where demand-destruction sets in. Over the medium to long term, investor-owned oil and gas producers literally are being directed by policymakers, shareholders and courts toward an extended wind-down of production and investment in future production. Markets have been pricing through just such a situation in the post-COVID-19 world, with OPEC 2.0 managing supply against falling demand and still managing to reduce inventories significantly. If the world follows the IEA's pathway to a decarbonized future – in which no investment in new oil or gas production is required after 2025 – this will become the status quo for these markets going forward.5 Metals producers, on the other hand, are being encouraged to increase marketable supply at a rapid pace to accommodate demand driven by the build-out of renewable energy – chiefly wind and solar – and the grids that will be required to move this energy. Producers, however, remain reluctant to do so, fearing their capex investment to build out supply will produce physical surpluses that depress returns, similar to the last China-led commodity super-cycle. Supplying the necessary base metals to make this happen will be difficult at best, according to Ivan Glasenberg, CEO at Glencore. At this week's Qatar Economic Forum, he said copper supply will have to double between now and 2050 to meet expected demand for this critical metal. “Today, the world consumes 30 million tonnes of copper per year and by the year 2050, following this trajectory, we’ve got to produce 60 million tonnes of copper per year,” he said. “If you look at the historical past 10 years, we’ve only added 500,000 tonnes per year … Do we have the projects? I don’t think so. I think it will be extremely difficult.”6 The volatility we are expecting in oil, gas and base metals prices, will present buy-the-dip opportunities in related equities vehicles. Since bottoming in March 2020, the XOP and XME ETFs covering oil and gas producers and metals miners are up ~ 218% and ~ 196%, respectively, matching the ~ 230% move in crude oil and the ~ 100% rise in copper prices. We remain long commodity index exposure – S&P GSCI, which is up 5.9% and the COMT ETF, which is up 7.6% – expecting steeper backwardations. The trailing stop on our MSCI Global Metals & Mining Producers ETF (PICK) position recommended 10 December 2020 was elected, which stopped us out with a gain of 23.9%. We are getting long the PICK again at tonight's close. Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Commodities Round-Up Energy: Bullish Commercial crude oil stocks in the US (ex-SPR barrels) fell 7.6mm barrels w/w in the week ended 18 June 2021, according to the US EIA. Including products, US crude and product inventories were down 5.8mm barrels. US domestic crude oil production was down 100k b/d, ending the week at 11.1mm b/d. Overall product supplied, the EIA's proxy for refined-product demand, was up 180k b/d at 20.75mm b/d, which is 129k b/d below 2019 demand for the same period. At 9.44mm b/d, gasoline demand was just below comparable 2019 consumption of 9.47mm b/d, while jet-fuel demand remains severely depressed vs. comparable 2019 consumption at 1.58mm b/d (vs. 1.92mm b/d). Distillate demand (e.g., diesel fuel) for the week ended 18 June 2021 was 3.95mm b/d vs. 3.97mm b/d for the comparable 2019 period. Base Metals: Bullish Benchmark spot iron ore (62% Fe) prices are holding above $210/MT in trading this week, as demand for the steel input remains strong in China (Chart 5). The Chinese Communist Party (CCP) increased its level of intervention in the iron ore market this week, launching investigations into “malicious speculation,” vowing to “severely punish” anyone found to be engaged in such behavior, according to ft.com.7 Benchmark iron ore prices hit $230/MT in May. We continue to expect exports from Brazil to pick up in 2H21, which will push prices lower in 2H21. Precious Metals: Bullish In the aftermath of last Wednesday’s FOMC meeting gold prices lost nearly $86/oz (Chart 6). Our colleagues at BCA Research's USBS believe markets are paying too much attention to the Fed’s dot plots, and not to the central bank’s verbal guidance.8 Originally, the Fed stated that it will only start raising interest rates once a checklist of three conditions have been met. This checklist includes guidance on actual and expected inflation rates and the labor market. Gold prices did not react to Chair Powell's testimony before the House Select Subcommittee on the Coronavirus Crisis. Ags/Softs: Neutral US spring wheat prices are rallying on the back of dry weather in the northern Plains, while forecasts for benign crop weather in the Midwest pressured soybeans lower this week, according to successfulfarming.com. Chart 5 Chart 6 Footnotes 1 Please see our most recent oil price forecasts published last week in Balance Of Risks Tilts To Higher Oil Prices. It is available at ces.bcaresearch.com. 2 Please see A Perfect Energy Storm On The Way published on June 3, 2021 for further discussion. 3 Please see Less Metal, More Jawboning published on May 27, 2021, which flagged China's likely decision to release strategic stockpiles of base metals. 4 Chart 4 shows implied volatility as a function of the slope of the forward curve, i.e., the difference between the 1st- and 13th-nearby futures divided by the 1st-nearby future vs implied volatilities for Brent and WTI options. This modeling extends Kogan et al (2009), mapping realized volatilities calculated using historical settlements of crude oil futures against the slope of crude oil futures conditioned on 6th- vs. 3rd-nearby futures returns (in %). Please see Kogan, L., Livdan, D., & Yaron, A. (2009), "Oil Futures Prices in a Production Economy With Investment Constraints." The Journal of Finance, 64:3, pp. 1345-1375. 5 Please see fn 2's discussion of the IEA's Net Zero by 2050, A Roadmap for the Global Energy Sector beginning on p. 5 under The Case For A Carbon Tax. 6 Please see Copper supply needs to double by 2050, Glencore CEO says published on June 23, 2021 by reuters.com. Of course, being a copper producer with large-scale base-metals projects due to come on line in the next year or so, Mr. Glasenberg could be talking his book, but as Chart 3 shows, copper has been and likely will be in physical deficits for years. 7 Please see China cracks down on iron ore market, published by ft.com on June 21, 2021. 8 Please see How To Re-Shape The Yield Curve Without Really Trying, published on June 22, 2021. Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades
Weekly Performance Update For the week ending Thu Jun 17, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio Total Weekly Return BCA US Portfolio S&P500 TRI -2.34% -0.37% Top Contributors WAT:US IT:US PSA:US KOF:US MPLX:US Weekly Return 12 bps 4 bps 2 bps 1 bps 0 bps Top Detractors TX:US SCCO:US STX:US LPX:US AN:US Weekly Return -38 bps -33 bps -27 bps -14 bps -13 bps Top Prospects TX:US BRK.A:US ESGR:US ANAT:US UHAL:US BCA Score 99.09% 98.99% 97.29% 96.86% 96.54% BCA Canada Portfolio Total Weekly Return BCA Canada Portfolio S&P/TSX TRI -0.74% 0.54% Top Contributors TOY:CA CSU:CA CPX:CA TCN:CA DSG:CA Weekly Return 14 bps 11 bps 9 bps 9 bps 8 bps Top Detractors CS:CA PXT:CA TCL.A:CA LNR:CA IMO:CA Weekly Return -43 bps -29 bps -19 bps -19 bps -18 bps Top Prospects CS:CA LNF:CA IFP:CA RUS:CA CFP:CA BCA Score 99.79% 98.75% 98.48% 98.39% 96.94% BCA UK Portfolio Total Weekly Return BCA UK Portfolio FTSE 100 TRI -0.22% 0.94% Top Contributors OXIG:GB POLR:GB CVSG:GB AAF:GB AGRO:GB Weekly Return 21 bps 16 bps 15 bps 10 bps 8 bps Top Detractors FDEV:GB HSBK:GB SVST:GB DRX:GB VVO:GB Weekly Return -36 bps -14 bps -13 bps -11 bps -10 bps Top Prospects SVST:GB GLTR:GB NLMK:GB RMG:GB BPCR:GB BCA Score 99.77% 98.61% 98.37% 97.91% 96.67% BCA Eurozone Portfolio Total Weekly Return BCA EMU Portfolio MSCI EMU TRI 0.12% 1.27% Top Contributors STR:AT PHA:FR AOF:DE GTT:FR EDNR:IT Weekly Return 22 bps 19 bps 13 bps 12 bps 8 bps Top Detractors SOLV:BE CEM:IT MMT:FR TKA:AT MS:IT Weekly Return -11 bps -8 bps -8 bps -7 bps -7 bps Top Prospects STR:AT SOLV:BE POST:AT CNV:FR BB:FR BCA Score 99.02% 98.56% 98.44% 97.93% 97.52% BCA Japan Portfolio Total Weekly Return BCA Japan Portfolio TOPIX TRI 0.90% 0.35% Top Contributors 2791:JP 4966:JP 3132:JP 6676:JP 7994:JP Weekly Return 32 bps 31 bps 27 bps 19 bps 18 bps Top Detractors 8117:JP 8850:JP 3291:JP 8595:JP 6345:JP Weekly Return -14 bps -13 bps -12 bps -11 bps -10 bps Top Prospects 5930:JP 3291:JP 4966:JP 9436:JP 7994:JP BCA Score 99.48% 98.95% 98.66% 98.34% 98.32% BCA Hong Kong Portfolio Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI 0.79% -0.61% Top Contributors 990:HK 3600:HK 857:HK 215:HK 1919:HK Weekly Return 58 bps 51 bps 21 bps 18 bps 15 bps Top Detractors 1258:HK 2877:HK 2768:HK 323:HK 743:HK Weekly Return -25 bps -19 bps -15 bps -12 bps -11 bps Top Prospects 990:HK 1606:HK 2232:HK 86:HK 116:HK BCA Score 98.85% 98.22% 97.78% 97.60% 97.38% BCA Australia Portfolio Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI -0.99% 0.56% Top Contributors JLG:AU FLN:AU NEW:AU PL8:AU ELD:AU Weekly Return 24 bps 21 bps 16 bps 8 bps 8 bps Top Detractors PDN:AU GRR:AU CIA:AU SRV:AU CAJ:AU Weekly Return -50 bps -23 bps -18 bps -17 bps -13 bps Top Prospects GRR:AU PIC:AU CIA:AU BFG:AU BLX:AU BCA Score 98.90% 98.01% 97.03% 96.38% 96.21%
Highlights Oil demand expectations remain high. Realized demand continues to disappoint. This means OPEC 2.0's production-management strategy – i.e., keeping the level of supply below demand – will continue to dictate oil-price levels. US producers will remain focused on consolidation via M&A and on returning capital to shareholders, in line with the Kingdom of Saudi Arabia's (KSA) expectation. Going forward, shale producers will focus on protecting and growing profit margins. The durability of OPEC 2.0's tactical advantage arising from its enormous spare capacity – ~ 7mm b/d – is difficult to gauge: Tightening global oil markets now in anticipation of Iran's return as a bona fide exporter benefits producers globally, and could accelerate the return of US shales if that return is delayed or re-opening boosts demand more than expected. We are raising our average Brent forecast for 2021 to $66.50 vs. $63/bbl earlier, with 2H21 prices averaging $70/bbl. We are moving our 2022 and 2023 forecasts up slightly to $74 and $81/bbl (Chart of the Week). WTI will trade $2-$3/bbl lower. We remain long the S&P GSCI Dynamic Roll Index ETF (COMT) and the S&P GSCI, expecting tight supply-demand balances to further steepen backwardations in forward curves. Feature While the forecasted rebound in global oil demand continues to drive expectations for higher prices, it is the production discipline of OPEC 2.0 and capital discipline imposed on US shale producers that has and will continue to super-charge the recovery of prices. Continued monetary accommodation and fiscal stimulus notwithstanding, realized global oil demand has mostly flatlined at ~ 96mm b/d following its surge in February, as uncertainty over COVID-19 containment keeps governments hesitant about reopening their economies too quickly. Stronger demand in Asia, led by China, has been offset by weaker demand in India and Japan, where COVID-19 remains a deterrent to re-opening and recovery. The recovery in DM demand generally stalled over this period even as vaccine availability increased (Chart 2). Chart of the WeekOPEC 2.0 Comfortable With Higher Prices Chart 2Global Demand Recovery Stalled That likely will change in 2H21, but it is not a given: The UK, which has been among the world leaders in COVID-19 containment and vaccinations, delayed its full reopening by a month – to July 19 – in an effort to gain more time to bolster its efforts against the Delta variant first identified in India. In the US, New York state lifted all COVID-19-induced restrictions and fully re-opened this week. Still, even in the US, unintended inventory accumulation in the gasoline market – just as the summer driving season should be kicking into high gear – suggests consumers remain cautious (Chart 3). Chart 3Unintended Inventory Accumulation in US Gasoline Market We continue to expect the re-opening of the US and Europe (including the UK) will boost DM demand in 2H21, and wider vaccine availability will boost EM oil demand later in the year and in 2022. For all of 2021, we have lifted our demand-growth estimate slightly to 5.3mm b/d from 5.2mm b/d last month. We expect global demand to grow 4.1mm b/d next year and 1.6mm b/d in 2023. Our 2021 estimates are in line with those of the US EIA and the IEA. OPEC is more bullish on demand recovery this year, expecting growth of 6mm b/d. We continue to believe the risk on the demand side remains to the upside; however, given continued uncertainty around global COVID-19 containment, we remain circumspect. Supply-Side Discipline Drives Oil Prices OPEC 2.0 remains committed to its production-management strategy that is keeping the level of supply below demand. Compliance with production cuts in May reportedly was at 115%, following a 114% rate in April.1 Core OPEC 2.0 – i.e., states with the capacity to increase production – is holding ~ 7mm b/d of spare capacity, according to the IEA, which will allow it to continue to perform its role as the dominant supplier in our modeling (Chart 4). Earlier this year, KSA's Energy Minister Abdulaziz bin Salman correctly recognized the turn in the market that likely ensures OPEC 2.0's dominance for the foreseeable future – i.e., the shift in focus of the US shale-oil producers from production for the sake of production to profitability.2 This is a trend that has been apparent for years as capital markets all but abandoned US shale-oil producers. Chart 4OPEC 2.0 Remains Dominant Producers outside OPEC 2.0 – what we refer to as the "price-taking cohort" – have prioritized shareholder interests as a result of this market pressure, and remain focused on sometimes-forced consolidation via M&A, which we have been expecting.3 The significance of this evolution of shale-oil production is difficult to overstate, particularly as the survivors of this consolidation will be firms with strong balance sheets and a focus on profitability, as is the case with any well-run manufacturing firm. We also expect large producers to opportunistically shed production assets to reduce their carbon footprints, so as to come into compliance with court-ordered emission reductions and shareholder demands to reduce pollution.4 With the oil majors like Shell, Equinor and Oxy divesting themselves of shale properties, production increasingly will be in the hands of firms driven by profitability.5 We expect US shale-oil production to end the year at 9.86mm b/d and to average 9.57mm b/d next year; however, as the shales become the marginal global supply, production could become more volatile (Chart 5). The consolidation of US production also will alter the profitability of firms continuing to operate in the shales. We expect breakeven costs to fall as acquired production by stronger firms results in high-grading of assets – only the most profitable will be produced given market-pricing dynamics – while less profitable acreage will be mothballed until prices support development(Chart 6). Chart 5US Producers Focus On Profitability Chart 6Shale Breakevens Likely Fall As Consolidation Picks Up Supply-Demand Balances Tightening The current round of M&A consolidation and OPEC 2.0's continued discipline lead us to expect continued tightening of global oil supply-demand balances this year and next (Chart 7). This will allow inventories to continue to draw, which will keep forward oil curves backwardated (Chart 8). Chart 7Supply-Demand Balances Will Continue To Tighten Chart 8Tighter Markets, Lower Stocks The critical factor here will be OPEC 2.0's continued calibration of supply in line with realized demand and the return of Iran as a bona fide exporter, which we expect later this year. OPEC 2.0's restoration of ~ 2mm b/d of supply will be done by the beginning of 3Q21, when we expect Iran to begin restoring production and visible exports (i.e., in addition to its under-the-radar sales presently). The return of Iranian supply – and a possible increase in Libyan output – will present some timing difficulties for OPEC 2.0's overall strategy, but they will be short-lived. We continue to monitor output to assess the evolution of balances (Table 1). Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) Investment Implications Oil demand will increase over the course of 2H21, as vaccines become more widely distributed globally, and the massive fiscal and monetary stimulus deployed worldwide kicks economic activity into high gear. On the supply side, markets will tighten on the back of continued restraint until Iranian barrels return to the market. The balance of risk is to the upside, particularly if the US and Iran are unable to agree terms that restore Iran as a bona fide exporter. In that case, the market tightening now under way will result in sharply higher prices. That said, realized demand growth has stalled over the past three months, which can be seen in unintended inventory accumulation in the US gasoline markets just as the summer driving season opens. We are raising our average Brent forecast for 2021 to $66.50 vs. $63/bbl earlier, with 2H21 prices averaging $70/bbl. We are moving our 2022 and 2023 forecasts up slightly as well to $74 and $81/bbl (Chart of the Week). WTI will trade $2-$3/bbl lower. We remain long the S&P GSCI Dynamic Roll Index ETF (COMT) and the S&P GSCI, expecting tight supply-demand balances to further steepen backwardations in forward curves. The big risk, as highlighted above, remains an acceleration of COVID-19 infections, hospitalizations and deaths, which force governments to delay re-opening or impose localized lockdowns once again. In this regard, KSA's strategy of calibrating its output to realized – vice forecasted – demand likely will remain in place. Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Commodities Round-Up Energy: Bullish China's refinery throughput surged 4.4% to 14.3mm b/d in May, a record high that surpassed November 2020's previous record of 14.26mm b/d, according to S&P Platts Global. The increased runs were not unexpected, and were largely accounted for by state-owned refiners, which operated at 80% of capacity after coming out of turnaround season. Turnarounds will fully end in July. In addition, taxes on niche refined-product imports are due to increase, which will bolster refinery margins as inventories are worked down. China's domestic crude oil production was just slightly more than 4mm b/d. Base Metals: Bullish China's Standing Committee approved the release an undisclosed amount of its copper, aluminum and zinc stockpiles via an auction process in the near future, according to reuters.com. The government disclosed its intent on the website of National Food and Strategic Reserves Administration on Wednesday; however, specifics of the auction – volumes and auction schedule, in particular – were not disclosed. Prices had fallen ~ 9% from recent record highs in the lead-up to the announcement, which we flagged last month.6 Prices rallied from lows close to $4.34/lb on the COMEX Wednesday (Chart 9). Precious Metals: Bullish After a worse-than-expected US employment report, we do not expect the Federal Reserve to lift nominal interest rates in Wednesday’s Federal Open Market Committee (FOMC) meeting. The Fed will only raise rates once the US economy reaches a level consistent with its definition of "maximum employment." Wednesday’s interest rate decision will be crucial to gold prices. If the Fed does not mention asset tapering or an interest-rate hike, citing current inflation as a transitory phenomenon, gold demand and prices will rise. On the other hand, if the Fed indicates an interest rate hike sooner than the previously stated 2024, this will weigh on gold prices (Chart 10). Ags/Softs: Neutral As of June 13, 96% of the US corn crop had emerged vs. the five-year average of 91%, according to the USDA. 68% of the crop was rated in good to excellent condition, slightly below the five-year average. In the bean market, 94% of the crop was planted as of 13 June, vs. the five-year average of 88%. The Department reported 86% of the crop had emerged vs. the five-year average of 74%. According to the USDA, 52% of the bean crop was in good-to-excellent condition vs the five-year average of 72%. Chart 9 Chart 10 Footnotes 1 Please see OPEC+ complies with 115% of agreed oil curbs in May - source published by reuters.com on June 11, 2021. 2 Please see Saudis raise U.S. and Asian crude prices for April delivery published by worldoil.com on March 8, 2021. 3 Please see US shale consolidation continues as Independence scoops up Contango Oil & Gas published by S&P Global Platts on June 8, 2021. 4 We discuss this in A Perfect Energy Storm On The Way, published on June 3, 2021. Climate activism will become increasingly important to the evolution of oil and natural gas production, and likely will lead to greater concentration of supply in the hands of OPEC 2.0 and privately held producers that do not answer to shareholders. 5 Please see Interest in Shell's Permian assets seen as a bellwether for shale demand published by reuters.com on June 15, 2021. 6 Please see Less Metal, More Jawboning, which we published on May 27, 2021. It is available at ces.bcaresearch.com. Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades
Weekly Performance Update For the week ending Thu Jun 10, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio Total Weekly Return BCA US Portfolio S&P500 TRI -0.07% 1.12% Top Contributors WES:US ET:US WAT:US KOF:US MPLX:US Weekly Return 26 bps 17 bps 16 bps 16 bps 12 bps Top Detractors LPX:US AN:US DE:US UPS:US PCH:US Weekly Return -22 bps -18 bps -15 bps -12 bps -12 bps Top Prospects ANAT:US BRK.A:US TX:US ESGR:US UHAL:US BCA Score 98.71% 98.37% 98.31% 96.17% 94.96% BCA Canada Portfolio Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 1.72% 0.59% Top Contributors TCL.A:CA DSG:CA LNF:CA PXT:CA DIR.UN:CA Weekly Return 51 bps 23 bps 17 bps 15 bps 11 bps Top Detractors CFP:CA TOY:CA QBR.A:CA ELF:CA GWO:CA Weekly Return -14 bps -10 bps -5 bps -4 bps -4 bps Top Prospects CS:CA LNF:CA IFP:CA RUS:CA CFP:CA BCA Score 99.55% 98.97% 98.96% 97.91% 97.68% BCA UK Portfolio Total Weekly Return BCA UK Portfolio FTSE 100 TRI 0.31% 0.36% Top Contributors GLTR:GB FDEV:GB AGRO:GB SVST:GB LXI:GB Weekly Return 28 bps 19 bps 14 bps 13 bps 10 bps Top Detractors KNOS:GB POLR:GB CNE:GB AAF:GB BYG:GB Weekly Return -13 bps -11 bps -9 bps -8 bps -7 bps Top Prospects SVST:GB NLMK:GB RMG:GB GLTR:GB BPCR:GB BCA Score 99.69% 97.67% 97.63% 96.96% 94.39% BCA Eurozone Portfolio Total Weekly Return BCA EMU Portfolio MSCI EMU TRI 1.51% 0.56% Top Contributors CNV:FR STR:AT TUB:BE MONT:BE POST:AT Weekly Return 52 bps 24 bps 18 bps 13 bps 12 bps Top Detractors ALTA:FR AOF:DE CEM:IT FSKRS:FI US:IT Weekly Return -10 bps -10 bps -5 bps -4 bps -4 bps Top Prospects POST:AT BB:FR STR:AT SOLV:BE PMAG:AT BCA Score 98.29% 98.07% 97.87% 97.75% 96.78% BCA Japan Portfolio Total Weekly Return BCA Japan Portfolio TOPIX TRI -0.07% -0.10% Top Contributors 8117:JP 3291:JP 9532:JP 9509:JP 8922:JP Weekly Return 36 bps 13 bps 9 bps 9 bps 8 bps Top Detractors 7860:JP 8595:JP 9543:JP 8630:JP 5451:JP Weekly Return -21 bps -20 bps -18 bps -10 bps -8 bps Top Prospects 5930:JP 9543:JP 4966:JP 9436:JP 7994:JP BCA Score 99.38% 98.70% 98.40% 98.38% 98.34% BCA Hong Kong Portfolio Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI 2.12% -0.71% Top Contributors 316:HK 1919:HK 6118:HK 990:HK 1798:HK Weekly Return 84 bps 72 bps 29 bps 28 bps 26 bps Top Detractors 3600:HK 1258:HK 856:HK 86:HK 3329:HK Weekly Return -23 bps -21 bps -15 bps -12 bps -8 bps Top Prospects 990:HK 811:HK 86:HK 1606:HK 743:HK BCA Score 99.36% 98.61% 97.22% 96.97% 96.55% BCA Australia Portfolio Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 2.14% 0.64% Top Contributors HSN:AU RUL:AU MNF:AU STX:AU PSQ:AU Weekly Return 51 bps 50 bps 28 bps 23 bps 19 bps Top Detractors BLX:AU AGI:AU EVT:AU EHE:AU CIA:AU Weekly Return -18 bps -10 bps -9 bps -6 bps -4 bps Top Prospects GRR:AU MGX:AU CIA:AU PIC:AU JLG:AU BCA Score 98.87% 98.06% 97.99% 97.29% 96.73%
Dear Client, Last week, I had the pleasure of participating in a debate with my colleague, Dhaval Joshi, on the future of cryptocurrencies. You can access a replay of the event here. Best regards, Peter Berezin Highlights The meme stock mania is unlikely to die down anytime soon. Fueled by zero-commission trading and an anti-establishment mindset, social media has given millions of retail traders the ability to coordinate attacks on individual companies. An examination of the most popular meme stocks reveals that returns were highest when both the closing price and volume during the prior day’s session were above their moving averages. For GameStop and AMC, in particular, returns averaged 11.0% and 13.9%, respectively, when both the prior day’s closing price and volume were above their 5-day moving averages, compared with -4.0% and -1.3%, respectively, when the price and volume were below their 5-day moving averages. Nearly 80% of the returns on meme stocks were earned overnight (i.e., between the close of trading and the following day’s open). The ups and downs of meme stocks have generally had little impact on the overall direction of the stock market. Nevertheless, growing interest in meme stocks is positive for equities over a medium-term horizon of about 12 months. This is because the meme stock phenomenon is drawing funds into the stock market, boosting prices and liquidity in the process. #HedgiesGetWedgies Chart 1Word Du Jour: Meme This January, the term “meme stock” entered the popular lexicon (Chart 1). That was the month that GameStop and a handful of other once-left-for-dead stocks soared to dizzying heights. Armed with stimulus checks, millions of amateur investors flocked to one of the few sources of entertainment still available to them: online trading. Tales of instant riches spread like wildfire, motivating yet more new investors to enter the fray. Whether it was stocks or cryptos, the allure of easy money was irresistible. The decision by most American brokerages to eliminate trading commissions in the fall of 2019 added fuel to the fire. Meanwhile, the proliferation of social media provided a ready-made mechanism for retail traders to coordinate attacks on individual stocks. And attack they did. Most of the companies targeted had high short interest, making them ripe for a short squeeze. The implosion of Melvin Capital demonstrated to the Reddit crowd that they, too, could beat hedge funds at their own game. “We can remain stupid longer than you can stay solvent” became their rallying cry. In a game of chicken, being perceived by your opponent as irrational boosts your odds of winning. Trading Meme Stocks For Fun And Profit If one were so inclined, how should one trade meme stocks? It helps to begin with some data. Table 1 displays average daily returns from the start of 2021 for six popular meme stocks: GameStop (GME), AMC Entertainment (AMC), Blackberry (BB), Nokia (NOK), Bed Bath & Beyond (BBBY) and Koss Corp (KOSS). A few observations stand out: There is strong price momentum. Looking across all six stocks, the average daily return was 5.9% when the prior day’s closing price was above its 5-day moving average, compared to 0.3% when the prior day’s close was below its 5-day moving average. The average daily return for stocks in our sample was 3.3%. Volatility predicts higher returns. Meme stocks gained 4.3%, on average, when the prior day’s return was positive compared to 2.4% when it was negative. Looking only at the subset of cases where the prior day’s return was either above 10% or below -10%, we find that meme stocks gained 11.3% when the price rose more than 10% during the prior day and gained a still-robust 7.5% when the price dropped more than 10% during the prior day. Strong volume predicts higher returns. Consistent with the volatility observation, meme stocks gained an average of 6.1% when the volume in the prior day’s trading session was above its 5-day moving average, compared to just 1.3% when the volume was below its 5-day moving average. Meme stocks do best after the close of trading. Nearly 80% of returns on meme stocks were earned overnight (i.e., between the close of trading and the following day’s open). We attribute this phenomenon to the tendency of many traders to exit positions before the closing bell and reopen them at the start of trading the following day. Such a pattern of selling and repurchasing tends to boost overnight returns. Historically, a similar pattern has held for most other US stocks (Chart 2). Table 1Meme Stock: Returns And Patterns Chart 2Bear By Day, Bull By Night In summary, meme stocks perform best when they are trading above their 5-day moving average. Both volatility and strong volume predict positive returns. Holding (hodling?)1 meme stocks overnight can significantly enhance returns. Be An Ape Chart 3The BUZZ ETF Is Off To A Lackluster Start Fans of AMC often refer to themselves as “apes.” The moniker is fitting, if not ironic, given the tendency of meme investors to ape one another in their trading decisions. The VanEck Vectors Social Sentiment ETF (BUZZ) tries to get in front of the apes and other meme investors by buying stocks that are garnering increasing attention from social media, news articles, blog posts, and other sources. While it is too early to assess the value of this approach, it should be noted that the fund has lagged the S&P 500 for most of the time since its inception in March (Chart 3). A potentially more fruitful approach, and one that I myself have adopted, is to seek out meme stocks before they become meme stocks. For example, Cinemark (CNK) is the second biggest publicly-listed movie theater chain in the US. The share of its float sold short is almost identical to AMC’s. Yet, the Reddit crowd has largely ignored it. Could that change? Only time will tell. Don’t Get A Wedgie: How To Short Meme Stocks Safely While meme stocks can benefit from positive price momentum in the short term, it is at the expense of lower returns down the road. By any reasonable measure, the leading meme stocks are grossly overvalued. Knowing when a meme stock will fall back to earth is no easy task, however. The discussion in this report provides one avenue for short-term traders to mitigate risk: Short meme stocks only when price and volume are trending lower. The average daily return for GME and AMC was 11.0% and 13.9%, respectively, when both the prior day’s closing price and volume were above their 5-day moving averages, compared with -4.0% and -1.3%, respectively, when the price and volume were below their 5-day moving averages. With that in mind, we are opening a new tactical trade going short an equally-weighted basket of AMC and GME. The trade will only be active when the prior day’s closing price and volume are below their 5-day moving averages.2 Longer-term investors looking to short meme stocks without having to frequently open and close positions should consider using the “exponential” shorting technique discussed in a recent report. The technique flips the usual risk-reward trade-off from going short on its head. Rather than facing unlimited losses and a maximum gain of only 100% of the initial position, our shorting strategy caps the loss at 100% but allows for unlimited gains. Broad Market Implications As Chart 4 illustrates, the ups and downs of meme stocks have generally had little impact on the overall direction of the stock market. Nevertheless, growing interest in meme stocks is positive for equities over a medium-term horizon of about 12 months. This is because the meme stock phenomenon is drawing funds into the stock market, boosting prices and liquidity in the process. Chart 4Meme Stock Roller-Coaster: Little Impact On The Broader Market Chart 5Global Equity Risk Premium Remains Quite High While the “stimmy” checks have already been deposited into brokerage accounts, their impact on the stock market will linger on. As we explained in Savings Gluts, Asset Shortages, And The 60/40 Split, retail investors who bid up the price of stocks will generally force institutional investors to sell their holdings.3 This will leave institutions with excess cash on hand – cash that they can deploy in other parts of the stock market. The resulting game of “hot potato” will only end when the value of the stock market rises by enough to ensure that all investors are happy with how much stock they own in relation to how much cash they hold. Given that the equity risk premium remains quite high, this dynamic likely has further to run (Chart 5). Disclosure: At the time of writing, I am personally long CNK and short AMC and GME. I previously held a short position in KOSS. Peter Berezin Chief Global Strategist pberezin@bcaresearch.com Footnotes 1 HODL stands for “Hold On for Dear Life”. The term is widely used by traders on Wallstreetbets and other online forums. 2 The equal-weighted trade should be initiated if the conditions are met for either stock (GME, AMC) in the basket. The conditions are as follows: Both the price and volume should be below their 5-day moving average. The price and volume at the end of the day determine whether one enters the trade the next day or not. 3 An exception is when retail investors buy stock from the company itself, as has happened several times with meme stocks. Global Investment Strategy View Matrix Special Trade Recommendations Current MacroQuant Model Scores
Highlights US labor-market disappointments notwithstanding, the global recovery being propelled by real GDP growth in the world's major economies is on track to be the strongest in 80 years. This growth will fuel commodity demand, which increasingly confronts tighter supply. Higher commodity prices will ensue, and feed through to realized and expected inflation. Manufacturers will continue to see higher input and output prices. Our modeling suggests the USD will weaken to end-2023; however, most of the move already has occurred. Real US rates will remain subdued, as the Fed looks through PCE inflation rates above its 2% target and continues to focus on its full-employment mandate (Chart of the Week). Given these supportive inflation fundamentals, we remain long gold with a price target of $2,000/oz for this year. We are upgrading silver to a strategic position, expecting a $30/oz price by year-end. We remain long the S&P GSCI Dynamic Roll Index ETF (COMT) and the S&P GSCI, expecting tight supply-demand balances to steepen backwardations in forward curves, and long the Global Metals & Mining Producers ETF (PICK). Global economic policy uncertainty will remain elevated until broader vaccine distributions reduce lockdown risks. Feature The recovery of the global economy catalyzed by massive monetary accommodation and fiscal stimulus is on track to be the strongest in the past 80 years, according to the World Bank.1 The Bank revised its growth expectation for real GDP this year sharply higher – to 5.6% from its January estimate of 4.1%. For 2022, the rate of global real GDP growth is expected to slow to 4.3%, which is still significantly higher than the average 3% growth of 2018-19. DM economies are expected to grow at a 4% rate this year – double the average 2018-19 rate – while EM growth is expected to come in at 6% this year vs a 4.2% average for 2018-19. The big drivers of growth this year will be China, where the Bank expects an unleashing of pent-up demand to push real GDP up by 8.5%, and the US, where massive fiscal and monetary support will lift real GDP 6.8%. The Bank expects other DM economies will contribute to this growth, as well. Growth in EM economies will be supported by stronger demand and higher commodity prices, in the Bank's forecast. Commodity demand is recovering faster than commodity supply in the wake of this big-economy GDP recovery. As a result, manufacturers globally are seeing significant increases in input and output prices (Chart 2). Chart of the WeekUS Real Rates Continue To Languish Chart 2Global Manufacturers' Prices Moving Higher These price increases at the manufacturing level reflect the higher-price environment in global commodity markets, particularly in industrial commodities – i.e., bulks like iron ore and steel; base metals like copper and aluminum; and oil prices, which touch most processes involved in getting materials out of the ground and into factories before they make their way to consumers, who then drive to stores to pick up goods or have them delivered. Chart 3Commodity Price Increases Reflected in CPI Inflation Expectations These price pressures are being picked up in 5y5y CPI swaps markets, which are cointegrated with commodity prices (Chart 3). This also is showing up in shorter-tenor inflation gauges – monthly CPI and 2y CPI swaps. Oil prices, in particular, will be critical to the evolution of 5-year/5-year (5y5y) CPI swap rates, which are closely followed by fixed-income markets (Chart 4). Chart 4Oil Prices Are Key To 5Y5Y CPI Swap Rates Higher Gold Prices Expected CPI inflation expectations drive 5-year and 10-year real rates, which are important explanatory variables for gold prices (Chart 5).2 In addition, the massive monetary and fiscal policy out of the US also is driving expectations for a lower USD: Currency debasement fears are higher than they otherwise would be, given all the liquidity and stimulus sloshing around global markets, which also is bullish for gold (Chart 6). Chart 5Weaker Real Rates Bullish For Gold Chart 6Weaker USD Supports Gold All of these effects, particularly the inflationary impacts, are summarized in our fair-value gold model (Chart 7). At the beginning of 2021, our fair-value gold model indicated price would be closer to $2,005/oz, which was well above the actual gold price in January. Gold prices have remained below the fair value model since the beginning of 2021. The model explains gold prices using real rates, TWIB, US CPI and global economic policy uncertainty. Based on our modeling, we expect these variables to continue to be supportive of gold, bolstering our view the yellow metal will reach $2000/ oz this year. Unlike industrial commodities, gold prices are sensitive to speculative positioning and technical indicators. Our gold composite indicator shows that gold prices may be reflecting bullish sentiment. This sentiment likely reflects increasing inflation expectations, which we use as an explanatory variable for gold prices. The fact that gold is moving higher on sentiment is corroborated by the latest data point from Marketvane’s gold bullish consensus, which reported 72% of the traders expect prices to rise further (Chart 8). Chart 7BCAs Gold Fair-Value Model Supports 00/oz View Chart 8Sentiment Supports Oil Prices Investment Implications The massive monetary and fiscal stimulus that saw the global economy through the worst of the economic devastation of the COVID-19 pandemic is now bubbling through the real economy, and will, if the World Bank's assessment proves out, result in the strongest real GDP growth in 80 years. Liquidity remains abundant and interest rates – real and nominal – remain low. In its latest Global Economic Prospects, the Bank notes, " The literature generally suggests that monetary easing, both conventional and unconventional, typically boosts aggregate demand and inflation with a lag of 1-3 years …" The evidence for this is stronger for DM economies than EM; however, as the experience in China shows, scale matters. If the Bank's assessment is correct, the inflationary impulse from this stimulus should be apparent now – and it is – and will endure for another year or two. This stimulus has catalyzed organic growth and will continue to do so for years, particularly in economies pouring massive resources into renewable-energy generation and the infrastructure required to support it, a topic we have been writing about for some time.3 We remain long gold with a price target of $2,000/oz for this year. We are long silver on a tactical basis, but given our growth expectations, are upgrading this to a strategic position, expecting a $30/oz price by year-end. As we have noted in the past, silver is sensitive to all of the financial factors we consider when assessing gold markets, and it has a strong industrial component that accounts for more than half of its demand.4 Supportive fundamentals remain in place, with total supply (mine output and recycling) falling, demand rising and balances tightening (Chart 9). Worth noting is silver's supply is constrained because of underinvestment in copper production at the mine level, where silver is a by-product. On the demand side, continued recovery of industrial and consumer demand will keep silver prices well supported. In terms of broad commodity exposure, we remain long the S&P GSCI Dynamic Roll Index ETF (COMT) and the S&P GSCI, expecting tight supply-demand balances to continue to draw down inventories – particularly in energy and metals markets – which will lead to steeper backwardations in forward curves. Backwardation is the source of roll-yields for long commodity index investments. Investors initially have a long exposure in deferred commodity futures contracts, which are then liquidated and re-established when these contracts become more prompt (i.e., closer to delivery). If the futures' forward curves are backwardated, investors essentially are buying the deferred contracts at a lower price than the price at which the position likely is liquidated. We also remain long the Global Metals & Mining Producers ETF (PICK), an equity vehicle that spans miners and traders; the longer discounting horizon of equity markets suits our view on metals. Chart 9Upgrading Silver To Strategic Position Chart 10Wider Vaccine Distribution Will Support Gold Demand Global economic policy uncertainty will remain elevated until broader vaccine distributions reduce lockdown risks. We expect the wider distribution of vaccines will become increasingly apparent during 2H21 and in 2022. This will be bullish for physical gold demand – particularly in China and India – which will add support for our gold position (Chart 10). Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Commodities Round-Up Energy: Bullish The US EIA expects Brent crude oil prices to fall to $60/bbl next year, given its call higher production from OPEC 2.0 and the US shales will outpace demand growth. The EIA expects global oil demand will average just under 98mm this year, or 5.4mm b/d above 2020 levels. For next year, the EIA is forecasting demand will grow 3.6mm b/d, averaging 101.3mm b/d. This is slightly less than the demand growth we expect next year – 101.65mm b/d. We are expecting 2022 Brent prices to average $73/bbl, and $78/bbl in 2023. We will be updating our oil balances and price forecasts in next week's publication. Base Metals: Bullish Pedro Castillo, the socialist candidate in Peru's presidential election, held on to a razor-thin lead in balloting as we went to press. Markets have been focused on the outcome of this election, as Castillo has campaigned on increasing taxes and royalties for mining companies operating in Peru, which accounts for ~10% of global copper production. The election results are likely to be contested by opposition candidate rival Keiko Fujimori, who has made unsubstantiated claims of fraud, according to reuters.com. Copper prices traded on either side of $4.50/lb on the CME/COMEX market as the election drama was unfolding (Chart 11). Precious Metals: Bullish As economies around the world reopen and growth rebounds, car manufacturing will revive. Stricter emissions regulations mean the demand for autocatalysts – hence platinum and palladium – will rise with the recovery in automobile production. Platinum is also used in the production of green hydrogen, making it an important metal for the shift to renewable energy. On the supply side, most platinum shafts in South Africa are back to pre-COVID-19 levels, according to Johnson Matthey, the metals refiner. As a result, supply from the world’s largest platinum producer will rebound by 40%, resulting in a surplus. South Africa accounts for ~ 70% of global platinum supply. The fact that an overwhelming majority of platinum comes from a nation which has had periodic electricity outages – the most recent one occurring a little more than a week ago – could pose a supply-side risk to this metal. This could introduce upside volatility to prices (Chart 12). Ags/Softs: Neutral As of 6 June, 90% of the US corn crop had emerged vs a five-year average of 82%; 72% of the crop was reported to be in good to excellent condition vs 75% at this time last year. Chart 11 Chart 12 Footnotes 1 Please see World Bank's Global Economic Prospects update, published June 8, 2021. 2 In fact, US Treasury Inflation-Indexed securities include the CPI-U as a factor in yield determination. 3 For our latest installment of this epic evolution, please see A Perfect Energy Storm On The Way, which we published last week. It is available at ces.bcareserch.com. 4 Please see Higher Inflation Expectations Battle Lower Risk Premia In Gold Markets, which we published February 4, 2021. It is available at ces.bcareserch.com. Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades