Commodities & Energy Sector

The tempo of China’s and the US’s military operations is picking up sharply. The risk of a sudden, perhaps unintended, escalation of military conflict, therefore, is rising in the South China Sea. So is the risk of another shooting war in the Middle East. Against this backdrop, China’s reopening, marginally stronger GDP growth, and massive fiscal stimulus to support renewables and defense is being rolled out. In states with high debt-to-GDP ratios like the EU and US, the risk of fiscal dominance is rising, and with it higher inflation. We remain long the XOP oil and gas ETF; the XME metals and mining ETF, and long the commodity COMT ETF to hedge this risk.

Copper prices are vulnerable to the downside in the coming months on a narrowing global supply-demand deficit. We expect that copper prices will plummet by 15-20% from the current level. However, the lingering structural supply deficit will put a floor under copper prices after this correction.

The risk-on rally is challenging our annual forecast so we are cutting some losses. But we still think central banks and geopolitics will combine to reverse the rally later this year.

Our bullish view on commodity prices is underpinned by demand growth driven by stronger real GDP, led by EM. Threats to this view – i.e., a failed re-opening in China, stronger USD, higher real rates in the US, and continued policy uncertainty – are non-trivial. All the same, we remain bullish industrial commodities and gold.

When does rising unemployment become a bigger problem than inflation? The Fed won't cut rates until that happens, probably thwarting market hopes of big cuts in 2H.

The Web 2.0 bubble is bursting, with far-reaching consequences for US stock market behaviour, sector allocation, and global asset allocation.

Europe’s domestic economy continues to surprise to the upside, can small-cap stocks do the same?