Commodities & Energy Sector

If the Fed convinces markets it is on track to lift rates this year and a couple of times next year, we expect a 10% appreciation of the USD over the next 12 months. This would be extremely bearish for commodities.

Recent shifts in the Fed's policy stance are bullish for the dollar, negative for commodities and emerging markets, and positive for assets with a yield. They also suggest risk assets will continue to perform decently.

Chair Janet Yellen's comments at Jackson Hole reinforce our view that a Fed rate hike is highly unlikely until December. The risk is that overbought equity and junk bond markets correct as an oversold dollar prices in a December move.

In August, the model outperformed the S&P 500 and global equities in both USD and local-currency terms. For September, the model increased its allocation to cash and trimmed its exposure to equities.

Gold stocks have been pummeled since we recommended booking profits on our overweight position on August 1. While the cyclical backdrop of policy and political uncertainty, rampant debt growth and negative interest rates are bullish for the yellow metal, tactical froth remains to be wrung out. The chart shows that flows into gold ETFs have been very aggressive this year, and speculative positions are running hot. Meanwhile, the relative gold share price ratio had reached extraordinarily overbought levels, and overheated conditions have barely been dented by the recent pullback. With the Fed talking tougher, the risk is that any premature tightening in financial conditions through a stronger U.S. dollar will continue to weigh on gold shares. We recommend staying on the sidelines for a while longer and will look to reestablish overweight positions once tactical downside risk has been expunged.

A Fed rate hike by December could erode the slowly evolving fundamentals favoring base metals.

Investors are being forced into riskier asset classes by the TINA effect, but the gaping macro disequilibria makes it difficult for investors to see how we move back to equilibrium in a benign way. Monetary policy on its own is limited in its ability to soften the adjustment, but the good news is that the political pendulum is swinging toward fiscal stimulus.

Special Report

Investors are being forced into riskier asset classes by the TINA effect, but the gaping macro disequilibria makes it difficult for investors to see how we move back to equilibrium in a benign way. Monetary policy on its own is limited in its ability to soften the adjustment, but the good news is that the political pendulum is swinging toward fiscal stimulus.

The lack of inflation makes a Fed rate hike before December unlikely. In the interim, the continued flow of liquidity could sustain the high-risk rally.

The evolution of oil demand will be far more important for prices than the outcome of next month's International Energy Forum meeting in Algiers. The supply destruction brought on by lower prices is increasingly shifting to OPEC producers outside the Persian Gulf, which keeps the odds of a large-scale unplanned outage - in Venezuela or Nigeria, in particular - elevated.