Commodities & Energy Sector
This year’s rise in commodity prices represents a blow-off rally rather than the start of a durable bull market. The global economy is heading for a recession. Stocks, commodities, and other risk assets are vulnerable.
Our quant models suggest Democrats are still slightly favored for the White House. Our Senate model favors Republican control, though Montana and Ohio are the weak links that could deliver Democrats a de facto Senate majority in the event they keep the White House. But there are still six months before the vote. An oil shock from the Middle East or other negative economic news would force a major change to these models.
In this note, we preview the Q1-2024 earnings season, give our take on expectations and share what we will be watching.
In the near term, favor oil and oil producers outside the Gulf Arab states. Over a 12-month horizon, favor US and North American equities, defensive sectors over cyclicals, and safe-assets. Within cyclicals, stick to energy and defense.
Stay overweight US equities versus world, long US energy sector versus Middle East stocks, and long Canada and Mexico versus global-ex-US stocks.
EUR/USD collapsed in the wake of last week’s hotter-than-expected US CPI report. Is this pessimism warranted and will the euro’s trading range that has prevailed since 2023 breakdown?
Gold and bitcoin are conceptually joined at the hip because the value of both comes from their ‘non-confiscatability’ by inflation, by bank failure, and in the case of bitcoin, by state expropriation. The sharp recent rallies in both gold and bitcoin reflect that the market has suddenly upped the value of non-confiscatability, and a plausible explanation is that recent US inflation data show that the journey to sustained 2 percent inflation has stalled, raising the risk that the Fed might balk at finishing the journey. Plus: JPM, CL, and USD/CHF are tactical reversal candidates.
Fears of a hard landing are abating as growth has been surprising to the upside. New worries are emerging, such as the trajectory of disinflation, and the pace and timing of rate cuts. In this environment, it is important to build a resilient all-weather portfolio, which protects against a correction, rising rates, or stubborn inflation but also has exposure to the AI theme.