Commodities & Energy Sector
In this report, we explore Brazil’s inflation and monetary policy outlook, the Lula administration’s back-and-forth between pragmatism and populism, and how these factors will affect Brazilian financial markets going forward. All in all, we believe Brazilian risk assets will be in a trading range relative to their EM peers in the next 12 months.
Global oil demand growth is tracking with our estimate of ~ 1.8mm b/d for this year. Supply discipline is being maintained by OPEC 2.0, where the core (KSA and the UAE) and Russia have reduced production by ~ 240k b/d yoy in 1H23. In addition, KSA extended its unilateral production cut of 1mm b/d from July into August. We expect inventory draws in 2H23 as supply stays below demand. Our Brent forecast remains unchanged at $92/bbl this year, and $120/bbl next year. We remain long the COMT and XOP ETFs.
Falling inflation enables central banks to pause rate hikes, which is good news. But time goes on. Restrictive monetary policy, Chinese debt-deflation, energy supply shocks, US and global policy uncertainty, and extreme geopolitical risks will undermine hopes of a soft landing and beautiful disinflation.
Positive economic surprises have delayed the onset of recession in the United States. But tighter monetary and fiscal policy, slowing global growth, and a looming rebound in policy uncertainty and geopolitical risk suggest that investors should buy insurance while it is cheap.
In this short weekly report, we review some of the most common questions clients asked us in the last few weeks.
On one hand, China will be exporting deflation to the rest of the world. On the other hand, core inflation is sticky in the US, making the Fed err on the hawkish side. Altogether, these crosscurrents are creating a toxic mix for risk asset prices.
Markets continue to be tossed to and fro by central-bank policy, and risks of higher commodity prices. These are due to fiscal stimulus and exogenous weather and war-related risk, which could send food and energy prices higher this winter. We remain long gold outright, energy and metals producers via the XOP, XME and PICK ETFs, direct commodity exposure via the COMT ETF, and futures exposure to backwardation in copper (long 4Q23 copper futures vs. short 4Q24 copper futures).
Recession is on track to start around year-end. Stocks usually peak shortly before recession begins. So, position defensively but be prepared for a few more months of the rally.