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Commodities dragged into global selloff as oil to copper get hit

Feb 06 2018 09:26
Jake Lloyd-Smith and Heesu Lee, Bloomberg

Singapore - Commodities from crude oil to metals and iron ore dropped as the global equity rout and surge in market volatility spurred investors to pare risk, cutting positions in raw materials even as banks and analysts stood by the asset class given the backdrop of solid global growth.

Brent crude slid as much as 1.2% to $66.82 a barrel, heading for a third daily drop and the longest losing run since November. On the London Metal Exchange, copper sank as much as 2% to $7 025 a metric ton as zinc, lead and nickel declined. Iron ore futures fell 1.2% in Singapore.

Global equity markets are in retreat after Wall Street losses that began in the final session of last week worsened on Monday, with the Dow Jones Industrial Average posting its biggest intraday point drop in history.

The selloff - triggered in part by an initial rise in bond yields and concerns about the pace at which the Federal Reserve will raise interest rates - is spilling into commodities, which rallied in late January to the highest level since 2015. Still, Citigroup said now’s the time for investors to add positions in metals.

“Clearly there is a risk off tone in the markets that will weigh on the sector,” said Daniel Hynes, a senior commodities strategist at Australia & New Zealand Banking. “But there is no fundamental reason for this selloff to change our view of commodity markets.”

BHP drops

Miners and energy companies fell as share benchmarks spiraled downward. In the US on Monday, Exxon Mobil and Chevron were among the worst performers in the Dow. In Sydney, BHP Billiton, the world’s largest mining company, dropped 2.7% as Rio Tinto traded lower. Oil producer PetroChina lost as much as 7.3% in Hong Kong.

Gold, often seen as a haven in times of turbulence, has so far failed to push much higher. Bullion for immediate delivery added 0.3% to $1 343.08 an ounce at 5:48 am in Singapore after rising 0.5% on Monday.

Vitol Group, the world’s top independent energy trader, signalled - in comments released on Tuesday - that the crude market looks solid after OPEC and allies showed better-than-expected compliance with supply cuts and cold weather aided demand. "We always look at the oil fundamentals: they are absolutely fine,” CEO Ian Taylor told Bloomberg TV.

Citi’s case for metals rested on its analysis they do better than other assets during periods of solid growth when inflation is picking up. “Global growth is synchronised, solid, and forecast to accelerate, output gaps are closing and risks to inflation are skewed to the upside,” it said in the February 5 report.

“The recent selloff in rates and equities, and spike in VIX, presents an opportunity to rotate into industrial metals,” the bank said in a report. “We recommend asset managers raise their exposure to industrial metals over the coming month, particularly at the expense of bonds and other fixed income.”

There was similar sentiment from other analysts that the broader picture remains supportive of commodities, echoing January remarks from billionaire bond manager Jeffrey Gundlach that raw materials may be one of this year’s best investments as they surge during the late phase of the economic cycle.

“The drop in US equities market is currently dragging prices of commodities down,” said Will Yun, a Seoul-based commodities analyst at Hyundai.

“However, it’d be too early to say commodities have joined the global selloff because the fundamental picture is still looking positive.”

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copper  |  commodities  |  markets  |  oil
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