Commodities set for best year since 2016 as trade worries ebb

[SINGAPORE] Commodities are set for the best annual performance since 2016, with crude to copper posting annual gains.

The Bloomberg Commodity Spot Index hit the highest since November 2018 as trade tensions ebb, a risk-on mood sweeps markets, and the dollar eases. The gauge is now up 11 per cent in 2019.

Commodities are benefiting from an end-of-year surge as the outlook for 2020 appears, at least at present, to be more promising than conditions that prevailed for much of this year. The US-China phase-one pact - expected to be formally concluded next month - hinges on the Asian nation increasing purchases of farm goods. In addition, prospects for a deal have helped spur restocking by raw-materials users, according to OCBC.

"Renewed optimism from the US-China trade deal is driving demand expectations higher," said Howie Lee, an economist at the Singapore-based lender. "Stockpiles are low going into 2020 and, with the expected pickup in demand, a lot of industry players find themselves short of inventories."

Raw materials have also enjoyed a tailwind from a weaker US currency, with the Bloomberg Dollar Spot Index retreating 1.7 per cent this month and touching the lowest since late June. After three interest rate cuts this year, the US Federal Reserve is expected to hold monetary policy steady over 2020.

Concerns among investors about the possibility of the onset of a US recession - which hurt commodities earlier this year - have eased. This month, bond manager Jeffrey Gundlach said the odds of a recession by the end of next year have dropped to 35 per cent. In September, he had predicted 75 per cent.

Conditions in China, the top raw-material user, are picking up too. The nation's economic performance improved in December for the first time in eight months, according to earliest-available indicators compiled by Bloomberg.

The advance in raw materials has been broad-based. Crude in New York has risen to the highest since September, with prices up 36 per cent this year as the Opec+ (Organization of the Petroleum Exporting Countries) group of producers presses on with supply curbs.

In base metals, copper has surged far above US$6,000 a tonne as global stockpiles sink and the macroeconomic outlook brightens. Wheat climbed the highest since 2018 and soya beans are set for the biggest monthly advance since 2016.

There have been gains in precious metals too, including traditional haven gold, which has climbed in December even as the risk-on mood prevails and equity markets set records. Bullion on the spot market has risen 3.5 per cent this month to about US$1,515 an ounce as at 4.11pm in New York.

BLOOMBERG