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March 2022
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Commodity Rally ExtendsOil was the clear winner over the past three months, which accounted for most of the gains in the broad commodity index. In the fourth quarter of last year, we expected a pause in the commodity rally, but rising prices amid geopolitical conflicts forced our system to adjust to the upside. Most price signals have extended into overbought territory, although pullbacks could be temporary over the next quarter. Elsewhere, metals have stabilized and oversold signals could present buying opportunities.
The shift from mid-cycle to late-cycle can be turbulent, which means high probability setups with less frequent trading can reduce overall risk. |
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December 2021
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The commodity price rally appears to be slowing, which could point to lower returns this year. Several overbought signals were confirmed over the past few months, especially in natural gas, which declined more than 30% in Q4. As expected, the dispersion in commodity returns narrowed over the past quarter as earlier declines in metals and agriculture stabilized. The US dollar remains a wildcard, which has strengthened along with commodities over the past few months. Meanwhile, commodity currencies such as the Australian and Canadian dollar have lagged the upside in commodities.
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September 2021
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The broad commodity complex continues to rally after breaking above a decade-long downtrend. However, underlying returns are mixed, with natural gas, oats, coffee, and cotton leading the way higher, while industrial commodities such as platinum and palladium sold off in the third quarter. Indicators suggest the divergence in returns could narrow in the months ahead as leaders appear significantly overbought relative to laggards.
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June 2021
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Stocks and commodities continued to rise in Q2, but upside appears limited into Q3 as seasonal weakness unfolds. For now, breakouts in cyclical and growth sectors suggests long opportunities remain for stock pickers and trend strategies. Inflation expectations appear stretched, which typically precedes a decline in commodity prices. Risk assets will likely experience near-term weakness, but could eventually hold lower support levels given long-term breakouts.
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March 2021
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The risk-on “reflation” trade from March 2020 lows is losing steam. Our trading has adjusted accordingly by trimming exposure to financials and energy, and positioning in improving sectors such as homebuilders. In commodities, the broader uptrend in agriculture, precious metals and oils has slowed. Trading in both equities and commodities have shifted to tighter entry and exit zones as prices consolidate, with positioning on both long and short sides of the market.
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December 2020
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In this report, we highlight opportunities and risks for the year ahead. Key themes from our 2020 outlook remain, such as the rotation to inflation-sensitive assets, emerging markets, and an up-cycle in commodities. We expect buyers to remain active on pull-backs - maintaining breakouts above local highs. However, tail risks remain which should keep volatility elevated.
Catch-up trades in underperforming sectors and regions could help reduce portfolio risk. Therefore, we see diversification benefits in value versus growth, and small-caps versus large-caps. We also outline our process for applying a technical overlay to global asset allocation. |
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October 2020
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2020 began with a sell-off across risk-assets, and just like previous crises, market panic was short-lived. The extreme moves between January and March benefitted mean reversion strategies - a theory that asset prices and historical returns will eventually return to their long-term average.
Our successful macro calls were the result of identifying extreme price moves that could return to historical ranges within six to twelve months. Long precious metals was the standout call this year. The global pandemic triggered a rise in global equity risk premia, which supported a rise in gold and silver. We were also long Chinese equities coming off the initial wave of the crisis. Our call to go long the S&P 500 in March was especially timely, although holding onto losing energy positions offset these gains. Spotting these extremes placed us ahead of a rotation to inflation sensitive assets. And after the October 31 close, we saw a sharp boost in small-caps and value versus growth stocks. A recovery in bond yields will help narrow remaining divergences across sectors and regions into 2021, which we’ll explain in the market outlook section. |