Q1 2019 In the Commodities Asset Class- Looking Ahead To Q2

Even though the dollar rose by 1.16% over the first three months of 2019, commodities prices posted gains over the period. Since the US dollar is the reserve currency of the world, it is also the benchmark pricing mechanism for most commodities around the world. Therefore, there is a long-standing inverse relationship between raw material prices and the greenback.

In Q1, the dollar index rose, and so did many commodities prices which could be either a sign of underlying strength in commodities or weakness in the US dollar as we head into the second quarter of 2019.

Commodities post gains

Winners outnumbered losers in Q1 2019 in the commodities market. The three best-performing commodities over the past three months were gasoline which was up 44.57%, NYMEX crude oil which rallied 32.44%, and lean hogs which gained 26.9%. There were many more double-digit percentage gainers in the commodities asset over the past three months.

Energy led the commodities asset class in Q1 with a 19.49% gain. Base metals won the silver medal as they moved 10.77% higher and animal proteins moved 8.65% to the upside. Precious metals were 4.22% higher for the quarter that ended on March 29.

Winners

Other leaders aside from the top three were Brent crude oil that gained 25.6% in Q1, iron ore moved 24.8% higher, and nickel gained 22.8%. Zinc appreciated by 19%; heating oil moved 17.4% to the upside, palladium was over 12% higher, copper on COMEX gained 11.7% while tin on the LME posted a 10.2% gain.

Commodities that were up between 5% and 10% include lumber which gained 8.33%, copper, on the LME at 8.3%, rice moved 7.5% higher, cotton gained 7.5%, and platinum moved an ominous 6.66% in Q1. Ethanol gained 6.4% over the period.

Those commodities that gained from 3% to 5% were sugar up 4.16%, and LME aluminum which moved 3.63% to the upside in Q1.

MGE wheat, live cattle, and soybean oil futures markets gained between 1% and 3%. Commodities that posted margin gains of less than 1% in Q1 included gold, LME lead, soybeans, and soybean meal.

The digital currency tokens moved higher in Q1 as Bitcoin gained 9.19% and the market cap of the asset class moved 14.5% higher compared to its level at the end of 2018. At a total market cap of $143.330 billion, the total capitalization of the asset class remains well below the peak which was north of $800 billion in late 2017.

Losers

Commodities prices do not always move in the same direction. The leading loser in Q1 was the grain sector that declined by only 1.71% over the past three months. Soft commodities dropped 1.08% for the period

The three worst-performing areas of the asset class in Q1 aside from the Baltic Dry Index that fell by 45% were KICBT wheat which declined by 12.02%, natural gas that fell 9.46%, and CBOT wheat that lost 9.04%of its value. Coffee moved 7.22% lower in Q1 while cocoa suffered a 5.63% decline.

Corn declined 4.93%, and FCOF futures fell 4.2%. Silver, oats, and feeder cattle all dropped between 1% and 3% in Q1.

The 45% decline in the Baltic Dry shipping index was both seasonal and reflected the weakness in the Chinese economy as the weight of protectionist policies interfered with demand from the world’s most populous nation.

Issues to watch in Q2

The UK and EU pushed the deadline on Brexit to April 12 as March 29 came and went. The potential for a hard Brexit is a real and present danger as we move into Q2 which could cause an increase in volatility in markets across all asset classes and commodities are no exception.

China is the demand side of the equation in the world of commodities given its population and rate of economic growth. While the market is going into Q2 with an optimistic outlook when it comes to the odds of a trade agreement between the US and Chinese, the ups and downs of the ongoing negotiations could cause increased price variance in markets. Industrial commodities are particularly sensitive to the Chinese economy, and copper which rose in Q1 could be a barometer as it is a fundamental building block commodity for infrastructure. A trade deal that causes a rebound in the Chinese economy would likely increase demand for the red metal and many other commodities.

In the world of energy, natural gas is now entering the injection season with the lowest level of inventories since 2014 which the price near its lowest level in 2019. When it comes to oil, the US administration will need to decide on extending the exemptions for eight countries for purchasing Iranian crude oil in May. Increasing the sanctions on Iran by not extending the exemptions could tighten the oil market in Q2.

Seasonality always plays a significant role in the world of commodities. Natural gas moves into the injection season in Q2. Gasoline moves into the driving season. In the grain markets, farmers are preparing to plant their crops for the 2019 season. Meanwhile, trade issues between the US and China are hanging over their heads and the worst floods in many years could delay planting and threaten crop yields. The 2019 grilling season, the time of the year for peak demand for animal proteins will begin in late May.

Best bets for the coming quarter

Commodities tend to be one of the most volatile asset classes. As we move into Q2, the price of coffee is trading near multiyear lows and the bottom of its pricing cycle. I favor long positions in the coffee market, at under $1 per pound, the potential for a rebound is rising. Since Brazil is the leading producer of Arabica beans, a stronger Brazilian real would be a welcome sign when it comes to a price recovery in the coffee futures market.

Natural gas closed Q1 around 11 cents higher than its February low. Since 2016, the bottom in the natural gas market came in February and March each year, and the lows have been progressively higher. I am friendly to the natural gas market so long as the price remains above the $2.50 per MMBtu on nearby futures. The risk-reward of the energy commodity favors long positions at its current price level.

I continue to favor platinum in the precious metals sector as its price level compared to the other metals is compelling on a historical basis. Gold and silver sold off at the end of Q1. While I continue to favor the upside in these metals, time will tell if the correction that began in late March will need to do more work to fund bottoms in the two metals.

A trade deal between the US and China would be bullish for the commodities asset class, in my opinion. I look forward to lots of volatility in Q2 in the world of raw materials markets. Volatility can be a nightmare for investors, but it is the mother’s milk of profits for traders and opportunists who approach markets with discipline and a plan for risk and reward. Q1 was a bullish period for many commodities after a scary final three months of 2018. Fasten your seatbelts as the commodities market are sure to offer lots of twists and turns over the coming three months.