Commodities: Position reduction in focus as volatility spikes and US growth slows

Key points

• The current turmoil in global financial markets has reached a level not seen since 2020
• Risk appetite has tumbled after the BoJ rate hike forced traders to exit positions funded by cheap JPY
• In commodities, we are currently seeing growth-dependent sectors from energy to industrial metals suffer
• Gold remains the go-to metal amid the current turmoil and the prospect for accelerated rate cuts in the coming months

The current turmoil in global financial markets has reached a level not seen since 2020, and while a succession of weak US data prints throughout July helped create nervous market conditions with in-demand equity sectors suffering reversals, it was the surprise rate hike from the Bank of Japan on 31 July which triggered what can best be described as a current momentum crash. In addition, last week's weak US data and dovish FOMC message has significantly changed the market sentiment with traders now seeing a major risk the Fed and other central banks are repeating the errors of history by waiting too long to cut interest rates, and then being too slow when they finally start. As a result, the market is now pricing in five 25 bps cut by the FOMC before yearend and a 50 bps cut at the September meeting. 

In response to a sharply stronger JPY, big reversals in the stock market and surging bonds, my colleague wrote the following in our daily Global Market Quick: “Sentiment has dramatically changed in just one month. We have gone from high confidence, a record equity index concentration and almost no rate cuts expected in the US, to a market that is now pricing in five rate cuts by year-end in the US and equity markets tumbling in Japan. The short-term outlook is right now driven by risk management policies kicking into gear across many institutional investors. When CVaR (conditional value at risk – key risk measure used in portfolio management) measures increase significantly, funds must cut exposure. Adding to the overall moves are factors such as AI profit-taking, stronger JPY (making funding more expensive), and the equity market index concentration which was the highest in 90 years just three weeks ago. The medium-term outlook will be determined by incoming macro figures. We remain cautiously optimistic about the economy and still think the recession probability is not higher than 33% at this point. There are still many high-frequency macro indicators that are not aligned with the narrative of the economy plunging into a recession.”