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Commodities Decreased as Trade Risks Reduced Demand Expectations

Commodities decreased as ongoing trade risks between the US and China dampened demand expectations for energy, base metals and livestock commodities.

The Bloomberg Commodity Index Total Return declined for the month, with 16 out of 23 constituents posting losses.

Credit Suisse Asset Management observed the following:

  • Energy decreased 11.97%, led lower by crude oil and petroleum products, due to US inventory builds and on weakening demand expectations as the ongoing trade war between the US and China weighed on the global growth outlook.
  • Industrial Metals declined 5.88% as the US and China both raised tariffs on imports from each other's nation, reducing base metals demand broadly.
  • Livestock fell 5.63%, led lower by Live Cattle, after the USDA reported that beef exports in March declined approximately 5% compared to the year prior. Heightened US-Mexico trade tensions also weighed on US beef export expectations.
  • Precious Metals ended the month relatively flat, gaining 0.72%. The various escalating trade threats led to a risk-off environment while spurring safe haven demand for Gold.
  • Agriculture increased 7.57%, led higher by Wheat and Corn, as heavy rainfall in the US Midwest and Great Plains reduced crop yield expectations.

Nelson Louie, Global Head of Commodities for Credit Suisse Asset Management, said: "The US and China may resume trade talks at the upcoming Group of 20 Summit in Japan as both administrations signaled that they would prefer a resolution rather than continued strained relations. A loosening of trade tensions could increase the demand for base metals and agricultural commodities. In the meantime, grains have been impacted by extreme weather events in the US Grain Belt and Europe's Black Sea region. If bad crop weather persists, then wheat and corn crop yields for the season may be further reduced, potentially ending the trend of multi-year bumper crops. In addition, growing conflict between Iran and the US may increase crude oil supply risks in the Middle East. Further escalation could result in further production disruptions and reduced export capabilities out of the Persian Gulf. Declining crude prices and increasing US inventories may also encourage OPEC and its partners to extend their crude oil production cut agreement longer than they otherwise would."

Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added: "US economic data have grown more mixed as of recent. The US unemployment rate dropped to 3.6% in April, and US inflation in April rose slightly but remains well below US Federal Reserve (Fed) targets. However, softening US factory activity in April showed that the US economy is not immune to cooling growth elsewhere. As a global economic growth slowdown or recession now appears more likely, central banks seem to be suggesting they are prepared to shift back to easier monetary policies. Markets are now pricing in that the Fed will be lowering the Fed Funds rate within the next three months, after pricing in hikes as recently as November of 2018, which is a noticeable shift in guidance. Central banks continue to be very flexible in their policy–making as they adapt to the changing economic landscape. Their actions may help to forestall any dramatic weakening in the global economy. At the same time, they appear more willing to potentially let the economy and inflation run hotter for longer on the upside, which would be beneficial to commodity prices."

About the Credit Suisse Total Commodity Return Strategy

Credit Suisse's Total Commodity Return Strategy is managed by a team with over 35 years of combined experience, and seeks to outperform the return of a commodities index, such as the Bloomberg Commodity Index Total Return or the S&P GSCI Total Return Index, using both a quantitative and qualitative commodity research process. Commodity index total returns are achieved through:

  • Spot Return: price return on specified commodity futures contracts;
  • Roll Yield: impact due to migration of futures positions from near to far contracts; and
  • Collateral Yield: return earned on collateral for the futures.

As of May 31, 2019, the Team managed approximately USD 6.7 billion in assets globally.