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Commodities Decreased on Production Concerns and Weakening Demand

Commodities decreased in February on expectations of increased US shale production and weakening demand for metals due to a stronger US Dollar.

The Bloomberg Commodity Index Total Return performance was lower for the month, with 13 out of 22 Index constituents posting losses.

Credit Suisse Asset Management observed the following: 

  • Energy fell 7.15% as mild US temperatures reduced heating demand for Natural Gas and on increased expectations that higher crude oil prices may continue to incentivize US shale production, impeding the progress of the global inventory rebalance.
  • Precious Metals decreased 2.56% as the US Dollar strengthened on news that the US Fed may implement faster-than-expected interest rate hikes to contain rising inflation.
  • Industrial Metals declined 2.17% as a stronger US Dollar made base metals more expensive.
  • Livestock fell 1.92%, led lower by Lean Hogs, after the USDA reported a decline in US pork exports in December 2017 compared to the year prior, potentially indicating softening demand.
  • Agriculture increased 4.71%, led higher by Soybean Meal, as Argentina faced its worst drought in ten years, hurting soybean crop production expectations.

Nelson Louie, Global Head of Commodities for Credit Suisse Asset Management, said: "Central banks appear to be more cautiously optimistic with increasing evidence of synchronized growth across major economies. US Federal Reserve Chairman Powell provided bullish commentary regarding the state of the US economy and confirmed that the Fed intends to continue to gradually increase interest rates in 2018. However, markets remain wary of faster-than-expected rate hikes if inflationary pressures increase. Commodities have historically outperformed during periods of higher-than-expected inflation.

Stronger-than-expected global oil demand along with high compliance rates to the OPEC-led production cuts helped with the global inventory rebalance, and this is expected to continue throughout 2018. Risk still remains regarding the growth of US oil production outperforming expectations. As global growth accelerates, there are also rising prospects for further infrastructure development and capital spending, particularly within China and the US. This may elevate demand for industrial metals, while supplies in this sector remain tight due to government-mandated production restrictions in Asia."

Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added: "As central banks look to adjust monetary policy, risks still remain globally. Fourth quarter UK GDP was revised lower, causing it to lag the economic growth achieved by its peer countries. China saw a larger-than-expected fall in January manufacturing PMI activity as well as softening export demand. Even within the US, new and previously owned home sales reached new lows in January. Market participants will closely keep watch of these situations to ensure the timing of monetary tightening won't impede or stall the progression of growth. Hence, the pace of tightening by the central banks may not be fast enough, which may lead to more inflationary pressures."

About the Credit Suisse Total Commodity Return Strategy

Credit Suisse's Total Commodity Return Strategy is managed by a team with over 32 years of 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 February 28, 2018, the Team managed approximately USD 8.9 billion in assets globally.