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Commodities Fell due to Rising Agricultural Supplies and Sluggish Demand for Base Metals

Commodities decreased in August as output forecasts for several agricultural commodities increased. Dampened global growth prospects, due to emerging markets weakness, lowered demand expectations for base metals.

The Bloomberg Commodity Index Total Return performance was lower for the month, with 15 out of 22 Index constituents posting losses.

Credit Suisse Asset Management observed the following:

  • Agriculture declined 5.97% for the month. Soybean Meal fell after the USDA raised its US soybean production estimates for the 2018/2019 growing season, increasing soybean crushing expectations.
  • Industrial Metals decreased 4.35%, led lower by Nickel, amid weakening global growth prospects as concerns rose that deteriorating economic conditions in Argentina and Turkey may cause financial contagion in Emerging Market nations and Europe.
  • Precious Metals fell 3.13% as the US Dollar strengthened on the back of continued positive US economic news despite growing geopolitical tensions.
  • Livestock was 0.34% lower, led down by Lean Hogs, after the US government signaled that it may apply levies on an additional $200 billion worth of imported Chinese goods. Retaliation from China may dampen export demand expectations for US pork.
  • Energy increased 3.77%, led higher by ULS Diesel, after the US EIA reported seasonally-strong US oil refinery utilization amid strong demand for refined products.

Nelson Louie, Global Head of Commodities for Credit Suisse Asset Management, said: "The preliminary trade deal between the US and Mexico may improve the future competitiveness of US pork, beef and other agricultural products. US trade relations with China, however, moved in the opposite direction after the US government announced plans to apply tariffs on additional goods despite a restart of negotiations between the two nations. This may encourage retaliatory actions from China, adding more inflationary pressure to impacted goods for end consumers. Meanwhile, in Iran, soon-to-be reenacted sanctions by the US, may severely cut Iran's future oil export potential. The potential of losing up to 1.5 million barrels of crude oil per day may nullify the recent OPEC production increases, further tightening the global crude oil supply/demand balance."

Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added: "Within the US, inflation is on the rise. Despite the upsurge in global geopolitical tensions, the US economy continued to show strength with unemployment dropping down to 3.9% in July, reducing wage slack in the workforce, while July's headline CPI reading showed a year-over-year growth of 2.9%. To reduce the risk of core inflation overshooting the US Federal Reserve's 2% annual target on a sustained basis, the Fed announced during its annual conference in Jackson Hole, Wyoming that it intends to raise interest rates two more times this year, with the next rate hike expected in September. The prospects of rising interest rates in the US and heightened risks of contagion from declining emerging economies have strengthened the US Dollar and dampened expectations for commodities thus far in 2018. However, if trade tensions ease, this could be supportive for global growth and commodities demand. In addition, labor market conditions may continue to tighten, leading to further increases in inflation. This may necessitate more aggressive actions from the Fed than is currently anticipated. However, the commodities asset class has historically outperformed other investment groups in periods of higher-than-expected inflation."

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 August 31, 2018, the Team managed approximately USD 9.1 billion in assets globally.