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Commodities Fell on Rising Production and Global Trade Tensions
The Bloomberg Commodity Index Total Return performance was lower for the month, with 16 out of 22 Index constituents posting losses.
Credit Suisse Asset Management observed the following:
- Agriculture declined 10.48%, led lower by Soybeans, as the ongoing trade conflict between the US and China continued to hurt the competitiveness of US products. The US Department of Agriculture also reported higher soybean production out of Brazil.
- Industrial Metals fell 4.76%, led down by Zinc, after the International Lead and Zinc Study Group showed global production outpacing consumption during the first four months of the year.
- Precious Metals dropped 3.29%. The US Federal Reserve (Fed) raised the Federal Funds Rate, while signaling it may hike at least one more time in 2018, decreasing the appeal of Gold and Silver as alternative stores of value.
- Energy increased 2.70% for the month, led up by WTI Crude Oil, as increased US exports, doubts surrounding US producers' ability to continue to grow production, and a power outage at a large Canadian producer pushed prices higher.
- Livestock was 2.74% higher for the period. Live Cattle gained due to robust seasonal meat packer demand amid higher meat packer margins as demand for beef was strong.
Nelson Louie, Global Head of Commodities for Credit Suisse Asset Management, said: "Trade tensions between the US and its major trading partners increased in June. In retaliation to US tariffs on $50 billion of Chinese goods, China announced reciprocal duties on American products, including several key agricultural commodities. In response, the US administration threatened tariffs on an additional $200 billion of Chinese exports, further escalating trade tensions. The European Union, Mexico, and Canada also released new counter measures to the US tariffs, seeking to protect their domestic industries. These duties may hamper economic growth. In June, the industrial production readings for the US and Eurozone came in below expectations. This may be concerning for the Eurozone as its industrial production readings have trended downward from the strong pace of growth witnessed in late 2017. Further tariffs between the US and other major economies may disrupt the global supply chain and lead to higher inflation expectations, while businesses may delay spending plans due to uncertainty regarding the cost and availability of inputs for finished goods."
Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added: "The Fed's preferred benchmark for measuring inflation, the core Personal Consumption Expenditures price index, reached the central bank's 2.0% target for the first time in six years. Even though the Fed has now set expectations for at least one additional rate hike in 2018, the Fed may let inflation run slightly above its historical 2% goal, following a prolonged period of low inflation, in order to potentially avoid large, unexpected movements away from its target in either direction. In the Eurozone, the annual rate of inflation rose above the European Central Bank's (ECB) targeted level for the first time in over a year. This positive reading came after the ECB revealed plans to close out its bond buying program by December 2018, while keeping a negative deposit rate in place into the summer of 2019. Assuming the trade war continues to escalate, central banks may be forced to choose between employing more dovish policies in an attempt to support economic growth or take a hawkish approach to stave off rising inflation. In either scenario, inflation may come in higher relative to market expectations."
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 June 30, 2018, the Team managed approximately USD 9.6 billion in assets globally.