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Commodities Rose on Increased Geopolitical Risks and Dovish Sentiment

Commodities rose as increasing geopolitical risks and dovish comments from central banks supported precious metals and energy prices.

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

Credit Suisse Asset Management observed the following:

  • Precious Metals increased 7.33% as rising geopolitical risks, including potential conflict between the US and Iran due to Iran's downing of a US military drone, helped to increase safe haven demand for Gold.
  • Energy rose 3.95%, led higher by crude oil and petroleum products, as escalating tensions between the US and Iran heightened supply risks in the Middle East while the resumption of US-China trade talks improved demand expectations.
  • Industrial Metals gained 2.05% on improved demand expectations following a temporary truce between the US and China in order to resume trade discussions.
  • Agriculture was 0.51% higher. Chicago Wheat increased after ongoing rainfall in the US Midwest heightened the risk of fungus growth, potentially decreasing crop yields and the production of delivery-grade supplies.
  • Livestock declined 3.46%, led lower by Lean Hogs, on increased pork production expectations as well as growth in US hog herd sizes.

Nelson Louie, Global Head of Commodities for Credit Suisse Asset Management, said: "The US and China's temporary trade truce has caused market participants to become cautiously optimistic that a near-term trade deal may be reached. Reduced barriers to trade would be beneficial to commodity demand as companies are increasingly delaying capital investments amid the uncertainty. OPEC+ also announced that they will extend their crude oil production cut agreement through year end and potentially into the first quarter of 2020. How strictly all participants will be at adhering to the agreement remains a concern as some nations, such as Nigeria, face growing political and financial constraints. So far, members of the OPEC+ agreement have exemplified their commitment to supporting crude oil prices. However, the biggest risk to the agreement's effectiveness rests with US shale producers whom may grow production further. Beyond policy risk, heavy rainfall in the US Midwest forced farmers to plant a higher percentage of their fields at the same time, increasing the concentration risk to plantings if additional adverse weather conditions appear. Meanwhile, a heatwave put European wheat crops at risk. In addition, a delayed monsoon season in India, a country which tends to shift between being a net consumer and a net exporter of sugar, may also impact sugarcane production. If dry conditions persist, then there may be less sugar supplies available for trade."

Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added: "Economic indicators seem to be losing some momentum, adding to the evidence that the ongoing US-China trade war has impacted growth expectations broadly. In the US, unemployment remained at 3.6% in May. However, the US PMI reading weakened in May. The Eurozone's reading also contracted while China's remained flat as exports fell. In response to these data points, central banks prepared to potentially take action. The Fed announced it was prepared to cut short-term interest rates, with two to three rate hikes priced in this year as of the end of June. ECB President Mario Draghi announced the central bank will consider cutting interest rates in the near future in an effort to counteract an economic slowdown. China may also implement more stimulus measures in an attempt to reduce the pace of the weakening following special bond issues released earlier in June. As central banks continue to adjust policies to accommodate growth in the latter stages of an expansionary cycle or even in early contractionary periods, the appeal of commodities as an asset class is increased as a business cycle diversifier."

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 June 30, 2019, the Team managed approximately USD 6.9 billion in assets globally.