Commodities to benefit from an increased focus on inflation

MANAMA: Commodities in general are benefiting from an increased focus on inflation as the current expansion cycle moves toward its late stage, where price pressures tend to build.

With OPEC and Russia having promised to keep production capped, the three key questions that are likely to determine the price of oil in 2018 are the production response to higher prices (not least from US shale oil producers), the potential from new supply disruptions, and the continued strength of the global economy, reaveals Saxo Bank research.

Saxo Bank, the online multi-asset trading and investment specialist, has published its quarterly outlook for global markets and key trading ideas for Q1 2018 with focus turning to bubbles: how they form and how to spot them.

“Barring any geopolitical upsets, the record 1 billion barrels oil long held by funds at the beginning of 2018 could pose a potential challenge to the current bullish momentum. Given the impact on the price of oil of a few hundred thousand barrels per day in changed supply or demand, we see the risk – especially during the coming months – skewed to lower prices, with Brent crude oil at risk of returning to $60/b,” Ole Hansen, Head of Commodity Strategy, said.

“After almost hitting our year-end target of $1,325/oz last year we maintain a bullish outlook for gold into the early stages of 2018. The dovish December 13 Federal Open Market Committee rate hike and the US tax reform agreement both helped signal another low point for gold with inflation once again emerging as a key driver for gold support.”

“Our trade idea for Q1 is to be long gold against WTI crude oil – we favour using WTI over Brent given the lower cost of holding a short position in WTI.”

Bonds – Deepwater Horizon 2017 saw some of the smoothest bond markets in memory, with volatility resting at record lows throughout the year. A flow of continually sideways macro data created the perfect condition for bond yields to stay at low levels for the core segments.

“When we speak of bubbles we should note that bond markets would have a very hard time coping with a sudden spike in US and global 10-year core yields. I’m also concerned that as the EM bond space and the DM corporate bond market have seen significant growth, the primary marketplace for these same bonds has diminished due to regulatory downscaling from banks,” Simon Fasdal, Head of Fixed Income Trading, said.

“Take a look at the 10-year Treasury yield, where we are at 2.57. Q1 is a time to be cautious.”

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