Commodity Markets on Tenterhooks as Delta Outbreak Rattles China
(Bloomberg) -- Global commodity markets are hitting heavy turbulence in August, with fears over Fed tightening and China’s coronavirus outbreaks set to dominate sentiment in coming days after a brutal opening on Monday.
Gold tumbled the most since January after U.S. jobs numbers posted bigger-than-expected gains, fueling bets on the central bank reining in stimulus. Investors will be on alert for any other hints at tightening, which only adds to global uncertainties as China and other Asian nations grapple with Covid-19’s delta variant. Crude added to its worst weekly slump since October to start Monday.
Oil-watchers can look to a triptych of key market assessments due this week, including one from OPEC, that should offer more grist on demand risks. Elsewhere, watch gas markets after a 1,000% price-surge, or iron ore as futures almost give up this year’s gains. On the earnings front, there’s No.2 gold miner Barrick Gold Corp, a swathe of European power utilities including Germany’s RWE AG, plus meat giants Tyson Foods Inc. and Brazil’s JBS SA.
Asian nations from Indonesia to Thailand and Japan are grappling with surging caseloads, but it’s China’s flare-ups causing the biggest concern for commodity markets. The delta variant is testing China’s largely successful zero-tolerance approach in quashing the pandemic. Investors are awaiting signals that Beijing has managed to turn the tide -- or that it will have to impose even tougher restrictions. On Monday, Goldman Sachs Group Inc. lowered its growth forecast for China in light of delta’s spread.
Heading into the weekend, cases in China jumped to a six-month high on Friday, and delta has reached regions that together account for 38% of the country’s gross domestic product. So far, the restrictions are hammering transport activity, with road traffic in affected cities down to just 70% of normal levels, and daily flights lower by a third. Elsewhere, falling hog prices point to possible ripples for food demand as more people stay at home.
Oil’s the clearest early casualty of delta’s rapid spread. West Texas Intermediate prices are heading for their worst week since March as the highly infectious variant threatens recoveries across Asia. This week’s surprise expansion in U.S. inventories didn’t help either. In one sign of the weaker dynamic, Saudi Arabia’s attempts to push up the price of its oil in Asia are backfiring as demand slows down while supply competition stiffens.
The demand headwinds come just weeks after OPEC and its allies agreed to go on easing the supply curbs imposed last year. The risk is that more prolonged or broader curbs on activity in China and Asia might leave the cartel moving too quickly. No doubt that Riyadh and the other oil capitals will be scrutinizing demand data more than ever. OPEC releases its latest monthly market outlook on Thursday, the same day as an offering from the International Energy Agency, and after the U.S. Energy Information Administration on Tuesday.
Gasping For Gas
Energy prices are rising around the world as the global economy emerges from the pandemic, fueling concerns about inflation and power shortages. European gas surged to a record last week amid tight supplies from Russia. In the U.S., natural gas traded near 31-month highs as a global supply crunch and hot summer weather limit the restocking of inventories for winter. Deliveries of gas to Asia are near all-time highs for this time of year.
Higher commodity prices are giving a boost to power utilities -- usually a boring corner of the market -- as they pass higher costs through to electricity consumers. Germany’s RWE AG, which reports earnings on Thursday, is up has already lifted its outlook for the year, as did France’s Engie SA. Adding to the power earnings, Uniper and E.ON SE also report next week.
After reporting quarterly production that fell just short of expectations, Barrick Gold Corp. will unveil how that fed through to its bottom line. The world’s second-biggest bullion producer -- and a sizable copper supplier -- reports financial results Monday, with much of the focus on costs as the industry starts to grapple with pricier inputs. Earnings are expected to remain around first-quarter levels, but well above last year on higher metal prices.
Barrick has said gold output probably will be higher in the second half, and the firm also hopes a key mine in Papua New Guinea will restart later in the year after an ownership agreement with the government. Chief Executive Officer Mark Bristow will be asked for comment on future investments and how they stack up against pressure from investors and host nations for a bigger share of the mining windfall.
For a third “WASDE” in a row, analysts are expecting the U.S. Department of Agriculture to cut estimates for U.S. corn yields. In both June and July, it defied forecasts, keeping its estimate unchanged even as drought expanded in the western half of the country, hurting crops in affected fields. But the third time might just be the charm for analysts, with corn’s yield potential coming into focus from farmers sharing crop data with the government.
Supply shocks might be necessary to push up corn and soybean prices beyond the peaks hit earlier this year. Markets have been relatively quiet in the days prior to WASDE’s release on Thursday, amid uncertainty on harvests and demand. While it’s been hot and dry in the western U.S., conditions have been milder and wetter in the east. As of now, the USDA is projecting small increases in ending supplies of corn and soybeans in the coming shipping season.
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