Commodities Weekly Summary: Liquidity Stress and Deleveraging Weigh on Sentiment

Author: Ole Hansen, Head of Commodity Strategy

Key Points

• A significant correction in precious metals, alongside weakness in equities and cryptocurrencies, has led to broad deleveraging and a shift towards defensive positioning in commodities.
• Despite a 5.3% weekly decline, the Bloomberg Commodity Total Return Index remains up 10% year-to-date, reflecting the strength of January's rally.
• Crowded positions in precious and industrial metals were adversely affected as deleveraging coincided with softening micro fundamentals and thin liquidity.
• Crude oil remains rangebound, influenced by geopolitical tensions, while soybeans have shown optimism due to expected Chinese demand.
• Coffee prices have slumped as high prices from the previous year led to increased production and crop renovation.

Market Overview

The past week marked a pivotal shift in the commodities market, transitioning from the broad-based strength seen in January to a more defensive and liquidity-driven environment. The catalyst was a historic correction in precious metals, which triggered a sell-off across various asset classes, including equities and cryptocurrencies. This led to a negative sentiment characterized by forced deleveraging and increased correlations across markets.

Since January 29, the performance of commodities has diverged significantly. Precious metals experienced the most substantial losses, followed by industrial metals and parts of the energy and soft commodities sectors. In contrast, grains emerged as one of the few areas to post gains, with the Bloomberg Commodity Total Return Index down 5.3% for the week but still reflecting a robust 10% increase year-to-date.

Macro Backdrop

Recent US economic data has indicated a trend towards weakness, particularly in the labor market, with disappointing job reports and rising layoff announcements unsettling investors. This has contributed to a risk-off sentiment in financial markets, with the Nasdaq experiencing a nearly 5% decline. The rotation from software and services stocks into semiconductor and hardware names suggests a reassessment of AI investments and their impact on valuations.

Market Dynamics

While fundamentals remain important, the past week's defining feature was the stress in market plumbing. Elevated volatility led to higher margin requirements and thinner liquidity, resulting in non-discretionary selling. This was particularly evident in the precious metals market, where extreme price fluctuations prompted rapid deleveraging across futures and ETFs.

Industrial Metals

The BCOM Industrial Metal Index fell approximately 5.5%, with copper prices declining around 6%. Concerns about medium-term supply and softening micro fundamentals contributed to this retreat. Rising visible inventories and weakening premiums in China indicated reduced urgency for immediate supply, leaving copper vulnerable to liquidity conditions.

Energy Markets

Energy markets showed relative resilience, with Brent crude trading within a USD 60–70 range, influenced by geopolitical risks. Natural gas, however, experienced significant volatility, concluding a tumultuous period with prices fluctuating dramatically due to weather-related demand spikes and production drops.

Agricultural Commodities

In agriculture, soybeans were a notable outlier, briefly reaching a two-month high due to optimistic remarks from President Trump regarding Chinese purchases. Conversely, coffee prices fell nearly 12%, driven by increased production expectations in Brazil.

Outlook

Looking ahead, the stabilization of the recent correction will depend on key US macroeconomic releases and signs of improving liquidity conditions. The upcoming Lunar New Year holiday in China may also impact metals demand as traders adjust their positions.

Conclusion

The commodities market is currently navigating a complex landscape characterized by liquidity stress and shifting sentiment. Investors will need to remain vigilant as macroeconomic indicators and market dynamics evolve.