FICC
| Commodities
Oil, metals, and the wider commodity complex, analyzed from the global macro picture down to physical supply and demand.
If the Fed convinces markets it is on track to lift rates this year and a couple of times next year, we expect a 10% appreciation of the USD over the next 12 months. This would be extremely bearish for commodities.
A Fed rate hike by December could erode the slowly evolving fundamentals favoring base metals.
The evolution of oil demand will be far more important for prices than the outcome of next month's International Energy Forum meeting in Algiers. The supply destruction brought on by lower prices is increasingly shifting to OPEC producers outside the Persian Gulf, which keeps the odds of a large-scale unplanned outage - in Venezuela or Nigeria, in particular - elevated.
The deepening interconnectedness of the "global eco-system" brought front-and-center by NY Fed President Dudley will keep inflation at the consumer level synchronized in the world's largest economies. The importance of global variables in the evolution of local inflation rates will remain elevated.
With the Fed more sensitive to how its policy affects the global economy, and vice versa, we believe monetary policy will remain accommodative to encourage U.S. and EM growth.
Clearing the refined-product overhang in the global storage markets is not as straightforward as it used to be: The Kingdom of Saudi Arabia (KSA), China, and India all are making concerted efforts to boost refining capacity, which is leaving them with surplus product that ends up being sold in export markets.
Refiners will reduce run rates over the next month or so to clear unintended inventory accumulation, but it's not like they've never had to deal with this situation.
Commodity speculation provides liquidity to hedgers, allows price discovery, and offers access to an asset class that typically produces returns that are not correlated with stock or bond returns.
Our strategic and tactical trades were up an average 24.6% in 2016Q2, led by strategic energy recommendations. Going forward, we continue to favor energy exposure over base and precious metals, ags and softs.