Energy crisis fuels commodity rally despite growth concerns

By Ole Hansen, Head of Commodity Strategy at Saxo Bank

The month-long run-up in commodity prices shows no sign of easing with the main engine continuing to be the global energy crisis and its direct impact on other sectors, not least the energy-intensive industrial metal sector. Shortages of fuel leading to record-high prices has forced reductions in metal production from China to Europe, thereby exacerbating price gains for several key metals, many of which are important components in the global push to decarbonize economies.

The continued rally has however by now also started to raise concerns about its impact on consumers and whether high prices eventually will dampen the prospect for demand, thereby supporting more balanced markets. Global growth is already seeing regular downgrades with rising energy prices acting as a direct tax on consumers. Adding to this are higher inflation and a slow resolution of supply bottlenecks around the world as well as the need for an even greater medical effort to combat a not yet under control virus.

In addition to the price-induced demand destruction and the impact of energy/power cost inflation on disposable incomes, a slowdown in the Chinese property market and cuts to Chinese industrial production could be forces that in our opinion may slow but not curb further commodity gains during the coming months.

Inflation remains a hot topic and following months of range-bound trading the difference between inflation protected and normal bonds has started to move higher. The so-called breakeven yield, which reflects the markets expectations for U.S. inflation over the next five years, reached 3 percent, thereby exceeding the previous high from 2005. A rise in the ten-year breakeven yield to 2.70 percent helped keep real yields suppressed around –1 percent, thereby supporting a gold market which increasingly has been competing with cryptos, not least after this week’s launch of a Bitcoin futures-linked ETF.

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