Commodities under pressure from trade wars, EM turmoil: Saxo Bank

Commodity prices will remain under pressure from an escalating trade war between the US and major economies, and fears of crisis in emerging markets (EMs), Saxo Bank said in a recent report.

The two developments have led Bloomberg Commodity Index to already lose nearly 9 percent since its early June peak and reaching its lowest weekly close in more than a year.

"The prospect of an escalated trade war continues to make matters worse for EM bonds, stocks and currencies," Ole Hansen, head of commodity strategy, Saxo Bank, noted.

The MSCI EM stock index is down 20 percent since January, while the MSCI EM currency index has lost  8.5 percent of its value since April since trade tensions among major economies escalated.

Crude oil has remained rangebound since April as the focus continues to switch between supply and demand, both of which could be "negatively impacted by current developments.”

The price support has come from the short-term challenging outlook for supply due to US sanctions against Iran, Hansen said.

"Rising oil prices due to the short-term impact of US sanctions may, however, create a medium-term challenge for demand growth. This as emerging markets, the main source of demand growth, suffer from a perfect storm of rising oil prices and weaker currencies.”

Meanwhile, China’s strategic petroleum reserves (SPR) purchase program is likely to witness a slowdown in demand. The report, citing Bloomberg’s intelligence unit, said China's SPR purchases have accounted for about a third of annual global oil demand growth since 2016.

"A slowdown of this magnitude would go a long way to offset the potential drop in supply from Iran. Such a development, together with the already heightened risks to overall demand going into 2019, could force a rethink of the medium-term price outlook and eventually help send the price back down to $70 a barrel," Hansen stated.

Separately, gold showed signs of stabilizing at around $1,200 per ounce, while silver dropped to $14 per ounce, a 2-1/2 year low against the US dollar and a 23-year low against gold.  

The agriculture sector remained mixed with sugar and coffee trying a recovery from a decade low. The ongoing trade dispute with China and a huge US crop kept a lid on soybeans as the price remained close to a 10-year low, the report stated.