Q3 Report - Commodities

The raw material markets continued to make a comeback in the third quarter of 2020 after the global pandemic caused a deflationary spiral taking the prices of most assets lower in Q1. The commodity asset class consisting of 29 of the primary commodities that trade on US and UK exchanges moved 17.77% lower in Q1 than the level at the end of the year that ended on December 31, 2019. In Q2, it recovered by 13.75% and in Q3 it rose by another 12.04%. The asset class was 1.08% lower over the first nine months of this year. In 2019, the asset class gained 10.98%. In 2018 the asset class lost 6.82% of its value.

The overall winner of the 29 for the third quarter was lean hogs that posted a gain of 61.15% in Q3 with NYMEX natural gas in second place with a 44.32% gain. Lumber was 40.51% higher, and silver gained 26.71% over the past three months.

The biggest loser for the quarter was the oats market that fell 14.32% with rough rice in second place on the downside with a 14% loss in Q3. The price of nearby FCOJ futures fell 10.68% over the period. Over the first nine months of this year, lumber futures led the way on the upside with a 51.05% gain, after rising to a new record high of $1,000 per 1,000 board feet in Q3. Iron ore gained 35.45% so far in 2020, and silver was 31.10% higher at the end of Q3. The biggest losers on the year was heating oil futures, down 43.38% over the nine months, and Brent crude oil with a 37.87% loss. NYMEX crude oil was a close third with a 34.13% loss since the end of 2019. The biggest loser during one quarter often turns out to be a leader on the upside during the next quarter. That occurred in Q3 as lean hogs moved over 60% higher for the three months.

The U.S. dollar is typically a significant factor when it comes to commodity prices, as it tends to have an inverse value relationship with raw material prices. The dollar index posted a 3.52% loss in Q3 and was 2.22% lower for the year. The dollar index was 0.34% higher in 2019.

The Fed pushed the Fed Funds rate to zero in the wake of the global pandemic. Quantitative easing is back, and more substantial than ever in the US and Europe as central banks seek to stabilize markets until scientists can develop treatments and a vaccine for the virus. The Fed told markets that short-term rates are not likely to rise until 2013. Moreover, the central bank shifted its inflation levels from a target rate of 2% to an average at that level. The Fed is encouraging higher inflation levels over the coming months and years.

A myriad of complex factors on a macro and microeconomic basis dictate the price direction for the commodities market over the coming three months and beyond. The pandemic continues to be the most significant factor facing markets across all asset classes. That will continue for quite some time, perhaps years as the economic fallout could be the most significant in history. However, next month’s US election could cause turbulence in markets during the final quarter of 2020. In early October, the hospitalization of President Trump with COVID-19 was the first shocking event, and more are likely to follow before election day on November 3.

Winners outnumber losers in Q3 in commodities

During the period from July through September 2020, all of the commodity sectors posted gains. Thirty products posted gains with twenty double-digit percentage increases. The list of gains are as follows:

Over the first nine months of 2020, the following twenty-one commodities posted gains:

The losers in Q3 in commodities

Only nine commodities posted losses in the third quarter of 2020 as the market continued to experience a rebound from the price carnage in Q1:

While winners far outnumbered losers in Q3, the year-to-date performance continued to display losses in 18 of 39 products:

Digital currencies post gains

The CFTC has defined digital currencies as commodities. The cryptocurrency asset class that was all the rage in 2017 plunged in 2018. In 2019, the digital currencies made a comeback, but the risk-off conditions weighed on many of the members of the asset class in Q1. In Q2 and Q3, they made a comeback. The market cap of the asset class as a whole moved from $181.094 billion at the end of Q1 2019 to $259.705 billion on June 30, up 43.41% for the three-months. In Q3, it reached $344.464 billion, up 32.64% in Q3 and was 79.47% higher over the first nine months of 2020. Bitcoin rose 17.53% in Q3 and was 48.57% higher so far in 2020. Ethereum posted a 58.23% gain in Q3 and was 173.51% higher so far this year. Litecoin was 11.24% higher for the period and moved 10.23% higher since the end of 2019. Bitcoin Cash was 2.15% higher in the third quarter and 9.79% higher over the nine months. The number of tokens exploded from 5,688 at the end of Q2 to 7,254 on September 30, a rise of 27.53%. The market cap of the digital currency asset class reached a peak of over $800 billion in late 2017. The rising number of tokens has diluted the asset class over the past two and one-half years. Bitcoin, the leader of the pack, underperformed the market cap of its asset class in Q3 and so far in 2020.

Issues to look forward to in Q3 2020

Optimism is the most significant factor for people to remember as we head into the final quarter of 2020. Scientists are working furiously on treatments and a vaccine that will remove the dangerous threat of coronavirus infections. However, the world is bracing for a new wave of infections during the flu season in the US and Europe. With coronavirus infecting the US President and first lady, the second wave of the virus shows that anyone is susceptible.

The economic costs of the global pandemic will be staggering, which will influence markets over the coming months and years. When it comes to commodities, lower prices so far in 2020 are leading to production declines. As prices reach levels where production falls, inventories are likely to begin to drop as the raw materials are the products that feed, clothe, power, and shelter over 7.685 billion people on our planet. Even after the tragic loss of life from the global pandemic, the population will continue to grow. Economic stagnation is likely to remain in the aftermath of the virus. The stimulus will weigh on the value of fiat currencies and boost government debt levels around the world. The decline in the purchasing power of fiat currencies could eventually cause commodity prices to skyrocket, causing periods of stagflation, an economic condition that is difficult to manage. Many markets made comebacks in Q2 and Q3, which could become a launchpad for the future. If the price action after 2008 repeats, we could see a bull market in the raw materials asset class in the coming months and years.

The US election will take the center of the stage alongside the coronavirus over the coming weeks. During Q4, the contentious exchanges between Democrats and Republicans are likely to rise. However, as the President remains in the hospital, it could result in a more civil tone following a tumultuous debate at the end of September. Simultaneously, the civil discord in the US will make the election period the most turbulent since 1968. If the election is close, no clear winner could stoke market volatility through the rest of this year.

I expect price variance in markets across all asset classes to remain at very high levels throughout Q4 and beyond. Trading rather than investing could provide optimal results. Approach all risk positions with a plan, stick to stops, and take profits when they are on the table. Fundamental and technical indicators may not work as well as in the past, given the dramatic changes in economies and behaviors around the world. Look for commodities and stocks that are likely to continue to attract demand in the current environment. Be cautious when taking positions home overnight or over weekends. Follow the trends in markets and try to ignore the news cycle. If we learned anything in 2020, markets often divorce from new items and trends are a better indicator of market direction than reactions to the daily ups and downs of the news cycle.

Most importantly, stay safe and take care of the vulnerable. Believe in science, as it will eventually come up with the solution. As we head into Q4, the number of cases is rising again, but the mortality rate is declining as healthcare professionals have learned a lot over the past months. Remain cautious; optimism will help us all get through the most challenging period for the world of our lifetimes.