Commodities declined in July due to increased potential for rising production in energy commodities and lower demand expectations for base metals.
The Bloomberg Commodity Index Total Return performance was lower for the month, with 15 out of 22 Index constituents posting losses.
Credit Suisse Asset Management observed the following:
Industrial Metals declined 4.69%, with all constituents posting losses, as growing trade conflict between the US and China weighed on demand expectations.
Energy fell 4.36%, led lower by crude oil and petroleum products, as Saudi Arabia and other OPEC members increased production while Russia and Libya reported intentions to bring production back online.
Livestock was 4.34% lower, led down by Lean Hogs, following increased production estimates and reduced exports of US pork products.
Precious Metals decreased 2.69% as the US Dollar rose after the US Fed announced its intention to continue raising short-term interest rates gradually despite the growing trade conflict posing a threat to economic growth.
Agriculture increased 2.70%, led higher by Wheat, after the latest USDA WASDE report showed larger-than-expected reductions in wheat production and exports from both the European Union and Russia for the 2018/2019 crop year.
Nelson Louie, Global Head of Commodities for Credit Suisse Asset Management, said: “The geopolitical environment has become immersed in trade disputes. Increased barriers have forced buyers and producers to trade commodities with new partners at greater costs due to more expensive transportation or the introduction of intermediaries within the supply chain. These factors have already been inflationary to some commodities. The effects of the tariffs have so far been mixed. The US economy continued to show strength growing at an annual rate of 4.1% during the second quarter. This expansion has strengthened the US administration’s resolve to push forward with additional tariffs. On the other hand, countries subject to US tariffs have shown some signs of weakness. Mexico’s second quarter GDP actually shrank slightly on a seasonally adjusted basis from the first quarter, while China’s July manufacturing activity came in lower than expected.”
Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added: “This increases the challenges posed to governments and their central banks as policymakers look to remove loose monetary policy but are keen to not stall economic growth as trade issues escalate. This may mean an even slower course of action than initially expected by central banks or increasing supportive fiscal measures. While the US Fed looks to be much more aggressive than other major central banks, gradual monetary tightening has been complemented with fiscal stimulus. In July, China announced a series of tax cuts, new business loans and increased infrastructure spending measures with the objective of countering the slowdown in its economy. The US and China are also both attempting to mitigate the impacts from the increased tariffs through aid packages and tariff rebates. In the meantime, Eurozone officials have begun discussions with the US in an attempt to resolve trade issues and improve relations. In the long run, if tariffs remain in place, this may be inflationary for the end users of many commodities involved. If a common ground can be found and the risks from tariffs are reduced, then the global economy may continue on its trajectory of synchronized growth first witnessed in 2017.”
About the Credit Suisse Total Commodity Return Strategy
Credit Suisse’s Total Commodity Return Strategy is managed by a team with over 32 years of experience, and seeks to outperform the return of a commodities index, such as the Bloomberg Commodity Index Total Return or the S&P GSCI Total Return Index, using both a quantitative and qualitative commodity research process. Commodity index total returns are achieved through:
Spot Return: price return on specified commodity futures contracts;
Roll Yield: impact due to migration of futures positions from near to far contracts; and
Collateral Yield: return earned on collateral for the futures.
As of July 31, 2018, the Team managed approximately USD 9.5 billion in assets globally.