Commodities gain amid a risk on tone across markets

A risk-on tone across markets saw commodity markets push higher. This was helped by a weaker USD, which boosted investor appetite.

Crude oil gained as a weaker USD offset ongoing concerns of weaker demand. Risk sentiment generally firmed across markets with equity markets climbing after a NY Fed report buoyed optimism that inflation may be receding. This was supported by signs that Chinese demand is improving. A spate of Chinese crude purchases via tender have spurred some optimism that weakness in the physical market in China had reached a bottom. This follows commodity trade data showing August volumes had also improved. Nevertheless, the outlook is challenging. Chinese authorities are likely to intensify lockdowns ahead of the Communist Party meeting in October. Local officials said an outbreak at one of China’s top media schools in Beijing should be stamped out in the shortest time. The apparent breakdown of negotiations on an Iranian nuclear deal also supported crude oil. The IAEA met in Vienna to discuss a standoff with Tehran that’s hampered efforts to revive the agreement. Germany’s chancellor, Olaf Scholz, said he doesn’t expect a deal any time soon.

European natural gas futures extended recent falls as the spectre of intervention in energy markets increases. EU energy ministers met in Brussels to discuss urgent steps to tame the price of gas. They will likely propose a mandatory target to cut power use and measures to funnel company profits to struggling consumers. Caps on electricity prices from wind, solar, geothermal, nuclear and hydro producers are also likely, according to a draft document. The idea of a price cap on natural gas was discussed, however most countries agreed that more work was required. Norway, a major supplier of gas to Europe remained wary an introducing such a measure, saying it will not do anything about the fundamental problem, namely that there is too little gas. North Asian LNG futures edged lower but remain resilient compared with losses in European markets amid signs of strong demand. India purchased several cargoes on the spot market, which helped offset softer demand in Japan due to cooler weather. Exporters are increasingly breaking long-term contracts to make the most of higher prices in the spot market. This is exacerbating the competition for cargo in the physical market.

Copper led the base metals sector higher amid the improvement in risk appetite. High energy prices continue to hang over the market. After operating on cheap Russian gas for decades, Europe’s manufacturing industry is reeling from the surge in prices. This is likely to see an increasing number of smelters close as their operations become uneconomic. The onset of China’s construction season is also underpinning base metals. This will be helped by efforts to support the beleaguered housing sector. More Chinese cities announced credit support and subsidies for home purchases. Iron ore futures also gained amid signs of stronger demand. Blast furnaces in China’s major steel hub of Tangshan have recovered after slumping in July as they met the ramp up in construction-related demand. Meanwhile, iron ore stockpiles across major Chinese ports fell 0.6% last week, in another encouraging sign that steel production is improving.

Gold gained as the US dollar extended its retreat from its record high ahead of US inflation data. This reversal comes after speculators had turned against the metal. Last week they boosted their bearish bets to their highest level in a month. The subsequent short covering could see this rally last a little longer.