Commodities Are Past the Worst, But Don’t Rejoice Yet

Give Goldman Sachs credit for zigging while the market is zagging. The venerable Wall Street firm has for months been recommending commodities, even as they slumped badly. But now, with a recovery underway, Goldman has turned cautious.

Commodities have been on a slow climb during 2018, peaking in October, and then losing 22% over the next two months. Goldman admitted that it had “failed spectacularly” during last year’s final quarter in judging commodities. Now, though, the asset class has perked up. Since bottoming out on Christmas Eve day, commodities have risen 10%.

While that’s still shy of the October peak, macro developments that were so discouraging in late 2018 now are looking up, according to a research note from Goldman’s analysts. They reasoned that commodities are largely moving past a “soft-patch in global macroeconomic data, as temporary drags on growth (particularly US government shutdown effects) are removed, and policy has turned more expansionary (particularly in China).”

Still, the lack of government dysfunction in America and a re-boot of stimulus in China simply means that raw materials are no longer undervalued, they wrote. And so, before breaking out the champagne, Goldman wants to see more evidence of better fundamentals from commodities. “The risk-reward of being outright long commodities,” the report said, “is therefore less compelling now compared to a few months ago.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The best spot on the commodity spectrum is oil, Goldman said. OPEC megalith Saudi Arabia is reducing production faster than US shale drillers can increase output, plus the chaos and trade sanctions roiling petro-producer Venezuela are cutting into world supply. Result: Higher oil prices could lie ahead, with the price per barrel reaching as high as $75. Brent crude is now $66. But the analysts think this situation may be temporary.

Meanwhile, however, Goldman didn’t find the rest of the commodities class very compelling, as “better data is not yet apparent.” The Goldman paper expressed disappointment at economic results coming out of China thus far, and China has been a powerful buyer of commodities in the past. The note was most downbeat about metals, like copper.

Goldman’s lone shiny spot among metals was gold, whose refuge status in a time when recession fears are stewing make it a go-to investment for some. Cold comfort, that.

Oil Prices Are Rising Despite the US Shale Boom

Commodities Rocket Louisiana Teachers to 15.93% Fiscal Return

Tags: Commodities, gold, Goldman Sachs, oil and gas

A major credit rating agency says that a possible Brexit extension, which the British Parliament is considering, could be a plus for the UK.

There’s a lot of uncertainty as to whether the nation’s divorce from the European Union, slated for March 29, will be amicable or acrimonious. Moody’s Investors Service has dubbed the possibility of pushing the date back “credit positive” for the UK’s rating.

The firm said this reduces the “no-deal” possibility, which would create calamity for trading between Continental Europe and Britain. Moody’s said it thinks the UK and the EU will “eventually agree on a negotiated withdrawal.”

Certainly, Moody’s is not indicating a rating upgrade now. Following Britain’s June 2016 referendum vote to secede from the EU, all three major ratings agencies lowered the UK government’s bonds to the third notch down on the credit spectrum. In all three cases, the rating still is labeled high grade.

For more stories like this, sign up for the CIO Alert newsletter. 

The one difference among the trio of ratings providers is that Moody’s rates Britain “stable,” while Standard & Poor’s and Fitch have the nation on “negative watch.” This means that they could lower their ratings further and they have doubts about the sustainability of their current assessment.

At this stage, Prime Minister Theresa May faces a series of parliamentary votes on the Brexit question. The first will be on a UK withdrawal revision, where, if May’s proposal is declined, a “no-deal” vote will occur the next day. If that doesn’t work out, the legislature will vote on a “short limited extension” to Article 50 from the EU, which enables the withdrawal. This would again stall Brexit. May has said she’d push it to June, adding that it would be “extremely difficult” to have it go further.

Parliament passed a rule that binds May to the schedule, as she’s changed voting dates at the last minute before.

Other leaders, such as Junior Justice Minister Rory Stewart and Irish Prime Minister Leo Varadkar, have said that delay is more likely.

“I think we would have to be forced into an extension of Article 50,” Stewart said in an interview with Sky News on Sunday. “There doesn’t seem to be parliamentary majority for ‘no deal.'”

Varadkar has told Cabinet colleagues he is expecting the terms to stall until June, according to Ireland’s Sunday Independent.

“At the moment, we do not think that the potential delay of the exit date provides any clear indication of what the final outcome of the Brexit process will be,” said Moody’s. “Such a delay also prolongs the state of elevated uncertainty for affected UK issuers, which weighs on their immediate business and credit prospects.”

If the extension option flies, the credit organization is concerned about how the EU will respond.

Like Stewart and Varadkar, Moody’s also sees this as a problem, but said it’s possible that there could be “unclear” conditions attached to the halt. If the European Council wants to extend a decision point to a date other than what Britain has proposed, that could end up making an agreement even tougher, the agency said.

Hard Brexit Could Raise UK Pension Deficit by £219 Billion

Post-Brexit Pensions in Jeopardy

Tags: Brexit, Moody's, Theresa May, UK