Global Macro/Metals

Hawkish Central banks are now focusing on the expectation of a more controlled core inflation. This is particularly true in the US where the combination of a stronger USD, lower equity market and higher rates has already had an important tightening impact and seems to have stabilized the wage pressure in the labor market. Job postings are down, the tech sector is even cutting staff as companies are expecting more difficult access to financing and lower growth. Last month has been a bad environment for equities but also for precious metals as lower expected real rates and the long European conflict have repelled the interest for gold (down 5.5% in May in EUR terms). Two hedge funds are bringing the London Metal Exchange to court on the handling of the nickel market and the unwinding of trades. High grade nickel is more and more widely used in batteries and fundamentals remain very bullish. The rest of the base metal complex has priced in a slower global growth and the impact of the zero covid policy in China (base metal basket down 7% on the month).


The geopolitics of higher crude oil price in an open economic warfare against Russia is not playing into the hands of the supporters of Ukraine. Last month’s supply surplus helped by large SPR sales, lower China demand and lower than expected growth may not be sufficient in the future to cope with the increasing demand of an ever opening economy, and a gradual difficulty for Russia to export its oil (through a progressive European ban). Politically driven supply loss has usually been g+radual (e.g. Iran) and higher prices will make this process even slower. Market is expecting about 2 mio b/d less from Russia exports by year end to about 10mb/d. Elasticity of demand is about 0.3% for 10 USD of price change (although not linear); it would require the price to be around 140-150 USD / barrel to have 1.5 mio b/d less demand. Core OPEC countries are expected to increase supply with a diplomatic effort from the white house (Biden expected to visit Saudi Arabia). As for the gas market, the development of LNG and the filling of reserves in Europe are propelling US gas to levels not seen in decades, and at the same time putting down pressure in the European gas market.


Russia has been clear that it would allow food exports from Ukraine in exchange for the lifting of sanctions (a very unlikely outcome). Such uncertainty is creating big shocks and volatility in the grain markets. In recent weeks, Ukraine has been supplying an increasing amount of grain via the rail market and continues to increase this capacity, enabling the partial rundown of the old-crop stockpiles. Nonetheless, Ukraine’s planting and growing season for both winter wheat and spring crops have been severely disrupted (about -33%). Crop conditions in France, Canada and the US are continuing to decline mainly due to weather conditions, keeping risk skewed on the upside (French wheat up 3% in May and 58% YTD).

Natural Gas


A consolidation in equities, lowering the risk of a sharp movement down, and the expectation of a prolonged conflict in Ukraine, has brought the global equities volatility down recently (VIX down from 33.40% to 26.19% on the month). Volatility was also slightly down for most commodities, except in the energy sector where it remains relatively high (crude oil implied volatility is flat on the month at 50%) on the back of geopolitical risks, in particular the combined impact of supply from the Ukraine war, as well as OPEC and US interventions.

Source: Four Elements Capital