WEAKER DOLLAR COULD MAKE 2020 A BETTER YEAR FOR COMMODITIES AND STOCKS TIED TO THEM -- MOST COMMODITY GROUPS ARE STRENGTHENING -- THAT INCLUDES ENERGY WHICH MAY BE BOTTOMING
A WEAKER DOLLAR COULD GIVE COMMODITIES A BETTER 2020... Commodities have become the forgotten asset class over the past several years. And for good reason. They've been the weakest part of the financial universe for nearly a decade. But that doesn't mean that they should continue to be ignored. That's because there are reasons to expect that they may start doing better in 2020. The fact that commodities usually do better in the late stages of an economic expansion is one reason why. Plus the fact that the U.S dollar may have a weaker 2020.
The monthly bars in Chart 1 compare the Reuters Jefferies CRB Index (of 19 commodity markets) to the U.S Dollar Index (green bars) over the last twenty years. The chart shows that the two markets have usually trended in opposite directions. During the years between 2000 and 2008, for example, a falling dollar coincided with sharply higher commodity prices. Part of the reason for that is that commodities are priced in dollars. So a weaker dollar has a tendency to push prices higher. The opposite is true when the dollar rallies. Commodity prices usually weaken.
The dollar bottom during the middle of 2008 coincided with a major peak in commodity prices at the same time (see arrows). The dollar rally between 2008 and 2016 pushed commodity prices even lower. Notice on the chart that the two upturns in the dollar during 2011 and 2014 also coincided with commodity peaks, and the start of another downturn in the brown bars. All of which suggests that any chart analysis of commodity prices has to take the direction of the U.S. dollar into account. Which brings us to the possibility that both markets may be starting to change direction.
The last down green arrow shows the USD peaking at the start of 2017; the falling green trendline shows the dollar weakening over the last three years. Commodity prices hit bottom at the start of 2016 and have been trending sideways since then (as the dollar weakened). Their sideways pattern suggests that commodity prices may be forming a bottom. That could carry good news for commodities in the new year. And the stocks that are tied to commodities, which include energy and metal stocks (precious and industrial); and even stocks tied to agricultural markets.
MOST COMMODITY GROUPS ARE RISING...The next four charts show that this year's rebound in commodity prices is pretty broad based; and includes most major commodity groups. Chart 2 shows the S&P GSCI Precious Metals Index having a strong summer before correcting downward over the last four months. The last two bars to the right, however, show precious metals starting to rise again (along with their miners). Chart 3 shows the GSCI Energy Index rising to the highest level in three months. That's starting to attract funds into the energy sector for the first time this year. Agricultural markets are also rebounding. Chart 4 shows the GSCI Agricultural Index rising to the highest level in five months. That's partially due to stronger grain markets, and soybeans in particular. That's most likely tied to the easing trade tensions between the U.S. and China; and expectations for higher Chinese imports of American farm products. That includes livestock. Chart 5 shows the GSCI Livestock Index also turning up since September. Higher hog imports to China due to swine flu in that country are helping lead that price advance.
COPPER IS LEADING INDUSTRIAL METALS HIGHER... Industrial metals have also gained ground this year, but at a slower pace than other commodity groups. Chart 6 shows the GSCI Industrial Metals Index rebounding during December, but still well below its July/November highs. But that may be somewhat deceiving. Prices of metals like aluminum, lead, tin, and zinc have seen relatively modest gains this year. One of the group's most economically-sensitive metals, however, is having a strong year. As are stocks tied to it.
Chart 7 shows the price of copper rising to the highest level in eight months. Several recent messages have featured the rise in copper and its producers (like Freeport McMoran). Copper has been one of the year's strongest commodities; and its producers have been the strongest part of Materials SPDR (XLB) over the last three months and helped lead it to a new record. Copper's rise may be a sign that other industrial metals are also headed for a better new year.
ENERGY SECTOR MAY BE BOTTOMING... For the first time in years commodity markets are starting to look stronger and more attractive to global investors looking for cheaper places to put some money. My Tuesday message showed money starting to flow back into precious metals. Energy has been the market's weakest sector this year, but is starting to attract a lot more attention. Higher energy prices are a big reason why. Chart 8 shows the Invesco DB Energy Fund (DBE) rising to the highest level in seven months and heading for a potential test of its spring high. The DBE includes WTIC and brent crude oil, gasoline, heating oil, and natural gas prices. All are rising today. More optimism on the global economy may also be driving funds into economically-sensitive energy markets.
Chart 9 shows the Energy Sector SPDR (XLE) moving up to challenge its September high. That's an important test for that emerging uptrend. The XLE has been the market's strongest sector for the month of December. We'll take a closer look at a potential bottom being formed in the oil patch in another message.
WHY A LOWER DOLLAR?... The dollar has benefited in past years from a more hawkish Fed while foreign central bankers kept bond yields negative. A more dovish Fed this year has reduced that yield spread which could weaken the dollar. In addition, stronger foreign stocks are helping boost their local currencies. That's true of foreign developed and emerging market currencies. Currencies tied to commodity exporters have also strengthened. Chart 10 shows the US Dollar Index peaking at the start of October and falling below its 200-day line to the lowest level in six months.
