The commodities market was one of the few markets that yielded positive returns during May while other markets nosedived to unprecedented figures. The CRB Index, which is comprised of 19 different commodities representing the global commodity markets and is calculated by the arithmetic average of commodity futures prices with monthly rebalancing, hiked around 8% since early May. It is expected to keep increasing with global inflation rising, according to the market’s expectations.
While the 10-years yield for the US Bonds showed a downward trend throughout May. Oil prices stayed above the USD100 level throughout the month with the line of good fit showing an upward trend; US crude oil rose around 9.5% and Brent by around 12.5% in May to settle at USD 114.67 and USD 115.60 per barrel respectively on Tuesday, 31st, and they are most likely to remain high amid the global geopolitical pressures, per analysts’ expectations. Prices hiked after the Russian Crude oil ban agreement by the European Union leaders.
The high oil prices, in addition to sugar export restrictions by the world’s second-largest exporter, lead farmers to divert production to biofuels and more lucrative crops causing sugar supply to fall and prices to increase. S&P Global Commodity Insights decreased the sugar output estimates for the next year to 17.3 million tonnes from 17.5 million tonnes. Gold, as well, showed a steady upward trend until the middle of the month when it started falling toward USD 1830, and it is expected to trade at around 1832.59 USD/ tonnes by the end Q2, according to market experts. Figure (1) below shows a comparison between the commodities’ performance versus the bond market.
Figure 1: Thomson Reuters/Core Commodity CRB Index/ Crude Oil futures/ Gold futures/ Sugar Futures Vs. US 10-Year Bond Yield| Source: TradingView
Investors either trade commodities or choose to trade in commodity-backed-up currencies; such as the Brazilian Real. Commodity-backed up currencies are a variance of commodity money where those currencies can be traded for a specific amount of the commodity. As seen below, an upward trend in May appreciating by about 20% in May. The rise in the price of commodities (including industrial metals, agricultural products, and energy) has tended to favor net commodity exporters, such as Brazil. As a result, there has been a rise in equity inflows into these markets to take advantage of this cyclical factor. During the first quarter, this has translated in the case of Brazil into a 15% rise in the country’s main stock index.
Figure 2: Brazilian Real/ US Dollars| Source: Trading View
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