What to Watch as China Gives Commodities a Wild Start to Year

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(Bloomberg) — Commodities are having a volatile start to the year as China’s virus tsunami and policy shifts leave investors scrambling to calibrate expectations for 2023.

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Crude and copper rose Friday on reports that President Xi Jinping might ease strict real-estate controls. That follows heavy losses triggered by the nation’s demand-destroying wave of Covid-19 infections. China’s uncertain path to recovery will steer commodities this year after prices posted a fourth annual gain in 2022.

Europe’s energy crunch and global monetary tightening are the other big themes. On the former, natural gas may have softened but that doesn’t mean the crisis is over. And on the latter, watch gold. Bullion’s wavering near a six-month high ahead of a jobs report due later Friday that will influence the Federal Reserve’s next moves.

Bumpy Road

China’s first quarter will be terrible for commodities demand as Covid-19 and the Lunar New Year holidays suppress activity. What happens beyond that is much less certain. Those counting on a second-half recovery got a boost Friday after Bloomberg News reported plans to ease the “three red lines” for property debt that have driven the sector’s prolonged slump. Watch iron ore — a sort of proxy for the re-opening trade — for clues on what 2023 will hold.

In the short term, investors, especially in oil, will scrutinize indicators from air travel to traffic congestion for clues on the path back to normalization after the virus wave. Trade and credit figures due next week will also offer a snapshot of the disruptions wrought by the abrupt pivot from Covid Zero. China’s full-year economic data including GDP growth and steel output is coming on Jan. 17.

Oil’s Shaky Start

Crude has greeted the new year with a chunky decline as lackluster demand and China’s virus turbulence leave the market plentifully supplied. Sentiment in January will be dominated by events in Asia’s biggest economy, and on the supply front by the fate of Russian exports after sanctions. OPEC+ has plenty time before its next early-February meeting to monitor developments.

Saudi Arabia has shown a firm commitment to large supply cutbacks announced by the alliance last year, and insist the group will be “pre-emptive” in keeping global markets in equilibrium. Crude’s faltering performance so far is likely to keep OPEC+ on high alert. In the diary, the US Energy Information Administration offers its first monthly report of 2023 on Tuesday, with projections from the International Energy Agency and OPEC due the week after that.

Surprisingly Balmy

Natural gas futures around the world are plummeting on the unseasonably warm start to winter, and prices are likely to fall further as the weaker demand eases fears of energy shortages. New seasonal highs were registered in several European countries over the last week, while milder temperatures are forecast from the US to Japan through mid-January.

Still, the energy crisis isn’t over. While European gas prices are at the lowest level since 2021, they are still three times higher than the 10-year average through 2020. Fuel supply is slated to remain tight for years as there is little new production coming online.

Precious Mettle

Gold’s also had a dramatic start to 2023. Prices touched their highest in more than six months before plunging Thursday on strong US hiring numbers and hawkish Fed minutes. That encapsulates some of the tensions facing gold after a rally fueled by bets on the Fed turning less aggressive.

A global economic slowdown could be a boon for bullion as investors seek havens, but there’s the risk that investors are still underestimating the Fed’s push to crush inflation. Stronger-than-expected data from the US could pile more pressure on the precious metal. That starts with initial jobless figures due later Friday, with estimates pointing to a decline in new jobs added.

Crop Counting

The US Department of Agriculture’s monthly WASDE crop report in January is one of the agency’s biggest data drops of the year. The Jan. 12 report will offer the first look at how much wheat was planted last autumn and how much grain and soy was on hand as of Dec. 1. Traders will be bracing for surprises, with global grain supplies still tight due to the war in Europe and patches of drought.

Agricultural powerhouse Brazil will also release its latest estimates for grains and oilseed production on Jan. 12, giving the market insights on the outlook for the world’s top soybean producer following a slow seasonal start. Still, Brazil’s soybean and corn production is expected to be at an all-time high despite drought and heat affecting yields in the nation’s far south. Dryness in South America has been a bullish factor for soybean contracts and updates on the Brazilian crop may set the tone for trading early this year.

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