What to watch as China gives commodities a wild start to 2023

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.

rude and copper rose last 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 that will influence the US Federal Reserve’s next moves.

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.

In the short term, investors, especially in oil, will scrutinise indicators from air travel to traffic congestion for clues on the path back to normalisation. 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 January 17.

Crude has greeted the new year with a chunky decline as lacklustre 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 insists 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.

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, 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.

Gold also had a dramatic start to 2023. Prices touched their highest in more than six months before plunging last Thursday on strong US hiring numbers and hawkish Fed minutes.

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.

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 January 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 December 1. Traders will be bracing for surprises, with global grain supplies still tight due to the war in Europe and patches of drought.