By Sumit Roy
Commodities saw notably divergent performance during the first quarter of the year. Natural gas, palladium, and WTI performed particularly well, while gold, silver, copper, and wheat tumbled. Stocks, as measured by the S&P 500, advanced an impressive 9.7% in the period.
The quarter was a strong one from the perspective of investor appetite for risk. Catapulted by the resolution of the U.S. "fiscal cliff" at the start of the year, stocks climbed steadily throughout the period. Though the "sequester," or $85 billion worth of automatic government spending cuts, went into effect, it did little to derail the rally. With political intransigence no longer an issue, investors were able to focus on the emerging strength in the U.S. economy.
The data have been unquestionably bullish. Housing indicators for sales, construction and prices are at the highest levels since 2008 or 2009, while the unemployment rate is similarly at the lowest level in four years. At the same time, the Federal Reserve has maintained its ultra-loose monetary policies, pledging to continue its $85 billion worth of monthly bond purchases until the unemployment rate falls even further.
But while the U.S. has been a bright spot in the global economy, elsewhere, things aren't as rosy. China's growth remains rather tepid, with expectations that the Asian giant will grow somewhere in the range of 7.5% to 8% this year. That has dampened demand growth for commodities such as copper, oil and soybeans and is likely why prices suffered thus far this year.
Europe is also a drag. The banking crisis in Cyprus is just the latest indication that the eurozone is not out of the woods when it comes to its debt problems. While far from the record levels set in 2011, Italian and Spanish bond yields are relatively high near 5%, suggesting that markets remain concerned about the debt burden in those countries.
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Gold and silver performed poorly in the three months ending March. In fact, this was gold's second-straight quarterly decline, the first time that has happened since 2001. While the Fed's quantitative easing program remains ongoing, traders speculate that it is only a matter of time that the central bank ends QE and begins to raise interest rates given the recent strength in the U.S. economy.
Currently, gold finds itself locked in a range between $1,555 and $1,620. Similarly, silver has fluctuated between $28.30 and $29.30, but the gray metal may be in the process of breaking down, as can be seen from the charts below.
Crude oil saw mixed performance in Q1 as Brent sagged, while WTI put in a solid gain. In turn, the spread between the two benchmarks fell from $19.29 to $12.61. We've written extensively about this year's infrastructure build-out that would alleviate the glut of oil in the U.S. Midwest and all but eliminate the WTI-Brent spread. That is what we are seeing play out currently.
However, in the bigger picture, oil fundamentals aren't very impressive at this time. China and Europe are drags on the demand side, while 20-year highs in U.S. production provide a headwind for prices on the supply side. We consider oil (using Brent as the benchmark) a range-bound market with risks the downside.
The grain complex plummeted to cap a neutral-to-bearish quarter. In its "Prospective Plantings" report, the USDA said today that farmers will plant 97.282 million acres of corn this year, close to expectations and the largest area since 1936. Soybean plantings will total 77.126 million acres, below the 78.421 million that was expected.
The plantings data was seen as mixed, but data on stocks were seen as all-around bearish. The USDA said that corn stockpiles at the end of the first quarter totaled 5.4 billion bushels, above the 5 billion bushels that analysts were expecting. Soybean stocks totaled 999 million bushels, above the 940 million that was anticipated, while wheat stocks totaled 1.234 billion, above the 1.183 billion expected.
Copper was the second-worst performing commodity this quarter as demand concerns stemming from China weighed on the industrial metal. Prices are likely to decline further in the second quarter.
Natural gas took the top spot in terms of performance in Q1 with a whopping 19.4% gain. Click here to see our latest outlook for prices.