The dreaded US ‘fiscal cliff’ which suppressed prices during December was this first week of 2013 replaced by what some choose to call The Fiscal Fudge. The US budget was agreed at the 11th hour. But with many of the contentious issues, such as finding the necessary funding, not resolved, the market was left unimpressed which meant that the relief rally lasted less than 48 hours. The US president will be facing further fiscal wrangling with Congress over coming weeks as the debt ceiling will have to be raised again because the debt level continues to rise.
Right on the heels of this, the US Federal Reserve surprised markets by expressing some hawkish views in the minutes from its December Federal Open Market Committee (FOMC) policy meeting. In this, some members were showing increased unease about the side effects, such as financial stability and continued expansion of the central bank’s balance sheet. Some members felt it would be appropriate to slow or even stop further asset purchases well before the end of 2013. This was the first sign that the unease that has been growing outside the Federal Reserve for months is now also being felt within, and it makes 2013 an even more interesting year as the markets will have to decipher the effects of a transition away from cheap money.
As a result of this, the dollar appreciation gathered further pace and commodities lost support, especially precious metals such as gold and silver which both had the rug pulled from underneath as they both have been thriving on the back of negative real yields caused by the low interest rate environment. Supporting the metals is the US budget compromise which will cause a drag on growth during the first couple of quarters. Nevertheless, the coming weeks will now seriously test the resolve of investors in precious metals and as a consequence, we may have to lower our 2013 average price projections for the two metals which are currently at 1840 and 34 respectively.
The monthly US jobless reports are now even more important as every potential improvement in those numbers will help bring forward the markets’ expectations of when quantitative easing will cease. The numbers for December, which were released on January 4, did not have any major impact given the fact non-farm payroll came out in line with expectations while the unemployment rate rose slightly to 7.8 percent.
Before moving on, let us take a moment to look back on how the sector performance table for 2012 ended up. Overall, the two major commodity index funds finished pretty much unchanged for the year, a disappointing result for long-only investors compared with other asset classes, especially stocks. A major correction in grains such as corn, wheat and soybeans during December resulted in a much reduced return for the grains sector but it still manage to outweigh the losses witnessed in softs, especially from the one-third drop in coffee, bringing the overall agriculture sector return up into second position.
Despite a decent rally across industrial metals during the final quarter, which were driven by an improved outlook for Chinese demand, the sector as a whole finished third ahead of the energy sector which suffered losses primarily from the negative performances of WTI Crude and Natural Gas which, on a (negative) roll adjusted basis, lost 30 percent. At the top spot we find precious metals not because of great individual performances but more due to the fact that all four components showed gains, especially silver and platinum.
Nervous trading best described performance during the first shortened week of 2013, not helped by the fact that the dollar was up by more than one percent. Currency traders had overextended their long exposure to the euro, and it triggered a sharp reversal which led to a stronger dollar thereby creating some early headwind for commodities with the DJ-UBS index losing almost one percent.
The only sector showing a positive return according to these indices was industrial metals, such as copper, which were helped by continued improved economic data out of China. The worst performing sector was agriculture with gains in livestock being offset by continued losses in grains and softs. Precious metals also experienced losses with gold, silver and palladium all in negative territory. The energy sector was also in negative territory, as gains in crude oil and products were offset by another heavy loss on natural gas.
