CMCI had a strong fourth quarter, led by gains in energy and agriculture on the improving U.S./China trade talks. During the quarter, the “Phase 1” U.S./China trade deal developed and is expected to be signed on January 15. China has agreed to almost double their purchases of U.S. agricultural products. This supported the entire sector. Additionally, the agreement (which reduces some tariffs) has improved investors’ outlook for global growth, especially in Asia.
During the year, most commodity markets were range-bound as the continuing U.S./China trade dispute limited the upside and the U.S. Federal Reserve’s (Fed’s) rate cuts and balance sheet expansion in the fourth quarter supported markets. President Donald Trump’s political troubles, culminating in his impeachment by the U.S. House of Representatives, had almost no impact on markets, or the economy, but remain a risk as we enter the 2020 election cycle. There were several geopolitical events that generated some short-term volatility in commodity markets, for example, Iran’s attack on the Saudi Arabian oil facilities in September. The Iran/U.S. conflict now looks like it will become the headline geopolitical risk as we begin 2020.
As we look ahead to 2020, commodities may be poised for strong gains. Supply fundamentals continue to improve slowly and the outlook for global growth is much better than it was a year ago. As growth outside the U.S. improves, we may see the U.S. dollar decline, adding support to commodity demand. Global central banks have aggressively eased monetary policy and the U.S./China trade situation is much better in our view. As always there are risks to global growth, Middle East tensions, U.S. politics (2020 election) and Brexit, to name a few. But as we start the year, we believe commodities look attractive and may outperform other asset classes.
Commodity Sector Review
The energy sector was up almost 10% in the fourth quarter, led by 12% gains in WTI and Brent crude oil. Natural gas fell during the quarter on warmer weather in the U.S. and CMCI’s lower exposure and curve positioning in the natural gas market produced most of CMCI’s outperformance relative to the Bloomberg Commodity Index. The agriculture sector gained 6% in the fourth quarter, with gains across the entire sector on the U.S./China Phase 1 trade agreement.
Industrial metals rallied 2% in the quarter on mixed results. Solid gains in copper, up 8% on the China trade deal, were offset by a large decline in nickel prices. Nickel prices fell 15% in the quarter, but still finished the year with 30% gains. Indonesia’s export policies, which drove the market up 75% earlier in the year, were relaxed in the fourth quarter. Precious metals continued their strong year, rising almost 4% during the quarter.
The livestock sector was mixed, rising 2%, with gains in cattle and losses in lean hogs. We believe the outlook for the livestock sector remains strong on both the U.S./China trade agreement and the global protein shortage created by the Asian swine flu, which may have killed one third of the global hog supply.
CMCI outperformed the Bloomberg Commodity Index (BCOM) this quarter mostly due to CMCI’s smaller allocation to natural gas and a slightly higher performance in the energy sector because of roll yield. CMCI continues to outperform BCOM over all standard time periods.
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