saucy doubts and fears

The Vampire Squid doubles down on its bearish commodities call

Here’s the very latest from Goldman Sachs, who are calling copper lower by 10% and gold to move back down to U$1,100/oz in the near-term, among other pearls.
Don’t kill the messenger, people. This is capital markets, not Sparta.
Thanks due to A.Reader:

  1. Market
    views on reflation, realignment and re-levering have driven a premature
    surge in commodity prices that we believe is not sustainable. Last year
    commodity prices were driven lower by deflation, divergence and
    deleveraging which were reinforcing through a negative feedback loop.
    Deflationary pressures from excess commodity supply reinforced
    divergence in US growth and a stronger US dollar which in turn
    exacerbated EM funding costs and the need for EMs to de-lever though
    lower investment and hence commodity demand. While we believe that these
    dynamics likely ran their course last year resulting in signs of
    rebalancing, the force of their reversal has created a new trend in
    market positioning that could run further. However, the longer they run,
    the more destabilizing they become to the nascent rebalancing they are
    trying to price.
  2. The reversal
    started last month with ‘green shoots’ of rebalancing. Deflation turned
    into reflation with evidence of long-awaited oil supply curtailments in
    both the US and other non-OPEC producers which supported energy prices.
    Divergence lost out to realignment with increased fears about US
    economic growth. This together with strength of EU manufacturing data
    over the same period and a pickup in China credit data in January led
    the market to question the idea that the US is fundamentally
    outperforming its peers. These worries are reflected in the recent
    weakness of the US dollar and strength in the gold price. And recent
    policy announcements in China combined with the pickup in Chinese credit
    raised the prospects of leverage-driven investment demand as a focus on
    de-leveraging faded.
  3. While
    these dynamics could run further, they simply are not sustainable in
    the current environment, in our view. Energy needs lower prices to
    maintain financial stress to finish the rebalancing process; otherwise,
    an oil price rally will prove self-defeating as it did last spring. The
    most recent macro data coming out of the US reinforces US growth
    divergence. Increases in core CPI, strong employment growth and a
    rebound in manufacturing, pushed the US MAP score – a metric for how
    much macro data surprises – up significantly to nearly positive for the
    first time in 2016. Most importantly, our US economics team continues to
    expect solid consumer spending growth of 2.5% to 3.0% in 2016. Finally,
    credit growth in China remains too high relative to GDP growth
    underscoring the need for de-leveraging.
  4. While
    we still believe oil will likely rebalance this year and create a
    deficit market by year end, ‘green shoots’ of a deficit alone are not
    sufficient for a new sustainable bull market. Only a real physical
    deficit can create a sustainable rally which is still months away should
    the behavioral shifts created by the low prices in January and February
    remain in place. Commodity markets are physical spot markets, not
    anticipatory financial markets that are driven by expectations. This is
    why an early rally in oil prices would prove self-defeating before a
    real deficit materializes as it would reverse the supply curtailments
    that are expected to rebalance the market in 2H16.
  5. The
    ‘green shoots’ for oil include US E&P’s guiding production lower
    (c.600 kb/d), supply disruptions in Iraq and Nigeria (c.750 kb/d),
    non-OPEC ex-US producers reporting significant potential reductions
    (c.400 kb/d) and strong US oil demand. While the Iraqi and Nigerian
    disruptions will likely prove temporary, they do help in the rebalancing
    process and have likely helped to tighten Brent timespreads. However,
    the other green shoots are both price sensitive and are still more
    relevant for expectations of rebalancing, than the rebalancing seen to
    date. The current oil market is still in a large surplus as witnessed by
    last week’s large US inventory build and the large global stock
    overhang. To keep the financial pressure on producers, we maintain our
    near-term view of a trendless oil market with substantial volatility
    between $40/bbl (under which creates financial stress) and $20/bbl
    (under which creates operational stress).
  6. We
    also maintain our bearish view on gold that has rallied along with the
    other commodities. Our short gold recommendation (which we opened with a
    17% upside, in line with our $1000/toz 12-m forecast) is currently at a
    c.5% loss, with a stop loss at 7%. This gold rally was driven by a lack
    of conviction in divergence in US growth as a weak US dollar has been
    highly correlated with a higher gold price. We believe this realignment
    view of weak global growth is not supported by the US data, which will
    likely reinforce higher US yields, a stronger US dollar and the return
    of divergence, particularly should strong US consumer growth dissolve
    market fears regarding US growth. This in turn will likely put downward
    pressure on gold prices towards our near-term target of $1100/toz
    (current price is $1265/toz).
  7. Despite
    a continued deterioration in Chinese manufacturing data in the face of
    recent easing measures, copper and metal prices have also surged to
    fresh highs. Again we believe these rallies are also not supported by
    the broader financial environment in China. China is credit constrained
    and likely to use limited stimulus to promote consumption over
    investment through fiscal policy. The only real avenue for metals demand
    growth is through an improvement in property sales and prices that will
    eventually feed into higher construction activity, which the current
    data does not support and would be a difficult policy outcome to achieve
    by design.
  8. The
    Chinese government is publicly targeting a reduction in the inventory
    of residential structures to create higher housing prices and promote
    associated positive wealth effects, such as improved consumer
    confidence. As a result, the government is restricting new starts in
    cities with high inventory levels while stimulating sales through credit
    availability. As a result, China property new starts and completions
    are likely to remain weak in 2016 despite the recent policy measures.
    Accordingly, we are maintaining our near-term copper price target of
    $4500/mt (current price is $5000/mt).
  9. Iron
    ore rallied the most in the past week, breaching $60/t today. We
    believe this rally too will likely prove temporary and are maintaining
    our end-of-year target of $35/t . The rally in iron ore prices was the
    result of a surge in steel prices needed to widen mill margins in order
    to incentivize operators to pay the restart costs and rebuild operating
    inventories of raw materials as China enters this year’s peak
    construction season. However, the physical shortfall in steel supply can
    be filled easily and the subsequent deterioration in steel margins is
    likely to put iron ore prices under renewed pressure. In other words,
    the market fundamentals are unchanged and the current rally is only a
    brief lull before production cuts at high-cost mines are required to
    make room for low-cost producers.
  10. While
    deflation, divergence and de-leveraging are all likely to reassert
    themselves and reapply modest downward pressure on commodity prices in
    the near-term, we do believe that the negative feedback loop that they
    create has mostly played out in this cycle from a bearish price trend
    perspective, particularly in oil which is why we maintain a bullish
    end-of-year view in energy. However, it is important to remember that in
    the end this was a supply-driven bear market and will not trade like a
    demand-driven market. In a demand-driven market, once demand gets ahead
    of supply following an economic recovery, supply struggles to catch up
    as it was also likely slowed by the lower prices. In the current
    supply-driven market, demand hasn’t really changed, it takes lower
    prices to push and keep supply below demand to create a deficit. As a
    result, higher prices are much harder to sustain in a supply-driven
    market since supply is primed to return with higher prices. But this
    lesson will likely only be learned through false starts.

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