Commodities weekly June reset as peace hopes hawkish Fed and fund liquidation hit crowded longs

The inflation ghost returnsWhile geopolitics drove the first leg of June’s correction, macroeconomics provided the second. The Federal Reserve’s latest policy meeting reinforced its determination to maintain restrictive monetary policy as inflation remains above target. Markets responded by raising expectations for further policy tightening while simultaneously rewarding the Fed’s inflation-fighting credibility. The result has been lower long-end yields while the dollar has reached its strongest level in more than a year.Historically, few macro variables matter more for commodities than the dollar. Since most raw materials are priced in US dollars, a stronger currency mechanically tightens financial conditions for international consumers while simultaneously reducing investment demand across the commodity complex.The interesting nuance this month has been the behaviour of the Treasury market. Short-term yields have remained elevated as investors priced additional policy tightening, while longer-dated yields have eased as markets increasingly believe today’s restrictive policy and the slump in energy costs will eventually succeed in slowing inflation.That combination has created an especially difficult backdrop for commodities, particularly precious metals that generate no income and industrial metals whose demand outlook remains closely tied to global manufacturing activity. In many respects, the inflation ghost has not disappeared, but at the same time the market may soon begin to question whether peak hawkishness has already been reached. Lower energy prices are likely to ease inflation over time, potentially reducing pressure on the Fed to hike rates and creating the conditions for a renewed tailwind through a softer dollar and more stable, rather than rising, funding costs.Metals caught between macro headwinds and structural strengthGold has extended its correction after breaking below several important technical support levels, triggering another round of long liquidation from institutional investors and short selling by speculative traders. While central bank demand remains robust and geopolitical uncertainty continues to provide an important longer-term pillar of support, these structural factors have temporarily been overwhelmed by dollar strength and rising real funding costs.Silver has performed even worse.As both a precious and industrial metal, silver has effectively suffered from the worst of both worlds. Weak investor appetite for precious metals has coincided with softer sentiment towards economically sensitive industrial metals, making silver the weakest performer across the major commodity sectors during June.Copper tells a similar story.The recent decline appears far more technical than fundamentally driven. The break below key support levels forced commodity trading advisors and hedge funds to reduce long exposure, accelerating price weakness even as exchange inventories continue to decline and physical demand remains relatively resilient.In our opinion, there has been little meaningful change to the long-term investment case. Electrification, grid expansion, artificial intelligence infrastructure, data centres, electric vehicles and renewable energy continue to require significantly more copper than current mine investment is likely to deliver over the coming decade.Aluminium has similarly been caught between easing Middle East supply concerns and a broader reduction in investor risk appetite, despite demand from transportation, packaging and the energy transition remaining supportive over the longer term.



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