Mikkel Rosenvold
2 weeks ago

How Professionals are Positioned

Analyst Oskar Vårdal analyzes the impact of real-world demand on commodity and real estate markets.
Photo by kmiragaya
Photo by kmiragaya

The recent surge in commodity prices highlights the tight supply conditions amid sustained demand, according to analyst Oskar Vårdal. He explains that the lag in real-world assets like commodities and real estate has shifted as prices are now moving rapidly. This change is driven by real-world demand rather than speculative trading.

Vårdal notes that markets have benefited from easier financial conditions due to a weaker-than-expected inflation print, although yields have returned to pre-CPI levels. A significant ongoing theme is the renewed pressure on commodities, with increased demand for crucial metals like copper and nickel spurring substantial inflows into broad commodities. The tightening supply conditions, coupled with strong demand, favor higher commodity prices based on actual fundamentals rather than survey-based data.

Industrial metals have shown solid performance over the past week, with crude oil being the last piece needed to see renewed inflationary pressures. Vårdal points out that risk assets might continue their upward trend towards June and July, especially with improving liquidity conditions following a soft April CPI report. However, the upcoming earnings report from NVIDIA will be crucial for sustaining the rally, given the market's reliance on a few key names to keep equity indices elevated.

Chinese sentiment is recovering, aided by credible support for the real estate sector and the broader economy. Vårdal observes that Chinese equities have been undervalued due to the rigid financial system, but recent developments are attracting investor interest.

In the foreign exchange market, commodity currencies like the Australian Dollar (AUD) and Canadian Dollar (CAD) have become overvalued due to the run in commodities, reflecting actual changes in commodity trade rather than speculation. Meanwhile, carry-heavy pairs like the Mexican Peso (MXN) and Japanese Yen (JPY) remain overvalued as FX volatility decreases.

Vårdal highlights that commodity positioning has broadly increased since the start of the year. Initially driven by speculation and survey-based manufacturing improvements, the current phase sees markets reacting to genuine supply and demand conditions. Long commodities have become a consensus bet for Q2 and Q3, providing a hedge against potentially hotter-than-expected data in May and June.

The shift in commodity trade reasoning is evident in the futures spreads of key commodities like copper, where front-month contracts have risen significantly. Despite a decrease from peak levels, Vårdal believes tight conditions will continue to influence commodity prices in the coming weeks.

In the bond market, there is a slight favoring of long bonds as Federal Reserve Chairman Jerome Powell's dovish comments have improved the short-term risk-reward of long-duration treasuries. However, the medium-term outlook remains uncertain, with a divergence between institutional and retail investor appetites for bonds.

Vårdal concludes that the April FOMC press conference has encouraged asset managers to heavily invest in short-duration treasuries, welcoming the return of the basis trade. This indicates that hedge funds are still finding opportunities for returns amid diminishing spreads between future and spot prices.

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