WM issue 5

Christos Elafros: Let’s conclude our mid-year outlook views with
Christos Tsenes, our FX and commodity specialist. Christos, can
you briefly describe the impact of the Russia-Ukraine war on
commodities and energy in particular?
Christos Tsenes: At the beginning of the year, global demand for
commodities was seen as resilient since global growth was showing
signs of strength. Then the war came to raise supply worries and add
further disruptions to the supply chain, raising the cost of raw
materials across the board. Oil and energy prices have skyrocketed
by 50%-130% since the beginning of the year. The reasons
are well-known: trimming – and in some cases zeroing – oil
and natural gas imports from Russia due to sanctions, a limited
willingness by OPEC to sustainably raise production quotas,
increases in selling prices by Saudi Arabia to its Asian customers,
to name just a few. At the same time, more 'green and ESG
friendly' capacity cannot fulfill demands from lost supply from
fossil fuel energy. The Europeans are now seeking new markets
such as the US for natural gas, and Venezuela and Iran for oil.
In an effort to address the issue, the US is tapping its Strategic
Petroleum Reserve. Regardless, the level of supply remains short
of demand and the uncertainty regarding the timing of the energy
market's normalization implies that oil prices will remain
elevated and hover around 110 - 120 $/bbrl. Supply will most
probably remain tight for the coming months, offering no optimism
that prices will fall. We still like oil as a hedge for a portfolio.
Rate hikes by most major and minor central banks and a
loss of consumers’ purchasing power all point to downside risks
to growth. This could drive net demand for oil into negative
territory – hence, oversupply – and some decompression in energy
prices. Still, prices could test higher levels, before ultimately
heading lower at a later stage.
Christos Elafros: Gold traditionally offers protection in this
kind of environment but this time seems to be different.
What are your thoughts?
Christos Tsenes: Gold initially gained ground as the war raised
interest for safe havens. Nevertheless, persistent inflationary
pressures have capped any sustainable upside potential. For the
rest of 2022, the two main drivers for gold valuations remain
the US core rates and the US dollar. The appreciation of the US
dollar and central bank determination to fight inflation continue
to keep the upside potential contained, rendering gold a sub-optimal
hedging instrument. We need to see a step back in market
expectations of upcoming rate hikes for gold to breathe. Overall,
we maintain a neutral stance for gold.
Christos Elafros: Does grain and food inflation play any
role?
Christos Tsenes: The war has had a major effect on agricultural
commodities as the involved parties are amongst the top global
suppliers. Russia is the second largest producer and supplier, behind
China, of ammonia, which is a primary material for fertilizers.
As a result, fertilizer costs have skyrocketed, along with grain
prices. This has led the UN Food and Agriculture World Food
Price Index to all-time highs. Moreover, some Asian countries
are engaged in curbing exports to protect domestic supplies. Add
the war came to raise supply
worries and add further
disruptions to the supply
chain, raising the cost of raw
materials across the board
CHRISTOS TSENES
to the equation the higher frequency of severe weather conditions due
to climate change and one can see why a higher-price equilibrium
may be building up for soft commodities, inspite of the slowdown in
the global economy. We would be buyers of a dip in agricultural prices,
mainly to hedge the rest of the portfolio.
Christos Elafros: We started the year with a long position in the
US dollar. Do you maintain this stance?
Christos Tsenes: Despite the US dollar posing as overvalued across
the board, it has gained significant ground in the first semester of
2022, as it has been the most effective hedging instrument against the
war. With respect to the euro, in the short term, central bank policy
divergence, yield differentials, and/or momentum seem to matter
more as markets keep USD expensiveness in the background. Even at
current levels, the US dollar is expensive against the euro, hence the
euro should appreciate. In the FX world, however, such long-term
misalignments might take quite some time to correct. In this new era,
current levels can no more be characterized as extreme, even as profits
from this hedging instrument are significant. We do not fear EUR/
USD parity but further depreciation looks quite difficult.