Commodities & Energy Sector

In this Special Report, we outline the three themes that we believe will drive commodity markets this year: (1) demand growth will remain sluggish across cyclical commodities (2) supply-side developments will ultimately be bearish for oil prices, and (3) traditional relationships between commodity prices and financial variables may not hold. 

In most developed economies, rising inflation expectations will lift them further above the 2 percent target, limiting the scope for further interest rate cuts. But in Japan, rising inflation expectations will lift them up to the BoJ’s 2 percent target, removing the BoJ’s justification for its zero-interest rate policy. The normalisation of Japan’s monetary policy poses a big structural risk to stocks because Japan has been the main source of financial market liquidity, and thereby, of rising stock market valuations. From a timing perspective though, wait until the complexities of the price trends in USD/JPY and/or Nasdaq versus 30-year T-bond have collapsed. Plus: go tactically long copper.

Trump's policies aim to support domestic producers and will be pro-growth and inflationary, at least initially. This environment is supportive of equities. Earnings will likely be strong, but elevated valuations make equities prone to a correction. Earnings growth broadening will translate into performance broadening – the S&P 493, Cyclicals, Value, Small and Mid are likely to outperform.

• Congress will pass tax cuts by end of 2025 producing a fiscal thrust of about 0.9% of GDP in 2026. 
• Trump will count on that stimulus as a basis for slapping tariffs on leading trade partners.
• China will retaliate against Trump and stimulate its domestic economy, while pursuing stronger trade ties with other countries. Europe will also retaliate. 
• Geopolitical risk will shift from Ukraine-Russia to Israel-Iran, where the conflict will continue to escalate until a crisis point is reached within 2025.