Commodities: Worst return across asset classes led by oil – Goldman Sachs

Research Team at Goldman Sachs notes that last week commodities saw a sharp correction and the worst return across asset classes as the price of oil declined the most with a 10% drop but gold, copper and the GSCI also dropped 2%, 3% and 5% respectively.

Key Quotes

“Two Reflation themes, not one, temporarily diverge, the recent weakness has been driven by (1) concerns over Chinese policy aimed at slowing demand and restarting shuttered capacity, (2) Chinese response to a more hawkish US Fed to stem capital outflows, and (3) doubts over the effectiveness of OPEC’s production cuts. We remain constructive on commodities and see this commodity correction as a buying opportunity. Our 3- and 12-month targets suggest double-digit returns and are the highest across asset classes.” 

“Credit has suffered from the commodity price declines the most - US HY credit spreads have been very tight and thus they leave little buffer for shocks and suggest poor asymmetry of returns. With bond yields rising, total return potential appears increasingly limited and our credit team prefers IG to HY in both Europe and the US. This week US HY lost 1.2% and its correlation with oil prices (and copper) has increased sharply - it is nearly back at its levels from 2015. On the positive side, the dollar/oil correlation has been relatively stable suggesting the vicious cycle between weaker oil, stronger dollar and weaker EM might not resume.”