Here’s what Goldman Sachs sees as the next big trade with no alternative

The last trading day of May is marked by weak stocks and soaring crude prices, climbing after the EU imposed a partial ban on imports of Russian oil following the country’s invasion of Ukraine. four months ago.

This brings us to our call of the day from Goldman Sachs, which sees a nascent “there is no alternative” trade in commodities.

As a team led by Goldman’s head of commodities research, Jeffrey Currie, explains, there are few alternatives for hedging macroeconomic risks as central banks step on the brakes in an attempt to control inflation. Equities are now negatively correlated to inflation expectations, suggesting investors are even more concerned about risk to equities and valuations.

“As central bankers can drain liquidity faster than the economy can generate new productive capacity, financial assets will continue to underperform physical assets like commodities,” Currie said. Goldman is so confident that the bank’s portfolio strategy team is sticking to its recommendations to overweight just commodities and cash for the next quarter.

Goldman Sachs Global Investment Research

“Indeed, among the top risk assets, commodities are the only source of value, despite clear headwinds from Chinese lockdowns, slowing manufacturing and rising rates,” Currie said, adding that nor is it a “crowded trade”. They estimate that net flows into index funds have stabilized since November 2021 as investors took profits following the Russian invasion.

Goldman sees the next step higher for prices coming from hoarding across space. From early April to mid-May, for example, China’s lockdown restrictions pushed commodity fundamentals into recession, but prices held steady, they note.

“As we saw in gasoline markets in 2006, when investors emerge after a period of scarcity and price volatility, market participants – from refiners to manufacturers – begin to hoard spare inventory like a hedge against future shortages,” Currie and the team said.

“This is creating lagging markets despite stockpiling and signals a strong setup for the next leg higher, as Chinese stimulus pressures continue to build and consumers continue to rotate into travel and leisure spending. higher leisure,” he added.

This is currently seen across commodities, with Russia’s invasion of Ukraine triggering a behavioral shock that has policymakers and upstream manufacturers trying to build thicker, more resilient supply chains. , and precautionary stocks of everything from soybeans to crude oil. And it’s like China tries to revive its economy and run after closings.

Goldman attributes the lack of significant commodity inflows to heightened investor uncertainty across the economy, but even as a hazier macro picture confuses investors, the scarcity conditions for many commodities aren’t going away. , they say.

“While confusing macro risks are more two-sided today than in the aftermath of the invasion, now is not the time to alter commodity outperformance expectations, in our view,” the Goldman team said. .

They predict a 21% return for the iShares S&P GSCI Commodity-Indexed Trust
GSG

over a 12-month view.

“With inventories and spare capacity still low in energy and agriculture markets, any small supply shocks will continue to have outsized impacts on prices,” Goldman said. “As we have often shown before, commodities are the only consistent hedge against unexpected inflation, usually as the source of it in the
economy.”

“As a result, even a small commodity allocation can have a significant impact
impact on a portfolio’s performance during unexpected inflationary episodes,” Currie and the team said.

The buzz

President Joe Biden will meet with Federal Reserve Chairman Jerome Powell on Tuesday to discuss the economy, in the first meeting between the two since November. In a Wall Street Journal op-ed, Biden promised not to meddle in Fed policy.

Elsewhere, Federal Reserve Governor Christopher Waller said Monday that half-point rate hikes keep going until inflation goes down. US data out on Tuesday includes a pair of house price indices for March and consumer confidence for May.

Gold Yamana
AUY

shares jump after Gold Fields
GFI

announced a $6.7 billion deal for the Canadian miner.

China industrial and tertiary activity improved in May, although activity was slower due to COVID lockdowns, which are beginning to relax in shanghai and Beijing.

As U.S. politicians remain at odds over gun control efforts, nearly a week after 19 children and two teachers were killed in the nation’s second-deadliest shootings, Canada plans to ban the purchase and sale of handguns.

The steps

Uncredited

WE stock index futures
ES00

YM00

ES00

are lower, while Treasury yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y

climb on these Waller comments from the Fed. Diesel prices
HOM22

are up about 4%, and U.S. crude and Brent
CL

BRN00

are on course for the longest monthly winning streaks since 2011. Among cryptos, bitcoin
BTCUSD

is back above $31,000 for the first time since early May.

Lily: Investors want asset inflation to stay high, says Deutsche Bank. And crypto isn’t even “on the radar”

Stock tickers

Here are the most traded tickers on MarketWatch as of 6 a.m. EST:

Table

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