Opec output cuts won't matter till the US inventories are low: Jodie Gunzberg

Interview with Global head of commodities, S&P Dow Jones Indices

Jodie Gunzberg, global head of commodities, S&P Dow Jones Indices, in an interview with Rajesh Bhayani. Edited excerpts:

What is your outlook on a US rate hike in 2016? Will the dollar remain strong?

Based on the US Fed's latest meeting, it seems there will be two more interest rate increases this year. All else constant, a rising rate will generally strengthen the dollar but, of course, there are other factors at play, like inflation. As energy rebounds, inflation is likely to increase and that is more of a headwind for the dollar. In March, the Dollar Spot Index year-over-year percentage fell for the first time since June 2014.

If so, how will it impact various assets classes, especially bond yields and gold?

Generally, rising rates are bad for bonds but not all bonds. For example, floating rate bonds and inflation-linked bonds might do well. Commodities are one of the most sensitive asset classes to the strength of the dollar, since natural resources are priced directly in dollars. In general, the correlation is about minus 0.7 between the dollar and commodities but the relationship is also not that simple. When the dollar rises, energy suffers most, with some significant impacts on industrial metals, too. However, gold, sugar and cattle seem to do just fine with a rising dollar. On the other hand if the dollar falls, commodities are impacted far more. Every commodity rises with a falling dollar and they rise on average 4.5 times more than they fall from a strong dollar. Industrial metals do best from a falling dollar. It seems other factors like the market sentiment and physically backed exchange-traded funds might influence gold more than the dollar does but a weak dollar helps.

Crude oil prices have seen sharp improvement from low levels on rising storage demand and hopes on a production cut by Opec (the exporting countries' cartel). Do you think the strength seen in its prices is real?

The most critical factor now influencing oil prices is the level of US inventories. Opec production cuts won’t really matter until US inventories are low. The strength we have seen in oil prices is one of the strongest in history and has only happened around other oil bottoms. Another signal of where the confidence sits is measured between the stock and bond performance of energy companies. Stocks are again outperforming bonds, indicating investors prefer to participate in the upside with energy companies, rather than seek the relative safety of their bonds.

Metal mines across the globe have cut production. Is that yielding results in terms of supporting and strengthening prices?

Cutting production is a key factor to support industrial metal prices, in addition to the strong China trade data. Again, the falling dollar drives industrial metals higher than any other commodity sector and is economically sensitive to inflation.

China has been another factor impacting global growth and trade. How do you see the various measures taken by Chinese authorities? Is the worst over, including for their currency?

China highly impacts commodity prices from both their actual demand and reserves. Their stock market volatility has been a negative force on natural resources and the currency devaluation made it worse. On top of a strong dollar, China’s made it even more expensive to import commodities, in the midst of falling demand.

Led by China, slowing global trade has impacted the freight index, especially in the dry bulk segment. When do you see freight rates stabilising and going up?

As summer nears and the seasonal uptick comes from the busy summer and fall seasons, there might be some stabilisation. Whether it is sustainable will depend on capacity management strategies and ongoing demand growth. Chinese exports rose and imports contracted but at a slower pace, which could be a first sign of stabilisation.