A two-sided year, in which there is a before and an after. This can be how 2022 can be defined for the commodities sector. In the past 12 months, the commodity index (Bloomberg Commodity Index) has in fact experienced basically two different phases. The first, which lasted from the beginning of the year until early March, saw a very strong surge in prices that brought up the index by about 45 percent in just over 2 months. The cause of this rise was the outbreak of war in Ukraine and the resulting tensions between Russia and the West. In contrast, the second phase, from the beginning of March until the end of the year, saw a sideways/descending trend in the overall commodity index, driven by the stabilization of the war environment in Eastern Europe and the eruption of widespread expectations of a cooling of the global business cycle. The latter is a consequence of the war but more importantly of the gradual and marked tightening of monetary policies of almost all major central banks in developed countries.
"In terms of sectors," says Corrado Cominotto, head of Active Asset Management at Banca Generali, "2022 saw the energy sector as the only strong outperformer while the other sectors underperformed, particularly precious metals and industrial metals, which were penalized by the macro environment of rising rates and, in the specific case of industrial metals, by the 'weakening economic cycle."
"It is very likely," Cominotto continues, "that the sideways/descending trend seen in the second phase of 2022 may continue in 2023 as a result of the increasingly evident signs of a slowdown in the global economy." At the sector level, Banca Generali's head of Active Asset Management says he expects "an underperformance of the energy sector while the defensive characteristics of the agricultural commodities sector and gold could cause both to perform better than the overall index." At the current stage, however, there remains as a risk factor (bullish when it comes to commodities) that of a further aggravation or widening of the war environment in Ukraine.
War events have also affected the currency market. The year 2022 was the year of the U.S. dollar, driven first by its traditional role as a "safe haven" (i.e., refuge) in geopolitical and military crises (such as the one in Ukraine) and then by the greater relative speed of the Federal Reserve (the U.S. central bank) compared to other central banks in carrying out the maneuver of readjusting interest rates to the changed global inflationary environment.
The strength of the U.S. currency was expressed against all major currencies, European or Asian, and led the U.S. dollar "trade-weighted" index to mark an increase of more than 20 percent at the end of September compared to levels at the beginning of 2022; on the other hand, a bearish phase began for the dollar from the start of the fourth quarter, mainly due to the stabilization around 5 percent of market expectations regarding the Fed Funds target interest rate at the end of the current monetary policy cycle.
Particularly weak in the year were the two major Asian currencies namely the Japanese Yen and the Chinese Renmimbi; in the first case, it negatively affected the currency that the Bank of Japan, the only one among the major central banks of developed countries, did not, with the exception of the last meeting of the year, change its policy of zero rates and curve control (0-0.25 percent from short maturities up to 10 years) while in the second case it was mainly the Chinese government's anti-Covid austerity that weighed on the currency with the consequent repeated freezes on economic activities, spotty throughout the country.
"For the U.S. dollar," says Cominotto, "we should see a stabilizing/weakening phase in the exchange rate against the euro favored mainly by the gradual narrowing of the interest rate differential between the U.S. and the Eurozone" On 12-month maturities, for example, we have already gone from summer highs of about 275 basis points (2.75 percent) to the current level of about 205 basis points (2.05 percent)"
For the Japanese yen, on the other hand, the Bank of Japan's ultra-expansionary policy ended with the last meeting in December, and the rate differential against the U.S. dollar on short maturities is currently at levels between 4.5 and 5 percent, touched at the time of the Asian crisis in the second half of the 1990s and then before the 2008 financial crisis, at the time of the bankruptcy of the investment bank Lehman Brothers. "Even Japanese inflation, while low by Western standards," Cominotto continues, "has now exceeded 3.5 percent and is increasingly jarring with rates at or near zero. All this should lead to a revaluation of the yen against both the U.S. dollar and the euro."
Finally, a look at the Chinese Renmimbi. The easing of Beijing's zero-Covid policy, now under review by the authorities, coupled with continued strong trade surpluses for Cominotto should bring the exchange rate between the renmimbi and the U.S. dollar back to lower levels than the current 6.95.
Even in the case of currencies, the head of Banca Generali's Active Asset Management mentions as the main risk with respect to the scenario outlined above that of a worsening or widening of the war environment in Ukraine.
Corrado Cominotto, responsabile Gestioni Patrimoniali attive di Banca Generali
"In terms of sectors, 2022 saw the energy sector as the only strong outperformer while the other sectors underperformed, particularly precious metals and industrial metals, which were penalized by the macro environment of rising rates and, in the specific case of industrial metals, by the 'weakening economic cycle."
