Market Musings 010226: End-month commodity reversal

Market Musings 010226: 
End-month commodity reversal

Weekly Podcast and Snapshot - Asia: Disruption by Design (click to listen)

Asia: It is all about policy not politics

• Taking advantage of a high approval rating, Prime minister Sanae Takaichi has called for a snap general election to take place on 8 February. This led to the yen weakening and JGB rising with long term yields hitting multi years highs.
• Following this, the Bank of Japan (BoJ) meeting kept the policy rate unchanged. But after a hawkish press conference, markets saw a move in dollar-yen strengthening. This has led to speculations about a possible although not confirmed intervention from the BoJ and or from the Fed. To note that Asian currencies have been in the past managed by local governments to be weaker compared to the US dollar in order to boost export competitiveness.
• Lately, a boost of re-industrialization in the US and the West is taking place. This restructuring could lead over time to a lower populism, rising real wages and higher incomes. It also helps reduce trade deficits, thereby lowering global imbalances. Furthermore, appreciating currencies and equity markets go together allowing Asian equities, including Japan, of benefiting from improving corporate governance.

Precious metals hit the skids

The seemingly unstoppable upwards momentum in gold, silver and platinum over the last few months came to shuddering stop on Thursday and Friday of last week.

On an intraday basis, gold dropped over 10% to dip back under $5000/ounce by the end of last week, while silver took a more hefty 30% hit from $120/ounce all the way back down to $85/ounce. Despite these huge 2-day drops, both gold and silver still posted respectable gains over January as a whole, which is quite impressive given the scale of these drops. 

Gold and silver: up in January but hit hard on Thursday/Friday

Other trending commodities also took a hit at the end of last week, most notably copper:

Copper (blue) and copper miners (green) take damage, but up overJanuary

What to do about commodities exposure? I continue to hold despite the precipitous drops of the last few days, as I see a correction in speculative excess in the short term but no meaningful change to the bullish fundamentals for these metals in the longer term. I am even tempted to add to my copper exposure at these levels...

Looking at more diversified commodity ETFs of energy and metals in euros and pounds, the positive momentum in place since September seems still to be holding.

Uptrends intact for diversified energy & metals ETFs 

Stock markets post advances in January

Outside of commodities, global stock markets posted solid advances over January, maintaining the strong upwards momentum from the end of last year. 

In general, US large-cap stocks continue to trail other regional markets, with emerging markets performing strongly. US small-caps also outperformed US large-caps by a good margin over January. The Nasdaq 100 has for now run out of momentum, flat in US dollar terms over the last 3 months since November and down 3%-5% in euro and pound terms.

US small-caps (green) start to beat large-cap Tech stocks (Nasdaq 100 in blue)

Europe and the UK made solid gains in January, led by Banks. This remains a sector that is relatively cheap even after strong 2025 performance, offers positive 2026 earnings growth on the back of growing loan demand,  maintains solid balance sheets allowing for continued share buybacks, and offers a 5%+ dividend yield.  

Euro banks climb to new multi-year highs

UK stocks continue to march higher, thanks to exposure to key sectors such as Banks, Health care, Aerospace & Defence and Oil & Gas which are all performing well at the moment.

FTSE 100 at new highs

The European oil & gas sector has followed both US and Canadian energy stocks to new highs, helped by strong refining margins and a rebound in crude oil prices as Iranian tensions mount with US naval forces sailing to the Gulf region to put more pressure on the Iranian regime.

Oil & Gas has up to now not followed the march higher in metals and natural gas prices, but perhaps now is set for a catch-up to these other commodities. 

Europe Oil & Gas and Totalenergies hit new highs

Brent and WTI crude oil prices rise on growing Iranian tensions

A tough week for me given my heavy commodities exposure, but still a positive month overall. So at times like these, it helps to zoom out and look at the bigger, long-term picture which is still looking positive for now. Not the time for knee-jerk reactions, as these often prove in time to be poor decisions.

Fingers crossed for next week, 

Edmund