With the Federal Reserve cutting its benchmark interest rate this week and more cuts expected in the coming months, analysts at both Citi and HSBC took the opportunity to delve into how commodities might perform going forward.

In its fourth-quarter outlook, Citi said the U.S. and global rate-cutting cycle will be “in full swing” by year-end, which will be “very bullish” for precious metals as real rates fall and concerns about economic growth remain elevated.

According to Citi, precious metals had a median annualized return of 13% in the six months following the first rate cuts of the past four cycles by the Federal Reserve in 1995, 2001, 2007 and 2019, and the 12-month returns in the most recent two rate-cut cycles averaged 20%.

When interest rates fall, it is often assumed that commodities get a boost because lower borrowing costs stimulate the economy and increase demand, but it is not always that simple.

Industrial metals, including copper, aluminum and lithium, as well as energy appear to benefit less during a rate-cutting cycle, according to Citigroup. Interest rates aren’t the only factor to consider, either.

Citigroup also said in a Sept. 15 report that the outcome of the U.S. election, any potential tariffs and supply disruptions caused by geopolitical tensions could affect commodity prices.

Despite these uncertainties, Citi said it is "very bullish" on silver and has a "high-conviction view" that it will rise. The bank's base case is that it expects silver to rise by more than 20% by the end of this year and more than 30% in the next 6 to 12 months. At that time, the spot silver price will be around $35 and $38 per ounce, respectively.

Citi said silver will benefit from the Fed's rate cut cycle, and ETF and fund futures purchases are "likely to increase significantly" in the next six months. The bank's analysts said: "Regardless of the direction of the Chinese economy, silver has a unique and bullish reason that may attract a large number of ETFs, funds and Chinese retail investors to buy."

They also pointed to strong demand for silver in China’s energy transition efforts, such as for use in solar power and electric vehicles.

It’s a similar story for gold, according to Citi. “As the Fed begins cutting rates, the odds of a U.S. recession remain elevated amid labor market turmoil. We know from experience that precious metals tend to significantly outperform other commodity sectors (particularly energy) and ETF buying tends to be stronger in low real rate environments,” Citi analysts wrote, highlighting its “conviction view” favoring gold over oil.

While gold prices have repeatedly hit record highs this year, Citi predicts that the rally is "unlikely to be linear" from here on out, but on average, gold prices should move higher in the fourth quarter and into 2025. It predicts that gold will reach $3,000 an ounce in 2025.

Copper and aluminum

Copper has been a beneficiary of energy transition efforts and the artificial intelligence boom in recent years. Demand for copper is also widely considered an indicator of economic health because the metal has a wide range of applications throughout construction and industry.

HSBC studied the relationship between the Fed's rate cut cycles and copper and aluminum prices over the past 30 years in a report on September 17. HSBC analysts said: "We expect industrial metal prices to follow the path of 2019, when the rate cut was a mid-cycle adjustment measure to prevent a further slowdown in the economy.

This means both metals are likely to remain “range-bound” during this rate-cutting cycle and rebound when demand picks up, they added.

HSBC believes that if a recession occurs, interest rate cuts will be faster and deeper than expected, and copper and aluminum prices may repeat the mistakes of the 2000-2003 Internet bubble. During this period, industrial metal prices experienced a "sharp decline" over a long period of time, and the bank said a similar situation may be the case now, with prices likely to fall by about 20%.

HSBC did, however, stress that there are other factors at play, such as supply and demand. In the current context, though, the bank said it prefers aluminium due to tight supply.

According to Citi's base case, copper prices will average $9,000 a tonne for the rest of the year, citing uncertainty over the U.S. election and weak manufacturing sentiment. That's down from current prices of around $9,390.

In the bull case, Citi expects copper prices to average $12,500 a tonne in 2025 and $15,000 in 2026. Citi said this scenario assumes a very successful "soft landing" in the United States and Europe, and a "strong and rapid" global manufacturing rebound driven by the Federal Reserve's rapid rate-cutting cycle.

On aluminum, Citi said it was “neutral” ahead of the U.S. election and in its base case, aluminum would trade between $2,300 and $2,500 a tonne in the fourth quarter of 2024, a range in which the metal currently sits at around $2,473. Citi expects aluminum prices to rise to an average of $2,750 a tonne by 2025, barring any tariff shocks.

energy

Citigroup expects oil prices to weaken again in 2025, with Brent crude falling to around $60 a barrel. It currently trades at around $74 a barrel. Even if OPEC+ maintains its production cuts, the bank expects the market to be in a supply surplus.

Citi said other factors should be considered, such as trade tariffs, a new round of sanctions on Iran and demand from China. Based on 2019 conditions, trade tariffs reduced global oil demand growth by 200,000 barrels per day. But Citi added that any significant stimulus from China could increase oil demand by an additional 100,000 barrels per day.

“China’s oil demand could surprise to the upside, but the magnitude is likely to be contained as economic policies are unlikely to target energy-intensive sectors,” the bank said.

Article forwarded from: Jinshi Data