It was interesting watching the real-time effect on markets as it became clear that Trump 2.0 was about to unfold.
Stock futures soared as traders relished the prospect of corporate tax breaks and slashing of red tape as Elon Musk’s department of government efficiency (DOGE) gets stuck in. Likewise, the US volatility index (the VIX, otherwise known as the “fear index”) fell dramatically as fears of a stock market collapse any time soon melted away.
But it was commodity markets and the nuances in stock markets that provided the best insights into what a future Donald Trump presidency might look like.
Consider crude oil, gold, copper, and gas and coal.
Drill, baby, drill
Trump has been clear about his desire for US oil producers to “drill, baby, drill” in the past. As higher supply generally results in lower prices, we naturally saw both Brent and US WTI spot contracts sell off into the final election result. Since then, however, spot prices have recovered as traders also speculate that a stronger domestic US economy will drive homegrown demand for crude.
Still, speculators don’t seem to have considered that Musk is the world’s greatest advocate for solar power, which could help balance the grid, while there are bound to be significant incentives to own an electric car in the US. Professional commodity traders are, however, alive to this fact because, while the spot price has recovered, the back end of the curve, around three to five years out, remains significantly down and out.
This is referred to as “backwardation”, where spot prices are higher than forward prices. The typical market response is to encourage selling whatever you have, as soon as you can, to capture the higher spot prices, because there’s no incentive to store it. The opposite of backwardation is “contango” where future prices are higher than spot prices. Contango does encourage storage – buy now, store, and sell later at a higher price.
The shape of the crude oil curve tells us that traders are very bearish on crude in the long term, which make sense as the “electrify everything” economy takes hold.
Ye olde fossil-fuelled power
As the world electrifies everything, it puts significant strain on power grids around the world. Renewable power (plus battery storage) needs to be built at a much faster rate, not only to enable the new power demand, but also to replace old gas and coal power. And, of course, power grids become more fragile as climate change events stress grids and unpredictable weather affects the performance of renewables.
Again, the initial response to a Trump victory was interpreted as a likely end to the war in Ukraine and a continuation of gas flows to Europe through Ukraine for the coming European winter. That sent spot prices down about 5% at one point. But since then, both gas and coal markets have recovered to largely unchanged as weather risks persist, and the possibility that the US will focus instead on domestic demand for its gas, rather than sending US liquefied natural gas supplies into Europe and Asia.
Let peace reign
The gold market saw probably the most interesting reaction to a Trump win.
Spot prices fell off a cliff as traders immediately realised the US could stop funding the forever-war machine. With funding and weapons supplies cut off to both Israel and Ukraine, some sort of peace deal will likely be inked soon. The geopolitical risk premium evaporated within hours.
However, the shape of the gold forward curve did not change much. We still see a healthy contango, which encourages central banks around the world to buy spot, store, and lease out their gold reserves to generate income. Considering rising US debt, that was a much more lucrative trade than simply holding US treasuries.
However, we expect this trade to unwind as the DOGE gets stuck into the US budget, potentially saving the country from a debt default by 2030.
Copper prices traditionally offer a window to the health of the global economy, having earned the moniker of “Dr Copper”. In that regard, both the three-month London Metal Exchange (LME) and forward prices are still trending lower, as the health of the global economy remains in doubt, while future supply and storage for now seems ample. For historical interest, the LME maintains a three-month contract because it once took three months to ship metal from South America to London.
Some other interesting insights emerging from a Trump win are the outlook for pharmaceutical and defence stocks.
With RFK Jr being tasked to “Make America Healthy Again”, pharmaceutical stocks are going to come under pressure. Similarly, with US defence spend as second item on the US budget (after interest on debt), the DOGE will likely cut that to ribbons, and hence stocks such as Lockheed Martin remain under pressure too.
Bevan Jones is an ex-commodities broker, trader and resources consultant. He lives now as an off-grid homesteader while offering commodity-market advice to clients at www.sourcemarkets.co.za.
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