Commodities Daily - December 10, 2021

> Oil prices slide amid renewed concerns about Omicron variant. This morning, Brent is hovering above $74/bbl as the market reassesses the potential demand impact from the Omicron variant. Investors are also looking ahead to November CPI data and the preliminary December reading of the University of Michigan consumer sentiment index from the US. We expect Brent to remain under pressure today and retest yesterday's low of $73.8/bbl amid further concerns about the Omicron variant, although we do not expect it to fall much lower, as the US CPI could ease to 0.7% m-o-m or lower, which would support global sentiment.> Gold drifts lower again ahead of US inflation data. Gold retreated from $1,780/oz to $1,775/oz yesterday, while the US 10y Treasury yield edged down from 1.51% to 1.50%. Gold is trading near $1,775/oz as we write. Today, the market awaits the US CPI for November and the preliminary University of Michigan consumer sentiment index for December. We expect bullion to test support at $1,765/oz today.> Base metals mostly in red on Evergrande default; aluminum and zinc outliers with flat performance. Base metals traded lower yesterday, with the losses attributable to more negative news about the Chinese property segment. The defaults could now have a domino effect, which would prolong the losses for metals. Aluminum and zinc, meanwhile, were flat d-o-d, with the former likely starting to price in potential Chinese output curbs in the winter period.OIL PRICES SLIDE AMID RENEWED CONCERNS ABOUT OMICRON VARIANTYesterday, Brent slid almost $3/bbl to as low as $73.8/bbl, as lockdowns and other measures aimed at containing the new Omicron strain are increasingly casting a shadow over the outlook for consumption. It did not help that a new study showed that Omicron is 4.2 times more transmissible than the Delta variant. The study, which was conducted by a Japanese scientist (a professor of health and environmental sciences at Kyoto University who specializes in mathematical modeling of infectious diseases) advising the country's health ministry, is likely to confirm fears about the new strain's contagiousness. It analyzed genomic data available through November 26 from South Africans in the Gauteng province and ultimately reached the conclusion that "the Omicron variant transmits more, and escapes immunity built naturally and through vaccines more."Cases in South Africa have rapidly increased to nearly 20,000 a day since the country reported the discovery of Omicron two weeks ago. The number of new daily Covid cases in the nation had been holding at relatively low levels in the preceding weeks even though only 26% of the population is fully vaccinated. In the US, hospital admissions with confirmed Covid-19 cases are rising in parts of the Northeast and Mid-Atlantic, while South Korea has seen record numbers of new infections this week despite being one of the most vaccinated nations in Asia (with 80% of the population fully inoculated). In Singapore, two residents may have caught the Omicron variant even after receiving Covid-19 booster shots, which has raised questions about the degree of protection offered by a third dose of the vaccine. China's latest outbreak is also persisting. Yesterday, front-month Brent eventually settled at $74.42/bbl, fixing $1.4/bbl below the previous settlement.This morning, Brent is hovering above $74/bbl as the market reassesses the potential demand impact from the Omicron variant. Investors are also looking ahead to November CPI data and the preliminary December reading of the University of Michigan consumer sentiment index from the US. We expect Brent to remain under pressure today and retest yesterday's low of $73.8/bbl amid further concerns about the Omicron variant, although we do not expect it to fall much lower, as the US CPI could ease to 0.7% m-o-m or lower, which would support global sentiment. We note that higher food and energy prices may account for about half of the m-o-m price growth, and that buyers of new and used vehicles are unlikely to have found reprieve in November. Meanwhile, housing costs are already drifting upward and higher CPI prints are likely in store next year. The Omicron variant may dent demand for travel and leisure activities, as well as prices for them, but the bigger risk may be prolonged inflationary pressures caused by persistent supply chain LD DRIFTS LOWER AGAIN AHEAD OF US INFLATION DATA Gold eased from $1,780/oz to $1,775/oz yesterday, while the US 10y Treasury yield nudged down from 1.51% to 1.50% and EUR/USD weakened from 1.135 to 1.129. US weekly initial jobless claims totaled 184k last week, the lowest reading in almost 50 years. Labor market conditions are pretty bright ahead of the FOMC meeting on December 14-15, given the recent decline in unemployment and the record high open vacancies. This has created worries for gold investors that the Fed could taper faster than currently expected. However, inflation is another significant component in the Fed's decision, and the figure for last month will be published today. Yesterday, gold was under pressure because of this. More pressure for bullion came from Omicron news, which appears to be 4.2 times more transmissible than Delta but causes mostly mild illness, according to Japanese scientists.Gold is trading near $1,775/oz as we write. Today, the market awaits the US CPI for November and the preliminary University of Michigan consumer sentiment index for December. The consensus for inflation is 0.7% m-o-m, versus 0.9% m-o-m in October, which is possible given that energy prices declined in November. In y-o-y terms, the consensus is for 6.8% growth. The consumer sentiment index is expected to improve in December, reflecting the solid pace of the US economic recovery. In this regard, we do not expect gold to find support from sliding monthly inflation, as the Fed is still likely to be hawkish at next week's meeting, which will bring fundamental pressure, and slightly more optimistic inflation figures may not significantly alter this. We expect bullion to test support at $1,765/oz SE METALS MOSTLY IN RED ON EVERGRANDE DEFAULT; ALUMINUM AND ZINC OUTLIERS WITH FLAT PERFORMANCEBase metals closed mostly in the red yesterday. The 3m LME contract for copper was down 1.22% (-$118/tonne from the previous day's close) at $9,535/tonne and nickel fell 1.75% (-$355/tonne) to settle at $19,875/tonne, while zinc and aluminum were about flat at $3,310/tonne and $2,627/tonne, respectively.Base metals took a hit from what marked a crackdown on the Chinese property sector, as two developers were labeled defaulters: infamous Evergrande Group and Kaisa Group Holdings. Evergrande failed to repay bonds due on Monday, and it seems its fate is likely a massive restructuring. The news yesterday was negative for sentiment especially in the metals market, as construction has always been the key consumer of raw materials. Although Chinese authorities have claimed there will be support for the real estate market in 2022, there is the risk that the Evergrande story is not unique and that other developers are on the verge of default too. Should this risk materialize, metals would be in for more headwinds from negative sentiment.Notably, zinc and aluminum remained basically flat d-o-d yesterday, with only slight losses. With some time lag, the aluminum market seems to have started to price in potential Chinese production curbs and smelting limits in 1Q22 too. We see further upside for this pair, backed by supply disruptions that we might see in the winter period in Europe and China. Today, all eyes are on the US CPI print, which might mean some volatility for the dollar and hence dollar-denominated