Commodities Daily - March 15, 2021

> Oil inches higher on upbeat Chinese industrial production and retail sales data. Today, investors are digesting upbeat Chinese industrial production and retail sales data for 2m21, which has pushed Brent up to $70/bbl, boosting the case for a post-pandemic recovery, while OPEC+ is pressing on with output cuts to drain global inventories. Investors also await the preliminary Urals loading program for April and the EIA drilling productivity report. We expect Brent to test $70.1/bbl resistance today, with a break above paving the way to medium-term target of $71.4/bbl.> Gold holds on to gains even as Treasury yields break through recent highs. On Friday, gold slid from $1,720/oz to $1,700/oz as US Treasury yields climbed above 1.6%, but during the US session it rebounded to $1,725/oz. This morning, gold has held near the $1,725/oz mark amid a decline in EUR/USD. The highlight today data-wise is the March reading of the Empire State manufacturing index, which is likely to show improvement. Later in the week, the FOMC meeting will move into focus. If the Fed upgrades its economic forecasts on Wednesday, gold prices could face pressure. As for today, we expect gold to trade in a range of $1,715-1,740/oz.> Stronger dollar, plus rising metal and ore stocks, moderately weighs on prices; Chinese macro data improves backdrop today. On Friday, the metals markets showed a moderately negative trend, mainly due to the dollar strengthening globally. We see the dollar advancing further this month and think that downward pressure on metal prices should be expected. Meanwhile, amid the current elevated prices, stockpiles are also growing in particular in iron ore, copper and zinc, which would also be expected to weigh on metal prices.OIL INCHES HIGHER ON UPBEAT CHINESE INDUSTRIAL PRODUCTION AND RETAIL SALES DATABrent was trading around the $69.5/bbl mark throughout most of Friday and eventually settled at $69.22/bbl, down $0.41/bbl on the day. The day's main highlight was February US PPI, as oil prices traditionally drive inflation, especially the PPI index, with oil being a major cost input in the economy and used to fuel transportation and heat homes, so if input costs rise, so does the cost of end products. This year's US inflation prints are becoming increasingly important for oil, as a potential steep rise over the coming months would likely drive UST yields higher, adding to investor concerns that the Fed may be underestimating upside inflation risks. A more hawkish Fed would weigh on stock markets and risk appetite in general. February prices paid to US producers came out in line with expectations, with inflation at 0.5%, causing UST yields to stabilize and equity markets to turn slightly positive. Investors and economists are split on the inflation outlook, with some projecting that price pressure will keep building amid strengthening demand and government stimulus, while others are forecasting that the rise in inflation will be short-lived.As we write, investors are digesting upbeat Chinese industrial production and retail sales data for 2m21. Although the data was heavily skewed by the very low base stemming from last year's massive slump, it nonetheless showed that China's strong rebound remained intact, driven by robust trade and government stimulus. Reuters has calculated that China's daily refinery throughput rose 15% in 2m21 from last year's low base, as fuel demand remains solid and refineries are rushing to hike production ahead of maintenance season. We believe the upbeat data out of China is likely to have positive reverberations for oil today and likely push Brent into testing the $70.1/bbl resistance level, with a break above opening the way to the next medium-term target of $71.4/bbl. Today, investors also await the EIA monthly drilling productivity report, which will provide US shale oil production forecasts for April.In focus this week will be the IEA's monthly oil market report on Wednesday, in particular its demand forecasts. The FOMC meeting this week and Fed Chair Jerome Powell's press briefing will come into focus, which follow the approval of President Joe Biden's $1.9 trln stimulus package and new vaccines pledge. Powell is expected to reaffirm his looser-for longer stance, but more importance will be attached to the Fed's growth, inflation and rates projections, due after the FOMC meeting. An upbeat revision would support UST yields and weigh on stock markets and risk sentiment in general; however, this would be fundamentally positive for oil and thus would likely to have a neutral effect on prices.GOLD HOLDS ON TO GAINS EVEN AS TREASURY YIELDS BREAK THROUGH RECENT HIGHSOn Friday, after sliding to as low as $1,700/oz early in the day, gold prices began to recover toward $1,725/oz. Gold found support from an advance in EUR/USD quotes, even as the US 10y Treasury yield soared more than 10 bps and consolidated above 1.60%. The initial slide in gold prices owed to the news that President Biden had signed the $1.9 trln stimulus bill into law, the reason being that the stimulus will increase the amount of liquidity in the US economy, which could eventually lead to faster than expected policy tightening. The subsequent reversal from the $1,700/oz mark may have been attributable to investors stepping in at what they saw as attractive levels. Moreover, the January industrial production data from the eurozone showed a 0.1% y-o-y increase versus a 0.2% decrease in December. This was the first positive value since October 2018. The US PPI, meanwhile, came in at 0.5% m-o-m in February, with the ex-food and energy gauge sliding to 0.2% m-o-m from 1.2% in January. The macro data was generally in line with expectations and supported gold prices. However, if gold prices start to take their cue from Treasury yields again, Friday's gains could prove short-lived.Gold is trading near $1,725/oz as we write. The highlight on the data calendar today is the March reading of the Empire State manufacturing index from the US, which we think is likely to show improvement given the better weather, the positive Covid developments in recent weeks and the generally strong macro data for February. Later in the week, the Fed may release upgraded economic forecasts when its meeting wraps up on Wednesday, which could cause Treasury yields to continue their march upward, which would put pressure on gold prices. Also on this week's data docket are the ZEW March eurozone survey, February US retail sales and industrial production, February CPI data from the eurozone and US initial jobless claims. We expect gold to trade in a range of $1,715-1,740/oz today.STRONGER DOLLAR, PLUS RISING METAL AND ORE STOCKS, MODERATELY WEIGHS ON PRICES; CHINESE MACRO DATA IMPROVES BACKDROP TODAYOn Friday, the metals markets showed a moderately negative trend, mainly due to the dollar strengthening globally. Nickel (the 3m forward contract on the LME) fell by 1.9% to $16,011/tonne, zinc (LME 3m) by 0.9% to $2,804/tonne and aluminum (LME 3m) by 0.75% to $2,171/tonne. Overall, we see the dollar strengthening further this month, especially against EM currencies, meaning downward pressure on metal prices should be expected. Meanwhile, amid the current elevated prices, stockpiles are also growing in iron ore, copper and zinc, in particular, which would also be expected to weigh on metal prices.Chinese data today turned out positive for metal markets: besides upbeat dynamics for new housing prices, industrial production in January-February was up 35.1% y-o-y (versus up 32.2% expected) on a low base (in January-February 2020, industrial production slid 13%) and thanks to the fact that many Chinese are said to have continued to work during the New Year holidays this year instead of returning home. Thus, the strong reading was atypical for February, and industrial production is expected to return to normal levels in March.