Commodities Daily - September 3, 2021

> Oil prices rise ahead of US jobs report. Yesterday, Brent gained $2.50/bbl to as high as $73.50/bbl as nearly 94% of Gulf of Mexico crude production remains shut, while the benchmark also drew support from a weaker dollar. This morning, Brent is trading around $73.00/bbl amid headwinds from a downbeat Chinese August services PMI. In addition to other service-sector PMIs today, investors will be focused on the US August jobs report. We think it will fall a little short of expectations (based on the disappointing ADP data released earlier this week, as well as the contraction in the employment component of the ISM manufacturing survey). Overall, a disappointing jobs report today would support risk assets (as US monetary stimulus would be seen as being wound down later rather than sooner). Against such a backdrop, we would expect Brent to rise toward $74/bbl.> Gold pressured ahead of US labor market data. Gold edged down from $1,815/oz to $1,810/oz yesterday, while the 10y US Treasury yield dropped from 1.30% to 1.29%. Yesterday's macro data mostly created headwinds for bullion, which is trading near $1,810/oz as we write. Today, the market awaits August US nonfarm payrolls, the August reading of the ISM US services PMI, IHS Markit services PMIs from the US and the eurozone, and July retail sales from the eurozone. We expect bullion to test support at $1,800/oz today.> Not all quiet on the eastern front for the base metals market. Base metals are trading sideways ahead of today's US labor market data. If the data is strong, investors will begin to anticipate a less dovish tone from the Fed at its September meeting, which would weigh on commodities. Chinese policy is another area that has been in focus for commodity investors. Authorities in China have hinted that aluminum, which is currently trading at 10-year highs, has been driven by speculative interest. This hint makes it look rather vulnerable to policy changes. Meanwhile, iron ore is under pressure from Chinese curbs on steel output.OIL PRICES RISE AHEAD OF US JOBS REPORTYesterday, Brent started to generate positive momentum during the Asian session, rebounding from $70.90/bbl and rallying during the day toward $73.50/bbl. It eventually settled at $73.03/bbl, $1.44/bbl above the previous settlement. It remains fundamentally supported as nearly 94% of Gulf of Mexico crude production (1.70 mln bpd) remains shut after the recent storm. Also fundamentally supportive is that Chinese independent oil refiners have returned to the physical crude market in recent weeks (picking up cargoes of Norwegian and Russian crudes for October-December delivery), which comes following a regulatory crackdown on the sector. We have highlighted previously that elevated Chinese crude purchases into 4Q21 (amid falling domestic inventories) would be key oil-price-supporting factor this autumn.Another supporting factor is a weaker dollar: EUR/USD extended its five-day winning streak, rallying to 1.1875 yesterday, the weakest the dollar has been against the euro since August 4. The euro has been boosted by reports that the ECB could soon begin to taper its bond purchases (though we think that this is very unlikely before Fed tapering).This morning, Brent is trading around $73/bbl amid headwinds from a downbeat Chinese August services PMI. In addition to other service-sector PMIs today, investors will be focused on the US August jobs report. We think it will fall a little short of expectations (based on the disappointing ADP data released earlier this week, as well as the contraction in the employment component of the ISM manufacturing survey), with NFP additions below the 725k Bloomberg consensus and much lower than the July 943k gain. It will be critical for the Fed outlook whether the labor recovery is seen as proceeding as expected in August and September. Overall, a disappointing jobs report today would support risk assets (as US monetary stimulus would be seen as being wound down later rather than sooner). Against such a backdrop, we would expect Brent to rise toward $74/ LD PRESSURED AHEAD OF US LABOR MARKET DATAGold edged down from $1,815/oz to $1,810/oz yesterday, while the 10y US Treasury yield dropped from 1.30% to 1.29% and EUR/USD rose from 1.184 to 1.187. Yesterday's macro data mostly created headwinds for bullion. First of all, US initial jobless claims came in at 340k for last week, which was the lowest level since the start of the pandemic and below the consensus of 345k and the previous week's 354k. Investors were looking for signs of further improvement in the US labor market ahead of today's nonfarm payrolls print, so the jobless claims print weighed on gold prices. It was also reported yesterday that US factory orders rose 0.4% in July, slightly above the consensus of 0.3% growth. Meanwhile, the eurozone PPI rose 2.3% m-o-m (versus 1.8% expected) and 12.1% y-o-y (11.1% expected). The above-consensus PPI readings had hawkish implications for ECB policy and should have created tailwinds for gold prices via euro strengthening, but it seems that yesterday markets were more focused on looking for clues on the US labor market and the outlook for Fed policy. Gold hovered near $1,810/oz during this morning's trading in Asia. Today's macro calendar includes August US nonfarm payrolls, the August reading of the ISM US services PMI, IHS Markit services PMIs from the US and the eurozone, and July retail sales from the eurozone. The consensus on nonfarm payrolls is for a 725k increase, which is almost 200k below the July level. We think a figure this high is possible given that jobless claims just fell to the lowest level since the start of the pandemic and that the enhanced employment benefits (payments of $400 per week) are set to expire on September 6. On the other hand, we also saw signs of a slight decrease in economic activity in IHS Markit's preliminary US PMI data and a weak private payrolls figure from ADP, and the Delta variant probably weighed on job growth as well. We expect bullion to test support at $1,800/oz today if the jobs data is at least in line with expectations. If instead the data is weak, gold may test resistance at $1,830/ T ALL QUIET ON THE EASTERN FRONT FOR THE BASE METALS MARKETThree-month LME contracts on copper gained 0.69% to settle at $9,403/tonne yesterday (up $65/tonne from the previous close), while aluminum was flat at $2,684/tonne, nickel was up 0.52% ($101/tonne) at $19,452/tonne and zinc was up 0.39% ($12/tonne) at $2,991/tonne.Earlier this week, performances were mixed in the base metals market due to metal-specific factors, but today the entire market is treading water ahead of today's US labor market data, which is considered crucial for the Fed's upcoming policy decisions. If the data proves strong, markets will begin to anticipate a less dovish tone from the Fed at its September meeting. This would create headwinds for risk assets, commodities included.On the eastern front, Chinese attempts to rein in commodity markets are in full swing. On Wednesday, the country released a total of 150 kt from its national metal stockpiles to auction off at a later date. Copper prices proved most sensitive to this development, while aluminum barely budged. Meanwhile, Chinese authorities have warned of growing speculative activity in the aluminum market and also said that the supply situation was not as bad as investors have feared amid production curbs. We think this is a hint that should not be underestimated. Whether aluminum, now trading near 10-year highs, is being propped up by speculation or not, there are risks of a hard fall if China decides to strengthen its grip on the market.As for the ferrous metals segment, iron ore 62% Fe (CFR China) futures on the COMEX exchange had been trading flat near the $160/tonne mark for around two weeks, but they plunged 10.2% to $143/tonne on Wednesday, following reports that Brazilian exports had surged 10% m-o-m (12% y-o-y) in August, the highest figure for the month on record. Iron ore remains under pressure from China's curbs on steel output, and a potential tightening of restrictions could push it into the $120-130/tonne range, though it would have to break through strong support at $140/tonne