This asset class is poised to rise 38% as markets overestimate the risk of a global recession, Goldman says

Still reeling from Fed Chairman Jerome Powell’s remarks last week, riskier assets such as stocks look poised for another rout on Monday.

“You can’t have the stock market crash more than 5% on one man’s words,” grumbled FWDBONDS chief economist Chris Rupkey, who sees a major credibility problem for the central bank. “Fed officials set inflation on fire with too much quantitative easing and now they say they know what to do now that inflation is out of control. Nobody believes that.”

And as we head into the worst calendar month for Wall Street, economists expect more dovishness from the Fed and say a strong jobs report on Friday will bolster determination to raise interest rates.

So where are the shelters? Dividend stocks, the front end of credit markets, and Latin American currencies and bonds are just some of the offerings out there.

Us call of the day from Goldman Sachs offers another. They see a buying opportunity through a recent soft patch in commodities and reduce risk elsewhere. They see stocks threatened by sticky inflation and a potentially hawkish Fed surprise.

Commodities are “the best asset class to hold in a late cycle phase where demand remains above supply. Physical fundamentals signal some of the tightest markets in decades,” a team led by senior commodities strategist Sabine Schel said in a new note.

Goldman Sachs

The recent decline in agricultural and manufactured goods was due to a global recession priced in by traders. Recession fears have had more of an impact on commodities than any other asset class, Goldman said. However, the bank believes a recession will be mostly confined to Europe, with the US and China avoiding a recession.

Goldman Sachs

It’s just a matter of not having enough merchandise to go around, they say.

“As further declines in inventories trigger depletion risks, commodity returns for investors are likely to strengthen. In other words, with the risk of inventory depletion significantly outweighing the risk of an impending global economic downturn in our view, we believe the commodity index pullback should accelerate,” said Schels.

Lookback refers to futures prices associated with a given commodity trading higher than the current spot price.

In line with this view, Goldman raised its forecast for the S&P GSCI commodity index on a 12-month basis to 38.8%. The bank also sees 12-month returns of 51.7% for the energy sector.

Goldman Sachs

Goldman says the drivers for this commodity line will be “minimum in nature, as further price spikes are needed to bring demand back in line with supply in the absence of inventories”, adding that these spikes will create “extreme” pullback periods .

“In 2000 or so [2007-2008]For example, the depletion of reserves shifted oil markets into a highly volatile pricing regime where extreme price increases caused a significant pullback. Even if there is no significant price appreciation, this can produce extremely high returns for investors,” Goldman said.

And while the pullback has been seen most often in energy, Goldman’s team sees it spreading to base metals, notably copper, corn and soybeans, where volatility is likely to increase.

Specifically, despite strong year-to-date returns, they see energy and agriculture leading the way. “With oil the commodity of last resort at a time of severe energy shortages, we believe the drawdown in the entire oil complex provides an attractive entry point for long-term investment.”

A McKinsey report recently highlighted a worsening situation for global food supplies in 2023 due to war in one of the world’s breadbaskets – Ukraine – and climate change. The recent USDA corn report downgraded next year’s yield.

Reading: A new supercycle is emerging for the economy, and these are the stocks that will benefit

The markets

ES00 Stock Futures,
-0.79%

YM00,
-0.71%

NQ00,
-1.01%
is underwater, the Treasury yield for 2 years TY00,
-0.37%

TMUBMUSD02Y,
3.433%
is at a level not seen since 2007, the dollar DXY,
-0.05%
is climbing and gold GC00,
+0.04%
is below. Oil CL.1,
+1.42%
is slightly higher, while the prices of natural gas NG00,
-1.10%
they swell. Asian and European stocks follow Wall Street’s lead and bitcoin BTCUSD,
-0.09%
has fallen below $20,000.

The hum

After Powell’s market-shattering remarks, expect a lot of data focus. Monday is quiet, but the rest of the week will bring consumer confidence, the latest Institute for Supply Management index and the most important payrolls data on Friday. New York Fed President John Williams is among several Fed speakers expected this week.

Tesla TSLA,
-2.70%
CEO Elon Musk has said he aims to have self-driving technology ready by the end of the year, with widespread rollout in the US and Europe, depending on regulators.

Pinduoduo PDD,
-3.78%
soared after the China-based agricultural company that connects consumers with producers reported increased revenue and profit.

The best of the web

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UN nuclear inspectors are finally headed to the Zaporizhia plant

The chart

After the S&P 500’s failure late last week at 4,200, which saw the most volume in two years, all eyes are on 3,900, Jonathan Krinksy, chief market strategist at BTIG, tells clients.

“While we remain cautious in the short term, we believe the June lows will hold as weakness below 4,000 should see sentiment and position become bearish enough to create a decent entry point for the fourth quarter,” he said. . But if that breaks, they’ll tear up the playbook a bit, he says.

BTIG

The tickers

These were the top searched items on MarketWatch as of 6am. eastern time:

Heart

Security name

TSLA,
-2.70%

Tesla

BBBY,
+5.94%

Bed Bath & Beyond

AMC,
-4.18%

AMC Entertainment

GM,
-3.19%

GameStop

MONKEY,
-4.83%

AMC Entertainment Preferred Stock

AAPL,
-3.77%

apple

NIO,
-0.80%

NIO

NVDA,
-9.23%

Nvidia

AMZN,
-4.76%

Amazon

DAD,
-1.89%

Alibaba

Random readings

Activists mourn ‘man in hole’, last of Brazilian Amazon tribe

NASA’s New Moon rocket may not lift off on Monday

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