Commodities fall amid increased risks of Trump's second-term: Russell

Commodities have reacted to Donald Trump's election to a second U.S. term with fear, and most are losing ground due to fears that a new trade war will hit the global economy.

The negative reaction contrasted sharply with the record-breaking performance of U.S. stocks, which rose to new highs amid optimism about Trump's tax cut agenda, at least for the United States.

The contrasting reaction to Trump's win over Democrat nominee, and now departing U.S. vice president Kamala Harris, showed why it is difficult to predict the impact of Trump's return as the White House.

Take crude oil as an example.

Brent futures, the global benchmark, dropped as much as 2,9% in Wednesday's trading before finishing down by 0.5% to $75.16 per barrel.

Theoretically, Trump's policies on energy should have a negative impact on global oil prices. He is in favor of loosening regulations in the United States and encouraging the production of crude oil in the world's largest producer.

The U.S. output of oil may not increase much, as it has already reached record levels. Companies will also be hesitant to boost production if the result is a further lowering of prices.

Trump has also pledged to bring peace to Middle East without specifying exactly how this will be achieved.

If he can convince Israel to stop its conflict with Iran, and the groups that it supports such as Hamas, and Hezbollah this will be a negative for the oil price as the geopolitical premium would diminish.

Trump's affection for Russia's president Vladimir Putin and another, unspecified promise, to end the Ukraine Conflict, could also lead to a easing of sanctions against Russia. This, in turn, may increase its crude oil exports and other energy products, such as coal and liquefied gas.

Trump, on the other hand has stated that he wants to be tough with Iran and could try to tighten up sanctions against Tehran. This may in turn make it slightly more difficult for Iran to market its crude.

Trump's plan of imposing tariffs between 10%-20% for all U.S. imported goods, and 60% on those from China is likely to also hurt crude oil prices. This would curtail the global trade and lead to a slower growth of the economy, as well as higher interest rates and inflation.

The main risks to crude prices are to the downside. This makes it difficult for OPEC, its allies and the wider OPEC+ to establish a policy of production that aims to keep the price high without the group giving up too much share on the market.

In theory, LNG could also face a bearish outlook in the Trump era due to his support for increasing U.S. production as well as building new export facilities.

Trump's Trade Policy will determine a lot.

It's possible that other countries will impose tit-fortat tariffs if comprehensive tariffs are imposed on all U.S. imports.

The price of U.S. LNG and crude oil, as well as coal, could be higher than alternative products. This may force U.S. producers to lower their prices in order to stay competitive or to hope that tariffs won't be placed on their product.

Metals Struggle

Industrial metals are less attractive than energy commodities. This is because they are more dependent on China, which is the largest buyer of iron ore and copper in the world.

London copper contracts fell 4.1% on Tuesday, closing at $9,343 per metric ton. This was the lowest close in almost two months.

Singapore iron ore futures did better but still finished down 1.2%, at $104 a tonne, while London zinc contracts dropped 4.2%, to $2,973 per tonne.

Zinc is used to galvanize steel. Iron ore is used as the main raw material for steel.

Both are heavily exposed. They face a lower demand in the event that Trump's tariffs are implemented and exports of the second largest economy of the world are affected.

Gold is another commodity where investors will likely play a waiting and watching game. The spot price dropped 3.1% on Tuesday to $2,659.24 per ounce.

Gold is also under pressure from the Trump presidency.

Gold's appeal will be reduced by higher bond yields and rates due to Trump's inflationary tariffs, tax cuts and likely inflationary tariffs.

The precious metal could also benefit from the volatility that could accompany a Trump presidency. This would increase geopolitical risks and encourage investors diversify their assets.

Trump's second tenure will bring more downside risks to commodities. However, much depends on how quickly he can implement his political and economic agenda.

These are the opinions of the columnist, an author for.

(source: Reuters)