♦ Multiple uncertainties, including the US presidential election will continue to underpin demand for investment metals, potentially led by silver, provided emerging signs of stabilising demand for industrial metals in China can be sustained

♦ The energy sector will be watching the US presidential election closely, given the two candidates’ opposing views on traditional versus renewable sources of energy. Having spent a considerable time this year trading in the USD 80’s we now see Brent being stuck in the 70’s for the foreseeable future

♦ We see additional but at this stage not spectacular gains for copper supported by lower funding costs as the US Federal Reserve cuts rates, further reducing the risk of a recession, a stabilising growth outlook in China amid government support and continued demand towards the green transition

In early 2024, we focused on the metal sector as a potential winner for the year and beyond. Following an already strong first half, the precious metal sector, led by gold, continued higher in the third quarter, as investors sought protection in an uncertain world, culminating in September with the start of a supportive US rate-cutting cycle. The energy and industrial metals sectors—two growth-dependent sectors—suffered setbacks amid a deepening slowdown in China and rising recession risks elsewhere, most notably in Europe.

As of now, the Bloomberg Commodity Total Return Index is up around 3.5% for the year, with strong gains in precious metals, soft commodities, and, to a lesser extent, industrial metals being offset by losses across the energy sector, and not least the grains sector, where prices remain subdued following another strong production year. While adverse weather drove large gains in coffee, cocoa, and sugar, the year so far has belonged to metals, especially gold and silver. These two investment metals have seen strong demand from investors.

Despite our view that the market overreacted to the latest payrolls data – considering that factors like weather and increased immigration contributed to the rise in unemployment – there remain some signs of weakening labor demand worth respecting. For example, the National Federation of Independent Business (NFIB) survey on the share of small businesses planning to increase their headcount continues to deteriorate, and this historically has been a leading indicator for the unemployment rate 6-months forward (as shown in Figure 2).

Recession or no recession in 2025?

US real-time indicators suggest trend growth around 2% real GDP growthFinancial conditions remain loose relative to economic activityThe capital expenditure boom in technology and health care continuesEquities at an all-time high and minimal funding stress in high yield bondsHigh-frequency US job posting indicators have stabilised since MayUS nominal GDP was 5.9% YoY in the latest readingEuropean real-time indicators suggest remains weakWage growth remains elevated in both the US and EuropeDespite pockets of weakness in the economy our overall assessment is that the economy has slowed but is not slipping into a recession just yet, and we think it is premature to significantly rotate investment portfolios into defensive sectors.

Rate cut cycle and US election will dominate macro in Q4

The fourth quarter will be dominated by debates over the pace of the US rate cut cycle and the upcoming US election on November 5. The two rate cut cycles in 2000 and 2007 have anchored investor belief that this rate cycle will also be the beginning of a recession. It is important to consult more than just recent history for guidance. Yes, the current pricing of the Fed funds rate over the next 12 months is more or less consistent with previous rate cut cycles in a response to a recession, but if we adjust for the inflation rate, the current pricing is closer to that of merely shifting the level lower to reflect lower inflation pressures. Second, past rate cut cycles have mostly been positive for equities with only the 1973, 2000, and 2007 rate cut cycles being the exceptions. While rate cuts are important signals to investors, our view is that investors should remain positive and instead rethink whether their portfolios have the right ingredients as the Fed lowers its policy rate.This year’s US election is probably the most important election in modern times. With US political bifurcation at its peak, the election outcome will have impact both on the economy and financial markets. Of the more likely scenarios, a Harris gridlock win (Harris as president, but lacking control of the Senate) is probably the worst for economic activity as the fiscal impulse will likely shift to being negative as a gridlocked US Congress will make it difficult to pass anything except for executive orders over the coming years. Another scenario is a Trump sweep victory with Republicans winning both houses of Congress. This scenario will have a high positive impact on Europe’s defence industry and likely a negative impact on technology and emerging markets from Trump’s ideas on high tariffs.A Trump gridlock scenario is also possible, in which he wins the presidency and the Republicans take the Senate, but fail to take the House. In this scenario, you get both the gridlock and fiscal impulse decline, but also new high tariffs.

Investment allocation

Every investor’s investment allocation is unique because of individual risk preferences and return objectives. To eliminate human biases it is always good to get the high level picture on asset allocation based on statistics. The current regime is like in Q3 which is a calm turbulence index and inflation still running above the Fed’s target of 2%. Based on periods of similar regime since 2007 we can calculate annualized returns across key asset classes, which can guide investors on how the various asset classes have done in the past in a similar regime.