By Ole Hansen*

THE Bloomberg Commodity Index, which tracks the performance of 22 major commodity futures, rose from the ashes this past week. The 2% gain occurred after some early weakness after the US announcement of additional tariffs on $200 billion worth of Chinese imports.

The broad-based recovery that followed in global stocks and currencies was driven by a combination of the US tariffs coming in at the lower 10% bracket and China, while responding with its own counter tariffs, announcing plans to cut taxes, lift consumption, and lowering its average tariff rate on imports from most of its trading partners as soon as October.

While these developments may have helped sentiment, a proper de-escalation in China / US relations has yet to be seen. Given this, some caution is warranted unless the recent dollar weakness continues to provide support (more on that later in this update).

Growth-dependent commodities such as energy and not least industrial metals received a boost. Since June, when the trade war began, it has been worries more than actual data pointing towards a slowdown that has driven the negative sentiment. Any sign of easing tensions is therefore likely to trigger renewed demand from consumers who had put off purchases in recent months.

The European power market continued its wild gyrations with renewed strength in ECX Carbon emissions and rising coal prices driving a new surge in power prices across the region.

Natural gas jumped the most since January and the near 7% rally on the week saw it return to face resistance once again at $3/therm. The rally was driven by lower than expected Chinese tariffs on LNG imports from the US and stocks being some 18% below the seasonal average with just a few weeks left before winter demand sets in. Rising US production this year has been met with rising demand and rising exports.

* The writer is Head of Commodity Strategy at Saxo Bank