Bart Melek

[music] >> Hello, I'm Anthony Okolie, in for Greg Bonnell, and welcome to MoneyTalk Live, which is brought to you by TD Direct Investing.

Every day, I'll be joined by guests from across TD, many of whom you'll only see here. It will take you through what's moving the markets and answer your questions about investing.

Coming up on today show: we'll discuss the outlook for oil is the price On Russian crude comes into effect with Bart Melek, head of commodity strategy at TD Securities.

And in today's WebBroker education segment, Caitlin Cormier will take us through how you can find analyst research on the program.

And here's how you get in touch with us.

Just email moneytalklive@td.com more fill out the viewer response box under the video player on WebBroker.

And before we get our guest today, let's get you an update on the markets.

we will start here in Canada with the TSX. Investors are awaiting the Bank of Canada's interest rate decision, which is due out on Wednesday.

right now, the S&P TSX composition is trading in the red, it is down 136 points or .68%, it's it's at 20,105.

Of course, the benchmark Canadian indexes coming off of its biggest percentage drop in four weeks on Monday dragged down by the energy sector.

We will turn south of the border, take a look at the broad-based S&P 500.

Of course, stocks have been building on losses from previous sessions, fears of even higher rates have sparked recession fears.

The S&P 500 is down 46 points or 1.15%.

We'll take a look at the tech heavy NASDAQ, it is also trading in the red. It is down right now just over 156 points or 1.4%.

And that is… Let's take a look at some of the big movers, actually. We will start with Paramount Global.

Shares of Paramount are actually weaker after the media company reported a top and bottom line miss for its latest quarter.

Shares of Paramount are down 6.8%.

We'll take a look at some other big movers.

Shares of Estée Lauder is making some moves in the early market trade. The cosmetic company issued a weaker than expected Outlook, noting higher costs, a stronger dollar and COVID lockdowns in China.

The company did reported better-than-expected earnings in his latest quarter.

And shareholders seem to like that. The stock is up about five points, or 2.1%.

It's at $236 per share.

And that is your market update.

The price of oil is trading around $76 a barrel as traders weigh what a On Russian oil prices mean for the market.

But amid tight global supply, is the price set to remain lower for longer, or just have room to run higher?

Joining us now to discuss is Bart Melek, head of commodity strategy at TD Security's.

Bart, thank you very much for joining us.

>> It's my pleasure.

It's always very nice to be here. Thank you very much for inviting me.

Well, in answer to your question, I think oil does better.

I think the big factor in oil's weakness was the uncertainty and now the acknowledgement by OPEC that they will not reduce supply going forward.

Part of the reason is, as you mentioned, is the price On Russian oil. It's still quite uncertain how impacted the supply side will be.

You know, there are various schools of thought.

Something that there could be quite a robust decrease because of that particular, and something that much of the impact will be circumvented by Russia'sclandestine fleet of 100 tankers were so a and other perhaps methods of circumventing these particular sanctions, the former sanctions.

>> Do you think that there are risks that Russia could cut off oil exports because of the embargo?

>> I think the risk is small. Russians are threatening that that could very well be at the case. My suspicion is that they are in a conflict with Ukraine.

they are positioned against the United States and NATO nations who are supporting Ukraine.

they are going to need that revenue stream, and I suspect that this is a lot of hyperbole on their part.

Perhaps threatening language that they are hopingmake convinced the allies to not take this action, but in the end, I think it's in the self-interest of the Russians to continue to do what they are doing even if they get less revenue.

I guess, you know, less revenue is better than no revenue.

>> Okay, let's talk about the other big announcement.

Of course, OPEC plus and its allies agreed to keep production at current levels.

Any surprising that decision for you?

>> This is what we thought was going to happen.

OPEC tends to be very guarded in how they change policy. Typically, and I think, you know, this has been true for a while, is they try to balance supply with demand and, at the same time, make sure that the national budgets are adequate.

So I'm not particularly surprised, given that uncertainty of this price gap and the impact it will have on supply.

we thought that they were going to continue with their 2.2 million barrels per day cut from the last meeting you and that wouldbe a target of 1.1 million barrels of supply.

And I think they are going to wait and see, see how demand evolves, how China's reopening impacts of these markets and then how the macro economies in the West are doing.

>> So they could be more strategic going forward in terms of how they manage their production?

>> Absolutely.

I think they have continued to be strategic for quite a while, and the reason they are able to do that, there aren't really significant competitors in the wings. In essence, if OPEC cuts another half a million barrels after cutting the 2 million barrels from the quote is the last time around, it's not like there is excess shale production that can fit in that void and reintroduced new supply.

OPEC is pretty free to do as they will at least for now.

>> What are some of the geopolitical risks for oil going forward?

I mean, we've heard that the US is seeking to halt tapping its oil reserves to refill their stockpiles.

You've mentioned a lack of demand from China.

What are some of the risks that you see going forward for oil?

>> Well, the big risk, of course, is surrounding natural gas.

You know, it might be a little strange for me to talk about natural gas when we are trying to answer a question about oil, but we are still at the start of the winter in the winter can still get very cold.

Perhaps a lot colder than we expect. We simply don't know.

Weather forecasting is hard, particularly future weather as opposed to back casting. But so far, there remains a risk that natural gas stockpiles will be reduced quite significantly.

as we all know, these supplies are quite low by historic levels and so is oil. So there is some excess capacity on refining in China and if we do find that distillate is much higher than we thought because of winter conditions, we could see these oil markets go into a much tighter configuration than we think now.

>> Okay, so given all these risks in the market, what is your outlook on the price of oil heading into 2023?

>> We are quite positive on oil. I think at this point everybody knows our logic but I will stay here again.

we do think that OPEC will continue to behave quite strategically and although we expect demand growth to deteriorate next year because, you know, certainly the Western world, you expect a recession in many parts of the world, Europe is not doing great, the US most likely sliding into, you know, a contraction at some point. But we are still expecting demand to be positive, well over a million barrels per day.

At the same time, we are seeing a crisis in the natural gas market where, as I just said, we could get much higher demand for product. And, I think OPEC continues to behave quite strategically and they will write size their production to make sure that there is an oversupply and that likely will drive prices higher.

And I think the other big risk here is that once we see up his it in Federal Reserve policy, we don't expect that until, you know, well into the middle of the year, that's when the markets, we think, are going to start pricing it, we can see speculative money drive it up.

So fundamental should remain tight at the moment.

I think we start thinking that this contraction in demand growth is being reversed or goes the other way, I think oil does a lot better. Perhaps not as quickly as we've hoped. We've written this outlook a few weeks ago and as I settled this >> Things change.

>> Things change. Forecasting of the future is quite hard. But I think the general theme remains.

>> I know that part of this, you had a roundtable on your Outlook for commodities. Were there any key themes that you think investors should be aware of going forward?

>> Yes. I think one of the key themes here is that the supply side is quite constrained.

And although we do expect a cyclical type of downturn, we don't expected to be anywhere near as deep as it has been historically historically, we've seen 40, may be up to 70% seven cycles. Some commodities like oil or copper. Hwe don't see these type of corrections coming up, and that's mainly because for base metals, for example, we are seeing constraints on the mind side, we are seeing constraints with smelters.

We have energy problems around the world.

And we are seeing a less significant drop in demand than you normally would expect during a contraction period.

for a metal light coffer, we are seeing the first signs thatelectric vehicles, and that's Chinese data, it showing that copper is being supported on the demand side by EVs. Taking that logic forward, where you are using a lot more metal per vehicle as this whole decarbonisation initiative around the world matures, we are going to seek a lot more of that copper demand for ESG purposes.

>> Great start to the conversation. You will get your questions about commodities for Bart Melek in just a moment.

And a reminder that you can get in touch with us at any time. Just email moneytalklive@td.com or fill out the viewer response box under the video player here on WebBroker.

here's an update on the top stories in the business world today and look at how the markets are trading.

Toronto house prices dropped in November, marking the eighth straight monthly decline.

the number of homes sold during the month tumbled 49% from one year ago. However, fewer people were listing their homes, suggesting homeowners are weathering the sharp jump in interest rates this year.

Canada's Cenovus Energy is forecasting higher capital expenditures next year as it looks to boost production amid higher crude prices.

Cenovus expects to produce 840,000 barrels of oil per day, a more than 3% increase year-over-year.

Global crude prices have risen as much a 79% this year following sanctions on Russian energy.

Finally, Taiwan Semiconductor, the world biggest contract chipmaker, is planning to build the second plant in Arizona.

the $12 billion facility is said to be fully operational by 2024 and will start producing higher-end chips in 2026.

The US government has been pushing to boost domestic semiconductor production after passing the CHIPS and Science Act back in August of this year.

And turning to markets, the TSX is still trading in the red, it's still down right now but hundred and 35.4About .7%.

We will take a look at the US, south of the border. The S&P 500 index is still down nearly 44 points or 1.1%.

All right, we are back with Bart Melek, taking your questions about commodities.

We will start with the first question off of our platform.

This is on EV demand. Which metals will benefit the most from electric vehicle demand?

>> I think copper is metal number one because it is used for everything.

Not only, of course,the vehicles themselves, which doubles the amount of conventional diesel or gasoline vehicle, but also the transformer network that is going to have to be expanded to facilitate these two week grids for solar power and wind for renewables, it's going to have to be… There is really no significant substitutes across the board.

Silver is another one. In fact, silver is more intensively used in electric vehicles than it has been over the years. We are using a lot more computers.

We are using a lot more PC boards, circuit boards.

> More and more products.

>> More and more products.

And of course, there solar as well. As solar panels use quite a bit of silver.

And that means, as a larger and larger proportion of these vehicles is produced as part of the fleet, it means that we will be using intensively these metals like copper, like silver. But of course, aluminum as well.

Aluminum is very light. And part of… Increasing energy efficiency is to lighten the vehicles. We have seen many companies do that.

Of course, aluminum has a lot of tensile strength and is very light.

So that's another one.

And all of those, all of these metals, I'm not mentioning the battery metals, which is quite obvious you are going to need those, platinum is another one.

If we significantly move towards a hydrogen economy for fewer power cells, that metal is going to be very much used on the electrolysis side to extract hydrogen, green hydrogen, using electricity. And also on the fuel-cell side.

And so all of these metals will be a lot more prevalent across all sectors in manufacturing and we don't really see a lot of new investment. For copper, we are hundreds of billions under invested.

Aluminum has electricity problems where, you know, we are not seeing a huge amount of new supply going forward and something like platinum, South Africa is a big supplier then and then they continue to have big issues with power again with Ascom, which is the power company, and the general lack of investment for all of them.

So it's going to be challenging.

>> Just a follow-up, we talk a little bit about the commodity supercycle that's forming and which commodities might likely be impacted by the lack of supply?

> We like to call it a supercycle, I'm not sure if that's an appropriate label to put on it, but it certainly sounds very good. We do think that perhaps not this year or 2023 or 24 where I think many of them will still be facing challenges due to cyclical downturns, but beyond that, I think… As I said, copper, silver… Platinum.

Of course, you have lithium and others, cobalt and all those.

When we look at the data for capital investment and we look at the projected requirements in terms of tons for these metals, you know, if we want to achieve particular goals relative to the Paris agreements, we are woefully under invested.

there is very little appetite at this point, ironically, from the financial industry, from investors and from boards and much of it has to deal with the high carbon footprint. But the problem is, you know, you kind of have to break some eggs to make an omelette. You can't have no carbon emissions. First, you have to make the metal to put in these vehicles so that long term, you can reduce the CO2 carbon footprint. As we know, I think conventional vehicles have less of a carbon footprint than EVs on the manufacturing stage, given all of the pollution that materializes when you extract metals.

but long term, these vehicles start reducing carbon over the life of these vehicles.

So you're going to need the investment first and so far, we don't think that that's happening.

But to me, if there is one metal that's probably not subject to change in the next 10 years or so in Thurston, Copper I think is the one.

> Excellent. Okay, let's get to the next question. This question is on gold.

What's your take on the gold price heading into next year?

>> Well, that's been very touchy subject for me because so far, we have been wrong.

It's very tough for analysts to say that.

But we still think that we could see gold under $1600 and I will tell you why. The reason is we don't believe that the Federal Reserve is going to pivot towards a more dovish policy anytime soon.

So I think we have seen basically a significant rally and risk markets and commodities, and that included gold, on the viewpoint that the Federal Reserve may be reluctant to continue to be aggressive when the Fed funds rate increases. They've actually said, Mr. Powell has telegraphed quite clearly that he will slow down the rate of increase.

But he is slowing down probably from 75 basis points to 50, which is still quite restrictive.

And given the very, very, very strong, maybe too many verys, but firm employment environment in the United States with employment up well over 250,000 new jobs , unemployment still quite low, still missing is somemillions of people from the labour force, wages going up, consumers still having a lot of cash on hand depending on who you listen to, that varies from some 2 1/2, $3 trillion-$5 trillion above trend.

From employment, wages moving up, cash on hand, it doesn't look like the service sector, which is now driving inflation, is ready to capitulate just yet, so the Fed might have to stay tight for longer and perhaps significantly higher than the market is currently pricing, which is I think just under 5%.

>> Of course, you mentioned inflation which has been quite high this year.

Gold has been seen as a hedge against inflation. Has it done well as a hedge?

>> I think it has done well year-over-year.

it has done well compared to other assets.

I think gold has done its job, but it's not always going to go upwhen inflation is high.

What will matter is how central banks react to this inflationary pressure. Our hypothesis is that as interest rates on the short end of the curve, that represents a significant opportunity cost of holding.

so gold, for most people, doesn't yield an interest rate unless you are a central bank and you could swap deals and so on.

So the carry is quite expensive, and we think as we move into the first few months of next year, inflation will start falling off and rates will continue to be high. So in real terms, when you net, you know, nominal rate versus inflation, those real interest rates become more restrictive, and that historically has not been a positive for gold.

In fact, when you look at evidence over time, when central banks reached the peak or are towards the end of tightening and stay there, gold doesn't particularly do well and we think it's because of that interest rate real impact. Interest rate goes down, nominal… >> Interest rates are in a really restrictive area because they are so high.

>> That's right, and they might very well get more restrictive. And what inflation starts coming from the highs, they will get more restrictive still in real terms.

>> A great start. As always, make sure your own research before making any investment decisions.

And we will get back to your questions for Bart Melek on commodities in just a moment.

And a reminder that you can get in touch with us at any time.

Just email moneytalklive@td.com.

Now, let's get to today's educational segment.

If you're interested in analyst research about possible investments, WebBroker has tools which can help.

Joining us now for more is Caitlin Cormier, she's a client education instructor at TD Direct Investing.

So Caitlin, where can you find analyst research on the platform?

>> Nice to see you, Anthony. Yes, analyst research is a really important part or one of the important parts ofdoing research on companies. Some investors might choose to kind of take a deeper dive into what analysts are saying about a particular stock to see through other research if it makes it something that they might want to add to their portfolio. So let's happen to WebBroker and see where we can find this information.

So what I'm going to do first is click on research. We are going to go under markets and click on the Analyst Centre there towards the bottom.

Now, this particular Analyst Centre is for the market as a whole as opposed to for individual securities.

So what we can see here as we can see the most recent updates. So these are kind of the most recently rated securities. These were done today. We can also go through and filter. So if we want to see only a five star rated analyst reviews, if we want to see ones that are sell, probably not five star if we are selling, we can also go down to Canada or the US, we can choose market Or sector. There's a lot we can filterwithin the categories. We can also click on trending and see some of the different trending stocks, how the changes have been in the recent past with particular securities and again, we have lots of filters available.

Quite a lot of information we can find within the analyst centre. It's a good jumping off point to get a little bit of context about what's going on in the market, what's may be changing, and what some of the most covered securities might be.

>> What if we find an analyst but we want to find out more about what that analyst provides, like one of the companies they provide ratings on?

When we go about that?

>> Great question.

So there might be a particular analyst that you are a little bit more interested in following than another.

So the way that we can do that is just go back to kind of the most recent and lets me be choose a particular company. I'm going to click on Apple. There's big market There.

So we're just going to go in and this is the overview page for Apple but we are going to look for that analyst button here, the little tab.

That's going to take us to the individual rating for this company.

Now, to follow an individual analyst, we are going to scroll down here and see. I'm going to click Shannahn cross.

We are going to get a quick little brief on this little analyst and what I want to do is I want to click the follow button.

And then if I scroll back up under research, I click my overall Analyst Centre again. You will notice that I actually have a tab called followed analysts. Here, it will show me any analysts that I follow.

Clearly, I didn't click follow through because it didn't add her to the list here.

But click followed analysts and it will show you any analysts you have here.

And what it can do here is just click the expand button.

This one is for Douglas Young.

It shows us his unsuccessful and successful ratings.

It shows companies that he is following.

It's a neat way to target a little more information about this analyst and see know what they are thinking about the ratings only but to dive deeper into their history, whether it's somebody you want to put a little bit of faith in their research and look at other companies they might be covering.

>> Great information as always, Caitlin. Thank you.

> Thank you so much.

>> Our thanks to Caitlin Cormier, client education instructor at TD direct investing.

Make sure to check out the learning centre and WebBroker for more educational videos, live interactive master classes and upcoming webinars.

Before you back to questions about commodities for Bart Melek, a reminder on how you can get in touch with us.

>>Do you have a question about investing were what's driving the market? Our guests are eager to hear what's on your mind, so send us your questions.

There are two ways you can get in touch with us.

You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker.

Just write in your question and hit send. We will see if one of our guest can get you your answer here at MoneyTalk Live.

>> We are back with Bart Melek taking your questions about commodity stocks. The next your question is on natural gas.what is your outlook for natural gas?

>> we are fairly positive on natural gas.

the big reason, of course, is this, increasingly we are seeing North American natural gas being liquefied into LNG form and that is increasingly being shipped to foreign markets, Europe, Asia. It's one way to counter the lack of Russian supply, which is basically nonexistent.

The flows into Europe before all intents and purposes have stopped. And when that continues to happen, that means that there is less and less market segmentation between high prices around the world and the prices in North America.

And I think, as demand continues to grow around the world for North American LNG, that tightens up supply on fundamentals here on this continent.

Historically, as we of course all know, there isn't a pipeline that goes between North America, where there is plenty of gas for relatively cheap, to the rest of the world.

There is a whole process of liquefying, deliquefying, gasifying. Infrastructure is being built out. Not a huge amount in Canada. But that means the North American market is tightening. We think as Freeport facilities open up, that will, I think, keep prices up.

>> Great answer there. We'll go to the next question which is on agriculture.

I've been reading about the possible food supply crisis on the horizon.

What's your outlook for agriculture?

>> Well, we don't formally cover agriculture prices.

That is something that we don't trade in. We don't have a formal forecast. But certainly I have an opinion on what is happening broadly.

So agricultural prices ranging from grain to cattle to other cash crops have been subject to lower exports from Ukraine.

As you know, they are a big exporter of grains.

We know there is a war going on.

So that supply has been lowered. And of course, we are all seeing it on the supermarket shelves, higher food prices as well.

And also, natural gas prices have exploded to the upside in Europe and all over the world.

And natural gas is one of the key components of fertilizers. As natural gas prices go, fertilizer prices go.

And as fertilizer prices go higher, farmers try to economize on it and so the plantings are less fertilizer intensive, I think is much as half of the current global yield is because of artificial fertilizers.

And if you reduce how much you put in, that means the relative supply demand balance turns toward scarcity.

Prices have come off. Potash experts have, again, Ukraine and Russia are big exporters, it's used less intensively in their higher cost and that almost by definition means that not necessarily every month but of course year-over-year, prices are elevated and, ultimately, that translates into higher food prices as well.

>> It's interesting to see that link between natural gas prices and agriculture there.

>> Yeah, it's all connected. LNG is a big and put in nitrogen production. Nitrogen is something plants really need to grow.

>> That's right.

Okay, the next question is on China and demand.

Any signs of Chinese commodity demand picking up again?

I know you sort of touched on this topic in our discussion, what are your thoughts there?

>> I think they've been stronger than we thought.

Like copper.

A growing share of Chinese production has been EVs and EVs use metals like copper's more intensively.

I think it's not going to be great. Demand growth is going to be subdued.

Even though we expect China to start lifting the COVID restrictions.

What I think we have to be guarded in our optimism because when these restrictions are lifted, it's going to be gradual. It's not going to be all or nothing.

We have to remember that in China, the population particularly of older people isn't as vaccinated as the West and the vaccine types they are you saying don't have the same efficacy rates as ours, so in my view, it would be very difficult for China to cut these regulations at once. Remember, they've been in a very strict quarantine type of conditions for much of the pandemic. And that means most of the population hasn't been exposed. So if you were to open it up, there would be a lot of potential deaths, which is why think they might open it up slowly, the less restrictive than they were, but that doesn't mean it's going to be extremely quick. On the other hand, much of China produces much of their growth is destined for Western markets. As we said, we expect recessions in the Western world and if not recessions, significantly slower growth environments. And that means exports of manufactured goods which are commodity intensive are going to be not as strong.

So it's not going to be horrific, but we are guarded.

>> Okay. Great discussion so far.

We'll get back to your questions for Bart Melek on quantities in just a moment.

And as always, make sure you do your own research before making any investment decisions.

And a reminder that you can get in touch with us anytime.

>> Give a question about investing or what's driving the markets? Our guests are eager to hear what's on your mind, so send us your questions.

There are two ways you can get in touch with us. You can send us an email any time at moneytalklive@td.com, or you can use the question box right below the screen here on WebBroker. Just writing your question and hit send. We will see if one of our guest can get you the answer right here at MoneyTalk Live.

>> Turning to the markets right now, we will take a look at the S&P TSX composite index Canada. It is down 184 points, just under 1%.we will take a look at market south of the border, we will start with the S&P 500 index. It is also trading down. It is down 1.3%. We will take a look at the tech heavy NASDAQ composite index, also in the red, down about 200 points, equivalent to 1.7%.

Okay, we are back now with Bart Melek from TD Securities with our next question.

Again,this is on US dollar strength. Is the US dollar strength finally coming to an end?

I think this is a big question that's been on a lot of people's minds this year.

>> I think we've been protecting the lack of strength in the US dollar for quite some time.

And so far, it continues to be strong.

It might migrate a little lower, but then it comes back. I think probably you for the next quarter or two, it's very difficult to see how the US dollar can meaningfully trend lower.

Our view on the Fed, we continue to expect the Federal Reserve to be quite aggressive. In fact, TD Securities macro team which has been pretty good at forecasting these things, including the fact of unemployment and inflation, we are still looking at well over 5% Fed funds terminal rate.

And that suggests that it's unlikely that we are going to have a reversal anytime soon. Probably, the Federal Reserve is going to continue to be tight and the US relative to others will probably be outperformed. So yes, the US dollar might migrate a little lower in the months to come, but I think a lack of total strength or a total reversal is probably going to be later once we start seeing the Federal Reserve habit and other central banks which have lagged behind start to continue to do their thing while the Fed is doing something opposite. But until that happens, it's probably a strength will continue for now.

>> Next question on the platform.

are there any commodities that are overabundant in supply right now or do all of them have constraints?

>> Well, I'm sure there are, just a lot of the ones that we cover.

But look, temporarily, we could say that there is oil.

It is thought to be in ample supply.

Prices have dropped below 80.

They are currently at 77.

So we could say that, temporarily, there is some, you know, lack of scarcity.

But for the most part, I would say when looking… A year out, two years out, most of these commodities arein a pretty tight supply demand configuration, where we are more likely to have tight supplies than not. Of course, much will depend on how deep this recession is, how quickly we recover.

But judging based on what we are seeing on the capital side, what we are seeing all the supply side, and what we are expecting with policy, you know, later in 2023, we think these markets will continue to be fairly tight. Though there will be cyclical… Reprieves and our forecast is reflecting that in the later part of 2023.

>> Thank you very much for joining us.

>> Was my pleasure.

>> Our thanks to Bart Melek, head of commodity strategy at TD Securities.

and stay tuned on Wednesday. Scott Colbourne, managing director for active fixed income at TD Asset Management will be our guest, giving us his reaction to the Bank of Canada rate decision and taking your questions about fixed income.

And a reminder that you can get a head start.

Just email moneytalklive@td.com.

And that's all for our show today. Take care. We will see you tomorrow.

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