BCA Indicators/Model

Special Report

Feature This week, we present the BCA Central Bank Monitor Chartbook, detailing our set of proprietary indicators measuring the cyclical forces influencing future monetary policy decisions in developed market countries. The surging Monitors are all sending a similar message: tighter global monetary policy is necessary because of above-trend economic growth, intensifying inflation pressur­­es and booming financial markets (Charts 1A & 1B). Chart 1ATightening Pressures … Chart 1B… Everywhere The Monitors are pointing to a continuation of the cyclical rise in global bond yields seen since mid-2020, justifying our recommended below-benchmark stance on overall duration exposure in global bond portfolios. The driver of the next leg upward in yields, however, is shifting from growth and inflation expectations to monetary policy expectations. The Fed is starting to slowly prepare markets for the next US tightening cycle, which is already putting flattening pressure on the US Treasury curve and creating more two-way risk for the US dollar over the next 6-12 months. The timing and pace of rate hikes discounted by markets varies across countries, however, creating interesting opportunities for currency pairs, via changing interest rate differentials, away from the US dollar crosses. An Overview Of The BCA Research Central Bank Monitors The BCA Research Central Bank Monitors are composite indicators that include data which have historically been correlated to changes in monetary policy. The economic data series used to construct the Monitors are not the same for every country, but the list of indicators generally measure similar things (i.e. manufacturing cycles, domestic demand strength, commodity prices, labor market conditions, financial conditions). The data series are standardized and combined to form the Monitors. We have constructed Monitors for ten developed market countries: the US, the euro area, the UK, Japan, Canada, Australia, New Zealand, Sweden, Switzerland and Norway. A rising trend for each Monitor indicates growing pressures for central banks to tighten policy, and vice versa. Within each country, we have aggregated the various data series within the Monitors into sub-groupings covering economic, inflation and financial conditions indicators (equity prices, corporate credit spreads, etc). The latter is critical as policymakers have increasingly realized the importance of financial conditions as a key transmission mechanism of monetary policy to the real economy. The weightings of each bucket vary by country, based on the strength of historical correlations of the Monitors to actual changes in policy interest rates. Disaggregating the Monitors this way offers an additional layer of analysis by helping describe central bank reaction functions (i.e. some central banks respond more strongly to economic growth, others to inflation or financial conditions). Through the nexus between growth, inflation, and market expectations of future interest rate changes, the Monitors do exhibit broad correlations to government bond yields in the major developed markets (Charts 2A & 2B). The Monitors do also exhibit steady correlations to currencies, although not in the same consistent fashion as with bond yields. For example, the Fed Monitor is typically negatively correlated to the US dollar, while the Reserve Bank of Australia (RBA) Monitor is positively correlated to the Australian dollar. We present charts showing the links between the Monitors and bond yields (and foreign exchange rates) in the individual country sections of this Chartbook. Chart 2AThe Surging CB Monitors …. Chart 2B… Suggest More Upside For Bond Yields In each edition of the Central Bank Monitor Chartbook, we include a “non-standard” chart that shows an interesting correlation between the Monitors and a financial market variable. In this latest report, we show how the relationship between the Monitors and our 24-Month Discounters, which measure that amount of rate hikes/cuts discounted in overnight index swap (OIS) forward curves over the next two years. We have also added a new Appendix Table that shows the so-called “liftoff dates” (the date when a first full rate hike is discounted in OIS curves), the cumulative amount of rate hikes expected to the end of 2024, and the valuation of each country’s currency on a purchasing power parity (PPP) basis. We’ve ranked the countries in the table by liftoff dates, thus providing a handy reference to see how markets are judging the order with which central banks will begin the next monetary policy tightening cycle. Fed Monitor: A Clear Signal Our Fed Monitor has been climbing steadily, uninterrupted, for 13 consecutive months, driven by the combination of strong US growth, sharply higher inflation and booming financial markets (Chart 3A). The message from the highly elevated level of the indicator is clear – the Fed should begin the process of unwinding the massive monetary policy accomodation put in place because of the COVID-19 pandemic. At this week’s FOMC meeting, the Fed delivered a mildly hawkish surprise by pulling forward the projected timing of “liftoff” (the first fed funds rate hike) from 2024 to 2023. The timing and pace of future Fed tapering of asset purchases and rate hikes will be determined by how rapidly the US economy approaches the Fed’s definition of “maximum employment”. We see that happening by the end of 2022, which is a bit ahead of the Fed’s own projections for the unemployment rate. The US OIS curve now discounts liftoff near the end of 2022 (see Appendix Table 1), which is now more in line with our own view that the Fed will begin tapering next January and begin rate hikes in December 20221. US economic growth momentum has likely peaked in Q2, but will remain solid in the latter half of 2021. Most of the nation has lifted the remaining pandemic restrictions on activity after a succesful vaccination program, and fiscal policy is still providing a boost to growth. The Fed’s updated economic projections call for real GDP growth to reach 7% this year, 3.4% in 2022 and 2.4% in 2023. The Fed’s assumption is trend GDP growth is still only 1.8%, thus the central bank now expects three consecutive years of above-trend growth. Unsurprisingly, the Fed is forecasting headline PCE inflation to stay above the Fed’s 2% target for all three years (Chart 3B). Chart 3AUS: Fed Monitor Chart 3BIs This Really 'Transitory' Inflation? The recovery in the Fed Monitor has been led primarily by the growth component, although the inflation and financial components have also risen significantly (Chart 3C). The Fed Monitor has typically been negatively correlated to the momentum of the US dollar, which has always been more of a counter-cyclical currency that weakens in good economic times. A more hawkish path for US interest rates could eventually give a sustainable lift to the greenback, but for now, the currency will be caught in a tug of war between shifting Fed expectations and robust global growth over the next 6-12 months. Chart 3CBooming Growth Supporting USD Weakness We continue to recommend an underweight strategic allocation to US Treasuries within global government bond portfolios, with markets still pricing in a pace of Fed tightening that appears too conservative (Chart 3D). Chart 3DNot Enough Fed Rate Hikes Priced The Fed’s mildly hawkish surprise this week generated a signficant flattening of the US Treasury curve, with the spread between 5-year and 30-year US yields narrowing by a whopping 20bps. We are closing our two recommeded yield curve trades in the BCA Research Global Fixed Income Strategy tactical trade portfolio, which were positioned more to earn near-term carry in a stable curve environment that has now changed with the Fed injecting volatility back into the bond market. BoE Monitor: More Hawkish Surprises Coming Our Bank of England (BoE) Monitor has spiked higher, fueled by a rapid recovery of UK growth alongside a pickup in inflation pressures (Chart 4A). The BoE has already responded by slowing the pace of its asset purchases in May, and we expect more tapering announcements over the next 6-12 months. The most recent set of BoE economic forecasts calls for headline UK CPI inflation to rise to 2.3% in 2022 before settling down to 2% in 2023 and 1.9% in 2024 (Chart 4B). This would be a mild inflation outcome by recent UK standards during what will certainly be a period of strong post-pandemic growth over the next 12-18 months. Longer-term inflation expectations, both survey-based and extracted from CPI swaps and inflation-linked Gilts, are priced for a bigger inflation upturn above 3%. Chart 4AUK: BoE Monitor Chart 4BUpside UK Inflation Surprises Ahead? The recent decision by the UK government to delay “Freedom Day”, when all remaining COVID-19 restrictions would be lifted, into July because of the spread of the Delta virus variant represents a potential near-term setback to UK growth momentum. The bigger picture, however, still points to an economy benefitting far more from the earlier success of the vaccination program. Consumer confidence remains resilient, while business confidence – and investment intentions – has taken a notable turn higher as well. The housing market has also started to heat up, with house price inflation accelerating. The backdrop still remains one of above-potential UK growth over the next 12-24 months. Within the BoE Monitor sub-components, the economic and financial elements stand out as having the biggest moves over the past year (Chart 4C). Momentum in the British pound is positively correlated to our BoE Monitor. As the central bank moves incrementally moves towards more tapering and eventual rate hikes, the currency, which remains moderately undervalued on a PPP basis (see Appendix Table 1), should be well supported. Chart 4CAll BoE Monitor Components Are Rising The UK OIS curve currently discounts BoE liftoff in May 2023, with 57bps of cumulative rate hikes expected by the end of 2024. We see risks of the central bank moving sooner than the market on liftoff, with a rate hike in the 3rd or 4th quarter of 2022 more likely. The Gilt market is vulnerable to any hawkish shift by the BoE with so few rate hikes discounted (Chart 4D). For now, we are maintaining a neutral stance on UK Gilts, given the BoE’s history of talking hawkishly but failing to deliver, but we do have them on “downgrade watch.” Chart 4DBoE Monitor Suggests Continued Downward Pressure On Gilt Yields ECB Monitor: Growth? Yes. Inflation? No. Our European Central Bank (ECB) Monitor has moved sharply higher as more of the euro area has emerged from pandemic restrictions (Chart 5A). Yet the central bank is not sending any of the kinds of moderately hawkish signals coming from the Fed and other central banks. The ECB is still a long way from such a move. While growth has clearly recovered strongly, the overall euro area unemployment rate remains high at 8% and wage growth remains anemic in most countries. There is the potential for upside growth surprises coming from fiscal policy, with the Next Generation EU (NGEU) funds set to be disributed by the EU later this year. Yet even with this fiscal boost, most of the euro area is likely to remain far enough away from full employment allowing the ECB to stay dovish for longer. While headine euro area inflation reached the ECB’s 2% target in May, core inflaton remained subdued at a mere 0.9% (Chart 5B). Market based measures of inflation expectations are also well below the ECB target, with the 5-year/5-year forward CPI swap rate only at 1.6%. Such “boring” inflation readings – even after a surge in commodity price fueled inflation in many other countries – proves that there remains ample spare capacity in the euro area economy and labor markets. The ECB is under no pressure to turn less dovish anytime soon. Chart 5AEuro Area: ECB Monitor Chart 5BStill Lots Of Spare Capacity In Europe The lack of an immediate inflation threat can also be seen in the sub-components of our ECB Monitor, where the inflation elements have clearly lagged the growth upturn (Chart 5C). From a currency perspective, a growth fueled surge in the ECB Monitor is usually enough to provide a boost to the euro. Yet, without an inflation trigger, the likelihood of the ECB dialing back bond purchases, let alone raising interest rates, is low. This suggests any rally in the euro from current levels will be a slow adjustment towards fair value. Chart 5CInflation Components Lagging Currently, the European OIS curve is discounting an initial ECB rate hike in October 2023, with only 27bps of rate hikes expected by the end of 2024 - one of the most dovish pricings in the G10 (see Appendix Table 1). Even though our ECB Monitor suggests that European bond markets should be pricing in more rate hikes (Chart 5D), that is unlikely to happen with the ECB messaging a dovish stance and with the central bank set to release a review of its inflation strategy later this year. We continue to recommend an overweight stance on European government bonds within global fixed income portfolios. Chart 5DMarkets Hear The ECB's Dovish Message   BoJ Monitor: Deflation Is Still A Threat Our Bank of Japan (BoJ) Monitor has recovered from deeply depressed pandemic lows to just above the zero line (Chart 6A). This is welcome news for the BoJ, that kept interest rates and asset purchases unchanged at yesterday's meeting, but recognized the need for additional stimulus via "green" loans.The reading from the central bank monitor is also consistent with a Japanese economy that requires more accommodative monetary policy vis-à-vis the rest of the G10. The Japanese economy remains under siege from the pandemic. The number of new COVID-19 cases remains at the highest level per capita in developed Asia. Meanwhile, the manufacturing PMI is the lowest in the developed world and a third wave of infections has also crippled the services sector. This pins the Japanese recovery well behind that of other G10 countries. The IMF expects the output gap in Japan to close sometime in 2023, but it is worth noting that there are few signs of inflationary pressures that would signal such an outcome. Both core and headline Japanese prices are deflating in a world where the risks are tilted towards an inflation overshoot (Chart 6B). The unemployment rate has rolled over, but still remains a ways from pre-pandemic lows. Savings in Japan are also surging, short-circuiting the sort of positive feedback loop that will generate genuine inflation. Chart 6AThe BoJ Monitor Chart 6BDeflation Is Still A Threat In Japan The individual elements of the BoJ Monitor suggest that the growth component has seen steady improvement over the last few months, while the financial component has rolled over (Chart 6C). The latter reflects the underperformance of Japanese equities in recent months, after a spectacular rally late last year. However, weakness in the yen has also allowed financial conditions to remain relatively easy. The yen is a safe-haven currency, making the relationship with the central bank monitor less intuitive. When the central bank monitor is improving (both in Japan and globally), traders tend to use the yen to fund carry trades elsewhere, which weakens the currency. When risk aversion sets in, these trades are unwound, and the yen rallies. This year, the yen has weakened in sympathy with improving global growth, suggesting this playbook remains very much relevant. Chart 6CModest Improvement In The Growth And Inflation Components The strength of our BoJ Monitor indicates that Japanese Government Bond (JGB) yields should rise towards the upper bound of the -25bps to +25bps band. However, the BoJ will stand firm in maintaining easy monetary policy, as expected by market participants (Chart 6D). This policy-induced stability makes JGBs a defensive bond market when US Treasury yields are rising, a key reason for our overweight stance on JGBs. Chart 6DNo Change In Policy Expected BoC Monitor: Strong Growth = Early Tightening Our Bank of Canada (BoC) Monitor has shown an impressive rebound and currently displays the highest figure among our Central Bank Monitors (Chart 7A). With a growing number of central banks contemplating a less dovish turn, Canada will be in the group of developed countries that hikes policy rates first. The Canadian economy started the year gaining significant positive momentum, with Q1 GDP growing by +5.6% (annualized quarter-on-quarter rate of change). The Q2 picture is a bit more mixed because of another wave of COVID-19 lockdowns. However, thanks to the rapid improvement in the pace of vaccinations after a botched initial rollout, Canadian household consumption and confidence have notably accelerated. Business confidence and investment intentions have also picked up solidly according the BoC’s most recent Business Outlook Survey. The job market also gained significant momentum, and as the lockdown measures gradually ease, workers who have been laid off during the pandemic will return to work. Therefore, the improvement in labor market will continue. A rapidly closing output gap means that the current surge in inflation may endure after the base effect comparisons to 2020 fade (Chart 7B). Chart 7ACanada: BoC Monitor Chart 7BCanadian Inflation Pressures Intensifying Looking at the components of our BoC Monitor, all three factors have clearly rebounded but the growth factor has shown the most impressive move (Chart 7C). Amid the broad economic factors that have improved, booming house prices – a primary cause for the BoC’s decision to taper its asset purchases back in April - have caused the growth factor to rebound quickly. Chart 7CA Positive Story For The CAD The Canadian OIS curve is pricing in BoC liftoff in August 2022 (Appendix Table 1), with a sooner liftoff only expected in Norway and New Zealand. We see risks that the BoC moves much sooner than that next year. A quicker liftoff which will put additional upward pressure on the Canadian dollar, both against the US dollar and on a trade-weighted basis, particularly if Canadian export demand remains solid and oil prices continue to climb, as our commodity strategists expect. Our PPP model suggests that the Loonie is close to fair value, so valuation is not yet an impediment to additional strength in the Canadian dollar. Looking at the longer-term horizon, the OIS curve is discounting four BoC rate hikes within the next 24 months, and it is not clear that will be enough to cool off the red-hot Canadian housing market – currently the biggest threat to inflation stability in Canada (Chart 7D). Given that relatively hawkish view, the more optimistic growth outlook, and the high-beta status of Canadian government bonds, we continue to recommend an underweight position on Canadian government bonds within a global fixed income portfolio. Chart 7DCanadian Rate Expectations Look Fairly Priced RBA Monitor: Waiting For Inflation Our Reserve Bank of Australia (RBA) Monitor has continued its strong rebound since the trough in 2020 and is now at all-time highs, suggesting heightened pressure on the RBA to tighten policy (Chart 8A). This rebound comes amid dovish messaging from an RBA that is waiting on signs of an inflation turnaround. The RBA’s patience makes sense when you consider measures of slack in the economy, such as output and unemployment gaps (Chart 8B). While the IMF does expect the output gap to tighten up significantly in 2021, it does not expect it to be closed even by 2022. Looking to capacity in the labor market, the unemployment rate has just returned to pre-COVID levels. However, the labor market will need to run “hot” for a sustained period of time to push up wage inflation, which remains deep in the doldrums according to the RBA’s wage price index. Chart 8AAustralia: RBA Monitor Chart 8BMuted Inflationary Pressures Down Under A look at the components of our RBA Monitor explains the RBA’s dovishness in the face of the tightening pressure indicated by the “headline” figure (Chart 8C). The rebound in the Monitor can be attributed almost entirely to the growth and financial components, which are driven in turn by improving confidence and an expanding RBA balance sheet. However, the inflation component, which has barely budged off its 2020 low, best captures the metrics that the RBA is watching. Importantly, the RBA will need to see sustainable domestically-generated inflation before it can begin to tolerate a stronger AUD which would otherwise imperil tradable goods inflation. With the AUD only slightly expensive on our PPP models, the RBA does not have much of a “valuation cushion” to play with in terms of delivering a hawkish surprise (Appendix Table 1). ​​​​​​ Chart 8CGrowth Factors Are Driving the RBA Monitor Chart 8D shows that market pricing for hikes over the next two years has remained mostly flat in 2021 in the face of persistently dovish messaging from the RBA. Our view, as expressed in a recent update of our “RBA checklist”2, is that fundamental factors will force the RBA to remain dovish, making Australian government debt an attractive overweight within global government bond portfolios. Chart 8DMarkets Are (Rightly) Looking Through Tightening Pressures In Australia RBNZ Monitor: Heating Up Our Reserve Bank of New Zealand (RBNZ) Monitor has rebounded to levels last seen in 2017, largely on the back of improving growth (Chart 9A). Success at containing the virus has allowed the New Zealand economy to beat growth expectations for Q1/2021, effectively pulling forward future policy tightening. Measures of capacity utilization in New Zealand will likely respond accordingly to improved growth prospects, with the output gap likely to close even faster than projected by the IMF (Chart 9B). Measures of core and headline inflation remain within the RBNZ’s 1-3% target range, with the Bank expecting headline inflation to shoot up to 2.6% in Q2/2021 before settling around the midpoint of the range. Chart 9ANew Zealand: RBNZ Monitor Chart 9BThe New Zealand Economy Is Quickly Working Off Slack Looking at the individual components of our RBNZ Monitor, the rebound in the overall indicator is clearly a growth story (Chart 9C). This component of our Monitor also captures the effect of accelerating house prices, which have become a direct concern for RBNZ policy. According to the bank’s own projections, house prices will post a whopping 29% growth rate in the second quarter. With issues of housing affordability at the forefront, and political pressure mounting, the RBNZ will likely be forced to turn less dovish soon, even if it comes with unwanted strength in the NZD. However, the currency is among the most expensive on our PPP models (Appendix Table 1), which means that a reversion to fair value could counteract upward pressure from a hawkish RBNZ. Chart 9CThe RBNZ Will Do Whatever It Takes To Stabilize House Prices Historically, our RBNZ Monitor has correlated well with market pricing embedded in the OIS curve (Chart 9D). In 2021, however, market expectations have far outstripped the signal from our central bank monitor, meaning that markets believe the RBNZ is more focused on growth factors rather than the overall picture, a view that we largely agree with. Chart 9DMarkets Expect A Hawkish RBNZ Even after the Fed’s hawkish surprise at this week’s meeting, we still believe that the RBNZ will be among the first to taper its balance sheet and move towards normalizing policy. Stay underweight New Zealand sovereign debt. Riksbank Monitor: Watch For An Upside Surprise Our Riksbank Monitor has posted a strong rebound, reaching all-time highs (Chart 10A). This rebound has come on the back of a robust economic recovery. Meanwhile, monetary policy has been accommodative with the Riksbank holding the repo rate at 0% while expanding the size of its balance sheet. Capacity utilization, which in Sweden did not fall nearly as much as in other developed economies, is looking set to recover in the coming years (Chart 10B). Although headline CPI shot past the 2% target, driven by fuel and food prices, underlying core inflation remains stable. The Riksbank expects inflation to fall due to less favorable year-over-year base effects, and only sustainably climb to the 2% level by mid-2024. Chart 10ASweden: Riksbank Monitor Chart 10BThe Rise In Swedish Inflation Is 'Transitory'... Breaking down the rise in the Riksbank Monitor, we can see that it is driven overwhelmingly by the growth component (Chart 10C). This, in turn, has been driven by surging PMIs and soaring business and consumer confidence. Our colleagues at BCA Research European Investment Strategy have pointed out that the small export-sensitive economy will be poised to benefit from an upturn in the global industrial cycle3. While Sweden did arguably botch its COVID-19 response last year, it is catching up, with 42% of Swedes having already received their first dose of the vaccine. The case for the SEK is strong, given that the currency is a high-beta play on global growth and is also quite undervalued according to our PPP models (Appendix Table 1). Market expectations are that the Riksbank will lag others in normalizing policy, putting off a hike until September 2023. The Riksbank baseline is a flat repo rate out to Q2/2024 but an earlier rate hike is well within the “uncertainty bands” of the Riksbank’s forecast. Such a scenario may manifest if growth and inflation surprise to the upside. Chart 10C...But The Riksbank Cannot Ignore Explosive Growth Given the positive economic backdrop and the financial stability risks posed by rising house prices and household indebtedness, we believe market pricing is too dovish relative to the actual pressure on the Riksbank to tighten policy (Chart 10D). This makes Swedish sovereign debt an attractive underweight candidate in global government bond portfolios. Chart 10DThe OIS Curve Is Pricing In Too Much Dovishness From The Riksbank Norges Bank Monitor: The First To Hike Our Norges Bank Monitor has risen sharply from the pandemic lows and now signals that emergency monetary settings are no longer appropriate for the Norwegian economy (Chart 11A). Consistent with this message, Norges Bank governor, Øystein Olsen, suggested this week that a rate hike will occur in September, with possibly another hike by December of this year. Norway has handled the pandemic successfully. Since the onset of the COVID-19 crisis, it has registered the lowest rate of infections per capita, in part aided by its early decision to close its borders. Fiscal stimulus was also prompt and finely tailored to the sectors most in need of emergency funds. Moreover, monetary policy was highly accommodative, with the Norges Bank cutting interest rates to zero for the first time since its founding in 1816. Fiscal stimulus will remain relatively accommodative, as Norway will register one of the smallest fiscal drags in the G10 for the remainder of 2021 and 2022. Rapid improvement in the labor market also continues. After peaking at 9.5% in March 2020, the headline unemployment rate has fallen to 3.3%. On the energy front, the new Johan Sverdrup oil and gas discovery marks a major turnaround in capital spending for Norway. According to the Norges Bank, real petroleum investment will increase from approximately NOK 175bn in 2021 to NOK 198bn by 2024. These developments have set the Norwegian economy on a sustainable recovery path. This positive economic outlook suggests that Norwegian inflation will remain above the central bank’s target of 2%. Already, headline CPI stands at 3% (Chart 11B). Meanwhile, while core inflation at 2% is decelerating, the slowdown should be temporary. According to a Norges Bank survey, both long-term and near-term inflation expectations among economists, business leaders, and households are rising, which indicates that a deflationary mindset has not taken root in Norway. Chart 11AThe Norges Bank Monitor Chart 11BInflation Is Well Anchored In Norway The biggest improvement in our Norges Bank Monitor comes from its growth and inflation components, the former surging to its highest level in two decades. This improvement surpasses those that followed the global financial crisis and the bursting of the dot-com bubble (Chart 11C). In essence, the growth component of the Monitor signals that the Norwegian economy has achieved escape velocity. The Monitor shows a very tight correlation with the trade-weighted currency, suggesting the exchange rate is an important valve for adjusting financial conditions. As an oil-producing economy, the drop in the NOK cushioned the crash in oil prices last year. This year, a recovery has benefitted the krone. The Norwegian krone also remains undervalued according to our PPP models. Chart 11CThe Norges Bank Should Hike Rates A positive correlation also exists between the Monitor and expected rate hikes by the Norges bank (Chart 11D). This suggest yields in Norway should either coincide or lead the improvement in global bond yields. From a portfolio perspective, our default stance is neutral, as the market is thinly traded. Chart 11DThe Norges Bank Should Hike Rates SNB Monitor: Green Shoots Our Swiss National Bank (SNB) Monitor has recovered smartly, and is at the highest level in over a decade (Chart 12A). This is a marked turnaround for a country that has had negative interest rates since 2015. It also raises the prospect that Switzerland may be finally able to escape its liquidity trap, allowing the SNB to modestly adjust monetary policy upward. The Swiss economy has recovered swiftly. As of May, the manufacturing PMI was at 69.9, the highest reading since the start of the series. If past manufacturing sentiment is prologue, the Swiss economy is about to experience its biggest rebound in decades. This will quell any deflationary fears about domestic conditions in Switzerland and begin to re-anchor inflation expectations upwards. This will also be a very welcome development for the SNB. Inflation dynamics in Switzerland will be particularly beholden to improvements in private sector demand. The unemployment rate in Switzerland has rolled over, which should begin to provide an anchor to wage growth. Both core and headline inflation are also recovering, albeit at a slow pace (Chart 12B). Import prices in Switzerland will also rise, driven by the relative weakness of the currency. This is important because for a small, open economy like Switzerland, the exchange rate often dictates the trend in domestic inflation. Chart 12AThe SNB Monitor Chart 12BSwiss Inflation Not Out Of The Woods Looking at the components of our SNB Monitor, the growth component has been in the driver’s seat (Chart 12C). But encouragingly, both the inflation and financial component have also been grinding higher. This improvement suggests that the weakness in the franc, especially amidst global dollar weakness, has been a welcome jolt to the economy. Like the yen, the CHF is a safe-haven currency, making the relationship with the central bank monitor less intuitive. Most of the time, the relationship with the monitor is inverse, corresponding to investors using the Swiss franc for carry trades when global conditions improve. Similar to the yen this year, the CHF has also weakened in sympathy with improving global growth. Should global growth see a setback in the near term, the franc will benefit. Chart 12CGrowth Indicators Are Surging In Switzerland The SNB Monitor is more accurate at capturing expected policy changes by the SNB. This means that yields in Switzerland could see more meaningful upside (Chart 12D). That said, our default stance on Swiss bonds is neutral in a global portfolio, given low liquidity. Chart 12DCould The SNB Finally Lift Rates? Appendix Table 1 Table 1Appendix Table 1 Footnotes 1 See BCA Research US Bond Strategy/Global Fixed Income Strategy Special Report, “A Central Bank Timeline For The Next Two Years”, dated June 1, 2021, available at gfis.bcaresearch.com 2 Please see BCA Research Global Fixed Income Strategy Report, "A Summer Nap For Global Bond Yields", dated June 9, 2021, available at gfis.bcaresearch.com. 3 Please see BCA Research European Investment Strategy Report, "Take A Chance On Sweden", dated May 3, 2021, available at eis.bcaresearch.com.

Weekly Performance Update For the week ending Thu Jun 17, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio Total Weekly Return BCA US Portfolio S&P500 TRI -2.34% -0.37% Top Contributors   WAT:US IT:US PSA:US KOF:US MPLX:US Weekly Return 12 bps 4 bps 2 bps 1 bps 0 bps Top Detractors   TX:US SCCO:US STX:US LPX:US AN:US Weekly Return -38 bps -33 bps -27 bps -14 bps -13 bps Top Prospects   TX:US BRK.A:US ESGR:US ANAT:US UHAL:US BCA Score 99.09% 98.99% 97.29% 96.86% 96.54% BCA Canada Portfolio Total Weekly Return BCA Canada Portfolio S&P/TSX TRI -0.74% 0.54% Top Contributors   TOY:CA CSU:CA CPX:CA TCN:CA DSG:CA Weekly Return 14 bps 11 bps 9 bps 9 bps 8 bps Top Detractors   CS:CA PXT:CA TCL.A:CA LNR:CA IMO:CA Weekly Return -43 bps -29 bps -19 bps -19 bps -18 bps Top Prospects   CS:CA LNF:CA IFP:CA RUS:CA CFP:CA BCA Score 99.79% 98.75% 98.48% 98.39% 96.94% BCA UK Portfolio Total Weekly Return BCA UK Portfolio FTSE 100 TRI -0.22% 0.94% Top Contributors   OXIG:GB POLR:GB CVSG:GB AAF:GB AGRO:GB Weekly Return 21 bps 16 bps 15 bps 10 bps 8 bps Top Detractors   FDEV:GB HSBK:GB SVST:GB DRX:GB VVO:GB Weekly Return -36 bps -14 bps -13 bps -11 bps -10 bps Top Prospects   SVST:GB GLTR:GB NLMK:GB RMG:GB BPCR:GB BCA Score 99.77% 98.61% 98.37% 97.91% 96.67% BCA Eurozone Portfolio Total Weekly Return BCA EMU Portfolio MSCI EMU TRI 0.12% 1.27% Top Contributors   STR:AT PHA:FR AOF:DE GTT:FR EDNR:IT Weekly Return 22 bps 19 bps 13 bps 12 bps 8 bps Top Detractors   SOLV:BE CEM:IT MMT:FR TKA:AT MS:IT Weekly Return -11 bps -8 bps -8 bps -7 bps -7 bps Top Prospects   STR:AT SOLV:BE POST:AT CNV:FR BB:FR BCA Score 99.02% 98.56% 98.44% 97.93% 97.52% BCA Japan Portfolio Total Weekly Return BCA Japan Portfolio TOPIX TRI 0.90% 0.35% Top Contributors   2791:JP 4966:JP 3132:JP 6676:JP 7994:JP Weekly Return 32 bps 31 bps 27 bps 19 bps 18 bps Top Detractors   8117:JP 8850:JP 3291:JP 8595:JP 6345:JP Weekly Return -14 bps -13 bps -12 bps -11 bps -10 bps Top Prospects   5930:JP 3291:JP 4966:JP 9436:JP 7994:JP BCA Score 99.48% 98.95% 98.66% 98.34% 98.32% BCA Hong Kong Portfolio Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI 0.79% -0.61% Top Contributors   990:HK 3600:HK 857:HK 215:HK 1919:HK Weekly Return 58 bps 51 bps 21 bps 18 bps 15 bps Top Detractors   1258:HK 2877:HK 2768:HK 323:HK 743:HK Weekly Return -25 bps -19 bps -15 bps -12 bps -11 bps Top Prospects   990:HK 1606:HK 2232:HK 86:HK 116:HK BCA Score 98.85% 98.22% 97.78% 97.60% 97.38% BCA Australia Portfolio Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI -0.99% 0.56% Top Contributors   JLG:AU FLN:AU NEW:AU PL8:AU ELD:AU Weekly Return 24 bps 21 bps 16 bps 8 bps 8 bps Top Detractors   PDN:AU GRR:AU CIA:AU SRV:AU CAJ:AU Weekly Return -50 bps -23 bps -18 bps -17 bps -13 bps Top Prospects   GRR:AU PIC:AU CIA:AU BFG:AU BLX:AU BCA Score 98.90% 98.01% 97.03% 96.38% 96.21%

Highlights Oil demand expectations remain high. Realized demand continues to disappoint. This means OPEC 2.0's production-management strategy – i.e., keeping the level of supply below demand – will continue to dictate oil-price levels. US producers will remain focused on consolidation via M&A and on returning capital to shareholders, in line with the Kingdom of Saudi Arabia's (KSA) expectation. Going forward, shale producers will focus on protecting and growing profit margins. The durability of OPEC 2.0's tactical advantage arising from its enormous spare capacity – ~ 7mm b/d – is difficult to gauge: Tightening global oil markets now in anticipation of Iran's return as a bona fide exporter benefits producers globally, and could accelerate the return of US shales if that return is delayed or re-opening boosts demand more than expected. We are raising our average Brent forecast for 2021 to $66.50 vs. $63/bbl earlier, with 2H21 prices averaging $70/bbl. We are moving our 2022 and 2023 forecasts up slightly to $74 and $81/bbl (Chart of the Week). WTI will trade $2-$3/bbl lower. We remain long the S&P GSCI Dynamic Roll Index ETF (COMT) and the S&P GSCI, expecting tight supply-demand balances to further steepen backwardations in forward curves. Feature While the forecasted rebound in global oil demand continues to drive expectations for higher prices, it is the production discipline of OPEC 2.0 and capital discipline imposed on US shale producers that has and will continue to super-charge the recovery of prices. Continued monetary accommodation and fiscal stimulus notwithstanding, realized global oil demand has mostly flatlined at ~ 96mm b/d following its surge in February, as uncertainty over COVID-19 containment keeps governments hesitant about reopening their economies too quickly. Stronger demand in Asia, led by China, has been offset by weaker demand in India and Japan, where COVID-19 remains a deterrent to re-opening and recovery. The recovery in DM demand generally stalled over this period even as vaccine availability increased (Chart 2). Chart of the WeekOPEC 2.0 Comfortable With Higher Prices Chart 2Global Demand Recovery Stalled That likely will change in 2H21, but it is not a given: The UK, which has been among the world leaders in COVID-19 containment and vaccinations, delayed its full reopening by a month – to July 19 – in an effort to gain more time to bolster its efforts against the Delta variant first identified in India. In the US, New York state lifted all COVID-19-induced restrictions and fully re-opened this week. Still, even in the US, unintended inventory accumulation in the gasoline market – just as the summer driving season should be kicking into high gear – suggests consumers remain cautious (Chart 3). Chart 3Unintended Inventory Accumulation in US Gasoline Market We continue to expect the re-opening of the US and Europe (including the UK) will boost DM demand in 2H21, and wider vaccine availability will boost EM oil demand later in the year and in 2022. For all of 2021, we have lifted our demand-growth estimate slightly to 5.3mm b/d from 5.2mm b/d last month. We expect global demand to grow 4.1mm b/d next year and 1.6mm b/d in 2023. Our 2021 estimates are in line with those of the US EIA and the IEA. OPEC is more bullish on demand recovery this year, expecting growth of 6mm b/d. We continue to believe the risk on the demand side remains to the upside; however, given continued uncertainty around global COVID-19 containment, we remain circumspect. Supply-Side Discipline Drives Oil Prices OPEC 2.0 remains committed to its production-management strategy that is keeping the level of supply below demand. Compliance with production cuts in May reportedly was at 115%, following a 114% rate in April.1 Core OPEC 2.0 – i.e., states with the capacity to increase production – is holding ~ 7mm b/d of spare capacity, according to the IEA, which will allow it to continue to perform its role as the dominant supplier in our modeling (Chart 4). Earlier this year, KSA's Energy Minister Abdulaziz bin Salman correctly recognized the turn in the market that likely ensures OPEC 2.0's dominance for the foreseeable future – i.e., the shift in focus of the US shale-oil producers from production for the sake of production to profitability.2 This is a trend that has been apparent for years as capital markets all but abandoned US shale-oil producers. Chart 4OPEC 2.0 Remains Dominant Producers outside OPEC 2.0 – what we refer to as the "price-taking cohort" – have prioritized shareholder interests as a result of this market pressure, and remain focused on sometimes-forced consolidation via M&A, which we have been expecting.3 The significance of this evolution of shale-oil production is difficult to overstate, particularly as the survivors of this consolidation will be firms with strong balance sheets and a focus on profitability, as is the case with any well-run manufacturing firm. We also expect large producers to opportunistically shed production assets to reduce their carbon footprints, so as to come into compliance with court-ordered emission reductions and shareholder demands to reduce pollution.4 With the oil majors like Shell, Equinor and Oxy divesting themselves of shale properties, production increasingly will be in the hands of firms driven by profitability.5 We expect US shale-oil production to end the year at 9.86mm b/d and to average 9.57mm b/d next year; however, as the shales become the marginal global supply, production could become more volatile (Chart 5). The consolidation of US production also will alter the profitability of firms continuing to operate in the shales. We expect breakeven costs to fall as acquired production by stronger firms results in high-grading of assets – only the most profitable will be produced given market-pricing dynamics – while less profitable acreage will be mothballed until prices support development(Chart 6). Chart 5US Producers Focus On Profitability Chart 6Shale Breakevens Likely Fall As Consolidation Picks Up Supply-Demand Balances Tightening The current round of M&A consolidation and OPEC 2.0's continued discipline lead us to expect continued tightening of global oil supply-demand balances this year and next (Chart 7). This will allow inventories to continue to draw, which will keep forward oil curves backwardated (Chart 8). Chart 7Supply-Demand Balances Will Continue To Tighten Chart 8Tighter Markets, Lower Stocks The critical factor here will be OPEC 2.0's continued calibration of supply in line with realized demand and the return of Iran as a bona fide exporter, which we expect later this year. OPEC 2.0's restoration of ~ 2mm b/d of supply will be done by the beginning of 3Q21, when we expect Iran to begin restoring production and visible exports (i.e., in addition to its under-the-radar sales presently). The return of Iranian supply – and a possible increase in Libyan output – will present some timing difficulties for OPEC 2.0's overall strategy, but they will be short-lived. We continue to monitor output to assess the evolution of balances (Table 1). Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) Investment Implications Oil demand will increase over the course of 2H21, as vaccines become more widely distributed globally, and the massive fiscal and monetary stimulus deployed worldwide kicks economic activity into high gear. On the supply side, markets will tighten on the back of continued restraint until Iranian barrels return to the market. The balance of risk is to the upside, particularly if the US and Iran are unable to agree terms that restore Iran as a bona fide exporter. In that case, the market tightening now under way will result in sharply higher prices. That said, realized demand growth has stalled over the past three months, which can be seen in unintended inventory accumulation in the US gasoline markets just as the summer driving season opens. We are raising our average Brent forecast for 2021 to $66.50 vs. $63/bbl earlier, with 2H21 prices averaging $70/bbl. We are moving our 2022 and 2023 forecasts up slightly as well to $74 and $81/bbl (Chart of the Week). WTI will trade $2-$3/bbl lower. We remain long the S&P GSCI Dynamic Roll Index ETF (COMT) and the S&P GSCI, expecting tight supply-demand balances to further steepen backwardations in forward curves. The big risk, as highlighted above, remains an acceleration of COVID-19 infections, hospitalizations and deaths, which force governments to delay re-opening or impose localized lockdowns once again. In this regard, KSA's strategy of calibrating its output to realized – vice forecasted – demand likely will remain in place.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com   Commodities Round-Up Energy: Bullish China's refinery throughput surged 4.4% to 14.3mm b/d in May, a record high that surpassed November 2020's previous record of 14.26mm b/d, according to S&P Platts Global. The increased runs were not unexpected, and were largely accounted for by state-owned refiners, which operated at 80% of capacity after coming out of turnaround season. Turnarounds will fully end in July. In addition, taxes on niche refined-product imports are due to increase, which will bolster refinery margins as inventories are worked down. China's domestic crude oil production was just slightly more than 4mm b/d. Base Metals: Bullish China's Standing Committee approved the release an undisclosed amount of its copper, aluminum and zinc stockpiles via an auction process in the near future, according to reuters.com. The government disclosed its intent on the website of National Food and Strategic Reserves Administration on Wednesday; however, specifics of the auction – volumes and auction schedule, in particular – were not disclosed. Prices had fallen ~ 9% from recent record highs in the lead-up to the announcement, which we flagged last month.6 Prices rallied from lows close to $4.34/lb on the COMEX Wednesday (Chart 9). Precious Metals: Bullish After a worse-than-expected US employment report, we do not expect the Federal Reserve to lift nominal interest rates in Wednesday’s Federal Open Market Committee (FOMC) meeting. The Fed will only raise rates once the US economy reaches a level consistent with its definition of "maximum employment." Wednesday’s interest rate decision will be crucial to gold prices. If the Fed does not mention asset tapering or an interest-rate hike, citing current inflation as a transitory phenomenon, gold demand and prices will rise. On the other hand, if the Fed indicates an interest rate hike sooner than the previously stated 2024, this will weigh on gold prices (Chart 10). Ags/Softs: Neutral As of June 13, 96% of the US corn crop had emerged vs. the five-year average of 91%, according to the USDA. 68% of the crop was rated in good to excellent condition, slightly below the five-year average. In the bean market, 94% of the crop was planted as of 13 June, vs. the five-year average of 88%. The Department reported 86% of the crop had emerged vs. the five-year average of 74%. According to the USDA, 52% of the bean crop was in good-to-excellent condition vs the five-year average of 72%. Chart 9 Chart 10   Footnotes 1     Please see OPEC+ complies with 115% of agreed oil curbs in May - source published by reuters.com on June 11, 2021. 2     Please see Saudis raise U.S. and Asian crude prices for April delivery published by worldoil.com on March 8, 2021. 3    Please see US shale consolidation continues as Independence scoops up Contango Oil & Gas published by S&P Global Platts on June 8, 2021. 4    We discuss this in A Perfect Energy Storm On The Way, published on June 3, 2021.  Climate activism will become increasingly important to the evolution of oil and natural gas production, and likely will lead to greater concentration of supply in the hands of OPEC 2.0 and privately held producers that do not answer to shareholders. 5    Please see Interest in Shell's Permian assets seen as a bellwether for shale demand published by reuters.com on June 15, 2021. 6    Please see Less Metal, More Jawboning, which we published on May 27, 2021.  It is available at ces.bcaresearch.com. Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades

Weekly Performance Update For the week ending Thu Jun 10, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio Total Weekly Return BCA US Portfolio S&P500 TRI -0.07% 1.12% Top Contributors   WES:US ET:US WAT:US KOF:US MPLX:US Weekly Return 26 bps 17 bps 16 bps 16 bps 12 bps Top Detractors   LPX:US AN:US DE:US UPS:US PCH:US Weekly Return -22 bps -18 bps -15 bps -12 bps -12 bps Top Prospects   ANAT:US BRK.A:US TX:US ESGR:US UHAL:US BCA Score 98.71% 98.37% 98.31% 96.17% 94.96% BCA Canada Portfolio Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 1.72% 0.59% Top Contributors   TCL.A:CA DSG:CA LNF:CA PXT:CA DIR.UN:CA Weekly Return 51 bps 23 bps 17 bps 15 bps 11 bps Top Detractors   CFP:CA TOY:CA QBR.A:CA ELF:CA GWO:CA Weekly Return -14 bps -10 bps -5 bps -4 bps -4 bps Top Prospects   CS:CA LNF:CA IFP:CA RUS:CA CFP:CA BCA Score 99.55% 98.97% 98.96% 97.91% 97.68% BCA UK Portfolio Total Weekly Return BCA UK Portfolio FTSE 100 TRI 0.31% 0.36% Top Contributors   GLTR:GB FDEV:GB AGRO:GB SVST:GB LXI:GB Weekly Return 28 bps 19 bps 14 bps 13 bps 10 bps Top Detractors   KNOS:GB POLR:GB CNE:GB AAF:GB BYG:GB Weekly Return -13 bps -11 bps -9 bps -8 bps -7 bps Top Prospects   SVST:GB NLMK:GB RMG:GB GLTR:GB BPCR:GB BCA Score 99.69% 97.67% 97.63% 96.96% 94.39% BCA Eurozone Portfolio Total Weekly Return BCA EMU Portfolio MSCI EMU TRI 1.51% 0.56% Top Contributors   CNV:FR STR:AT TUB:BE MONT:BE POST:AT Weekly Return 52 bps 24 bps 18 bps 13 bps 12 bps Top Detractors   ALTA:FR AOF:DE CEM:IT FSKRS:FI US:IT Weekly Return -10 bps -10 bps -5 bps -4 bps -4 bps Top Prospects   POST:AT BB:FR STR:AT SOLV:BE PMAG:AT BCA Score 98.29% 98.07% 97.87% 97.75% 96.78% BCA Japan Portfolio Total Weekly Return BCA Japan Portfolio TOPIX TRI -0.07% -0.10% Top Contributors   8117:JP 3291:JP 9532:JP 9509:JP 8922:JP Weekly Return 36 bps 13 bps 9 bps 9 bps 8 bps Top Detractors   7860:JP 8595:JP 9543:JP 8630:JP 5451:JP Weekly Return -21 bps -20 bps -18 bps -10 bps -8 bps Top Prospects   5930:JP 9543:JP 4966:JP 9436:JP 7994:JP BCA Score 99.38% 98.70% 98.40% 98.38% 98.34% BCA Hong Kong Portfolio Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI 2.12% -0.71% Top Contributors   316:HK 1919:HK 6118:HK 990:HK 1798:HK Weekly Return 84 bps 72 bps 29 bps 28 bps 26 bps Top Detractors   3600:HK 1258:HK 856:HK 86:HK 3329:HK Weekly Return -23 bps -21 bps -15 bps -12 bps -8 bps Top Prospects   990:HK 811:HK 86:HK 1606:HK 743:HK BCA Score 99.36% 98.61% 97.22% 96.97% 96.55% BCA Australia Portfolio Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 2.14% 0.64% Top Contributors   HSN:AU RUL:AU MNF:AU STX:AU PSQ:AU Weekly Return 51 bps 50 bps 28 bps 23 bps 19 bps Top Detractors   BLX:AU AGI:AU EVT:AU EHE:AU CIA:AU Weekly Return -18 bps -10 bps -9 bps -6 bps -4 bps Top Prospects   GRR:AU MGX:AU CIA:AU PIC:AU JLG:AU BCA Score 98.87% 98.06% 97.99% 97.29% 96.73%

Dear Client, Last week, I had the pleasure of participating in a debate with my colleague, Dhaval Joshi, on the future of cryptocurrencies. You can access a replay of the event here. Best regards, Peter Berezin Highlights The meme stock mania is unlikely to die down anytime soon. Fueled by zero-commission trading and an anti-establishment mindset, social media has given millions of retail traders the ability to coordinate attacks on individual companies. An examination of the most popular meme stocks reveals that returns were highest when both the closing price and volume during the prior day’s session were above their moving averages. For GameStop and AMC, in particular, returns averaged 11.0% and 13.9%, respectively, when both the prior day’s closing price and volume were above their 5-day moving averages, compared with -4.0% and -1.3%, respectively, when the price and volume were below their 5-day moving averages. Nearly 80% of the returns on meme stocks were earned overnight (i.e., between the close of trading and the following day’s open). The ups and downs of meme stocks have generally had little impact on the overall direction of the stock market. Nevertheless, growing interest in meme stocks is positive for equities over a medium-term horizon of about 12 months. This is because the meme stock phenomenon is drawing funds into the stock market, boosting prices and liquidity in the process. #HedgiesGetWedgies Chart 1Word Du Jour: Meme This January, the term “meme stock” entered the popular lexicon (Chart 1). That was the month that GameStop and a handful of other once-left-for-dead stocks soared to dizzying heights. Armed with stimulus checks, millions of amateur investors flocked to one of the few sources of entertainment still available to them: online trading. Tales of instant riches spread like wildfire, motivating yet more new investors to enter the fray. Whether it was stocks or cryptos, the allure of easy money was irresistible. The decision by most American brokerages to eliminate trading commissions in the fall of 2019 added fuel to the fire. Meanwhile, the proliferation of social media provided a ready-made mechanism for retail traders to coordinate attacks on individual stocks. And attack they did. Most of the companies targeted had high short interest, making them ripe for a short squeeze. The implosion of Melvin Capital demonstrated to the Reddit crowd that they, too, could beat hedge funds at their own game. “We can remain stupid longer than you can stay solvent” became their rallying cry. In a game of chicken, being perceived by your opponent as irrational boosts your odds of winning. Trading Meme Stocks For Fun And Profit If one were so inclined, how should one trade meme stocks? It helps to begin with some data. Table 1 displays average daily returns from the start of 2021 for six popular meme stocks: GameStop (GME), AMC Entertainment (AMC), Blackberry (BB), Nokia (NOK), Bed Bath & Beyond (BBBY) and Koss Corp (KOSS). A few observations stand out: There is strong price momentum. Looking across all six stocks, the average daily return was 5.9% when the prior day’s closing price was above its 5-day moving average, compared to 0.3% when the prior day’s close was below its 5-day moving average. The average daily return for stocks in our sample was 3.3%. Volatility predicts higher returns. Meme stocks gained 4.3%, on average, when the prior day’s return was positive compared to 2.4% when it was negative. Looking only at the subset of cases where the prior day’s return was either above 10% or below -10%, we find that meme stocks gained 11.3% when the price rose more than 10% during the prior day and gained a still-robust 7.5% when the price dropped more than 10% during the prior day. Strong volume predicts higher returns. Consistent with the volatility observation, meme stocks gained an average of 6.1% when the volume in the prior day’s trading session was above its 5-day moving average, compared to just 1.3% when the volume was below its 5-day moving average. Meme stocks do best after the close of trading. Nearly 80% of returns on meme stocks were earned overnight (i.e., between the close of trading and the following day’s open). We attribute this phenomenon to the tendency of many traders to exit positions before the closing bell and reopen them at the start of trading the following day. Such a pattern of selling and repurchasing tends to boost overnight returns. Historically, a similar pattern has held for most other US stocks (Chart 2). Table 1Meme Stock: Returns And Patterns Chart 2Bear By Day, Bull By Night In summary, meme stocks perform best when they are trading above their 5-day moving average. Both volatility and strong volume predict positive returns. Holding (hodling?)1 meme stocks overnight can significantly enhance returns. Be An Ape Chart 3The BUZZ ETF Is Off To A Lackluster Start Fans of AMC often refer to themselves as “apes.” The moniker is fitting, if not ironic, given the tendency of meme investors to ape one another in their trading decisions. The VanEck Vectors Social Sentiment ETF (BUZZ) tries to get in front of the apes and other meme investors by buying stocks that are garnering increasing attention from social media, news articles, blog posts, and other sources. While it is too early to assess the value of this approach, it should be noted that the fund has lagged the S&P 500 for most of the time since its inception in March (Chart 3). A potentially more fruitful approach, and one that I myself have adopted, is to seek out meme stocks before they become meme stocks. For example, Cinemark (CNK) is the second biggest publicly-listed movie theater chain in the US. The share of its float sold short is almost identical to AMC’s. Yet, the Reddit crowd has largely ignored it. Could that change? Only time will tell. Don’t Get A Wedgie: How To Short Meme Stocks Safely While meme stocks can benefit from positive price momentum in the short term, it is at the expense of lower returns down the road. By any reasonable measure, the leading meme stocks are grossly overvalued. Knowing when a meme stock will fall back to earth is no easy task, however. The discussion in this report provides one avenue for short-term traders to mitigate risk: Short meme stocks only when price and volume are trending lower. The average daily return for GME and AMC was 11.0% and 13.9%, respectively, when both the prior day’s closing price and volume were above their 5-day moving averages, compared with -4.0% and -1.3%, respectively, when the price and volume were below their 5-day moving averages. With that in mind, we are opening a new tactical trade going short an equally-weighted basket of AMC and GME. The trade will only be active when the prior day’s closing price and volume are below their 5-day moving averages.2  Longer-term investors looking to short meme stocks without having to frequently open and close positions should consider using the “exponential” shorting technique discussed in a recent report. The technique flips the usual risk-reward trade-off from going short on its head. Rather than facing unlimited losses and a maximum gain of only 100% of the initial position, our shorting strategy caps the loss at 100% but allows for unlimited gains. Broad Market Implications As Chart 4 illustrates, the ups and downs of meme stocks have generally had little impact on the overall direction of the stock market. Nevertheless, growing interest in meme stocks is positive for equities over a medium-term horizon of about 12 months. This is because the meme stock phenomenon is drawing funds into the stock market, boosting prices and liquidity in the process. Chart 4Meme Stock Roller-Coaster: Little Impact On The Broader Market Chart 5Global Equity Risk Premium Remains Quite High   While the “stimmy” checks have already been deposited into brokerage accounts, their impact on the stock market will linger on. As we explained in Savings Gluts, Asset Shortages, And The 60/40 Split, retail investors who bid up the price of stocks will generally force institutional investors to sell their holdings.3 This will leave institutions with excess cash on hand – cash that they can deploy in other parts of the stock market. The resulting game of “hot potato” will only end when the value of the stock market rises by enough to ensure that all investors are happy with how much stock they own in relation to how much cash they hold. Given that the equity risk premium remains quite high, this dynamic likely has further to run (Chart 5). Disclosure: At the time of writing, I am personally long CNK and short AMC and GME. I previously held a short position in KOSS. Peter Berezin Chief Global Strategist pberezin@bcaresearch.com   Footnotes 1 HODL stands for “Hold On for Dear Life”. The term is widely used by traders on Wallstreetbets and other online forums. 2 The equal-weighted trade should be initiated if the conditions are met for either stock (GME, AMC) in the basket. The conditions are as follows: Both the price and volume should be below their 5-day moving average. The price and volume at the end of the day determine whether one enters the trade the next day or not. 3 An exception is when retail investors buy stock from the company itself, as has happened several times with meme stocks. Global Investment Strategy View Matrix Special Trade Recommendations Current MacroQuant Model Scores  

Highlights US labor-market disappointments notwithstanding, the global recovery being propelled by real GDP growth in the world's major economies is on track to be the strongest in 80 years. This growth will fuel commodity demand, which increasingly confronts tighter supply.  Higher commodity prices will ensue, and feed through to realized and expected inflation.  Manufacturers will continue to see higher input and output prices. Our modeling suggests the USD will weaken to end-2023; however, most of the move already has occurred.  Real US rates will remain subdued, as the Fed looks through PCE inflation rates above its 2% target and continues to focus on its full-employment mandate (Chart of the Week). Given these supportive inflation fundamentals, we remain long gold with a price target of $2,000/oz for this year.  We are upgrading silver to a strategic position, expecting a $30/oz price by year-end.  We remain long the S&P GSCI Dynamic Roll Index ETF (COMT) and the S&P GSCI, expecting tight supply-demand balances to steepen backwardations in forward curves, and long the Global Metals & Mining Producers ETF (PICK). Global economic policy uncertainty will remain elevated until broader vaccine distributions reduce lockdown risks. Feature The recovery of the global economy catalyzed by massive monetary accommodation and fiscal stimulus is on track to be the strongest in the past 80 years, according to the World Bank.1 The Bank revised its growth expectation for real GDP this year sharply higher – to 5.6% from its January estimate of 4.1%. For 2022, the rate of global real GDP growth is expected to slow to 4.3%, which is still significantly higher than the average 3% growth of 2018-19. DM economies are expected to grow at a 4% rate this year – double the average 2018-19 rate – while EM growth is expected to come in at 6% this year vs a 4.2% average for 2018-19. The big drivers of growth this year will be China, where the Bank expects an unleashing of pent-up demand to push real GDP up by 8.5%, and the US, where massive fiscal and monetary support will lift real GDP 6.8%. The Bank expects other DM economies will contribute to this growth, as well. Growth in EM economies will be supported by stronger demand and higher commodity prices, in the Bank's forecast. Commodity demand is recovering faster than commodity supply in the wake of this big-economy GDP recovery. As a result, manufacturers globally are seeing significant increases in input and output prices (Chart 2). Chart of the WeekUS Real Rates Continue To Languish Chart 2Global Manufacturers' Prices Moving Higher These price increases at the manufacturing level reflect the higher-price environment in global commodity markets, particularly in industrial commodities – i.e., bulks like iron ore and steel; base metals like copper and aluminum; and oil prices, which touch most processes involved in getting materials out of the ground and into factories before they make their way to consumers, who then drive to stores to pick up goods or have them delivered. Chart 3Commodity Price Increases Reflected in CPI Inflation Expectations These price pressures are being picked up in 5y5y CPI swaps markets, which are cointegrated with commodity prices (Chart 3). This also is showing up in shorter-tenor inflation gauges – monthly CPI and 2y CPI swaps. Oil prices, in particular, will be critical to the evolution of 5-year/5-year (5y5y) CPI swap rates, which are closely followed by fixed-income markets (Chart 4). Chart 4Oil Prices Are Key To 5Y5Y CPI Swap Rates Higher Gold Prices Expected CPI inflation expectations drive 5-year and 10-year real rates, which are important explanatory variables for gold prices (Chart 5).2 In addition, the massive monetary and fiscal policy out of the US also is driving expectations for a lower USD: Currency debasement fears are higher than they otherwise would be, given all the liquidity and stimulus sloshing around global markets, which also is bullish for gold (Chart 6). Chart 5Weaker Real Rates Bullish For Gold Chart 6Weaker USD Supports Gold All of these effects, particularly the inflationary impacts, are summarized in our fair-value gold model (Chart 7). At the beginning of 2021, our fair-value gold model indicated price would be closer to $2,005/oz, which was well above the actual gold price in January. Gold prices have remained below the fair value model since the beginning of 2021. The model explains gold prices using real rates, TWIB, US CPI and global economic policy uncertainty. Based on our modeling, we expect these variables to continue to be supportive of gold, bolstering our view the yellow metal will reach $2000/ oz this year. Unlike industrial commodities, gold prices are sensitive to speculative positioning and technical indicators. Our gold composite indicator shows that gold prices may be reflecting bullish sentiment. This sentiment likely reflects increasing inflation expectations, which we use as an explanatory variable for gold prices. The fact that gold is moving higher on sentiment is corroborated by the latest data point from Marketvane’s gold bullish consensus, which reported 72% of the traders expect prices to rise further (Chart 8). Chart 7BCAs Gold Fair-Value Model Supports 00/oz View Chart 8Sentiment Supports Oil Prices Investment Implications The massive monetary and fiscal stimulus that saw the global economy through the worst of the economic devastation of the COVID-19 pandemic is now bubbling through the real economy, and will, if the World Bank's assessment proves out, result in the strongest real GDP growth in 80 years. Liquidity remains abundant and interest rates – real and nominal – remain low. In its latest Global Economic Prospects, the Bank notes, " The literature generally suggests that monetary easing, both conventional and unconventional, typically boosts aggregate demand and inflation with a lag of 1-3 years …" The evidence for this is stronger for DM economies than EM; however, as the experience in China shows, scale matters. If the Bank's assessment is correct, the inflationary impulse from this stimulus should be apparent now – and it is – and will endure for another year or two. This stimulus has catalyzed organic growth and will continue to do so for years, particularly in economies pouring massive resources into renewable-energy generation and the infrastructure required to support it, a topic we have been writing about for some time.3 We remain long gold with a price target of $2,000/oz for this year. We are long silver on a tactical basis, but given our growth expectations, are upgrading this to a strategic position, expecting a $30/oz price by year-end. As we have noted in the past, silver is sensitive to all of the financial factors we consider when assessing gold markets, and it has a strong industrial component that accounts for more than half of its demand.4 Supportive fundamentals remain in place, with total supply (mine output and recycling) falling, demand rising and balances tightening (Chart 9). Worth noting is silver's supply is constrained because of underinvestment in copper production at the mine level, where silver is a by-product. On the demand side, continued recovery of industrial and consumer demand will keep silver prices well supported. In terms of broad commodity exposure, we remain long the S&P GSCI Dynamic Roll Index ETF (COMT) and the S&P GSCI, expecting tight supply-demand balances to continue to draw down inventories – particularly in energy and metals markets – which will lead to steeper backwardations in forward curves. Backwardation is the source of roll-yields for long commodity index investments. Investors initially have a long exposure in deferred commodity futures contracts, which are then liquidated and re-established when these contracts become more prompt (i.e., closer to delivery). If the futures' forward curves are backwardated, investors essentially are buying the deferred contracts at a lower price than the price at which the position likely is liquidated. We also remain long the Global Metals & Mining Producers ETF (PICK), an equity vehicle that spans miners and traders; the longer discounting horizon of equity markets suits our view on metals. Chart 9Upgrading Silver To Strategic Position Chart 10Wider Vaccine Distribution Will Support Gold Demand Global economic policy uncertainty will remain elevated until broader vaccine distributions reduce lockdown risks. We expect the wider distribution of vaccines will become increasingly apparent during 2H21 and in 2022. This will be bullish for physical gold demand – particularly in China and India – which will add support for our gold position (Chart 10).       Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com   Commodities Round-Up Energy: Bullish The US EIA expects Brent crude oil prices to fall to $60/bbl next year, given its call higher production from OPEC 2.0 and the US shales will outpace demand growth. The EIA expects global oil demand will average just under 98mm this year, or 5.4mm b/d above 2020 levels. For next year, the EIA is forecasting demand will grow 3.6mm b/d, averaging 101.3mm b/d. This is slightly less than the demand growth we expect next year – 101.65mm b/d. We are expecting 2022 Brent prices to average $73/bbl, and $78/bbl in 2023. We will be updating our oil balances and price forecasts in next week's publication. Base Metals: Bullish Pedro Castillo, the socialist candidate in Peru's presidential election, held on to a razor-thin lead in balloting as we went to press. Markets have been focused on the outcome of this election, as Castillo has campaigned on increasing taxes and royalties for mining companies operating in Peru, which accounts for ~10% of global copper production. The election results are likely to be contested by opposition candidate rival Keiko Fujimori, who has made unsubstantiated claims of fraud, according to reuters.com. Copper prices traded on either side of $4.50/lb on the CME/COMEX market as the election drama was unfolding (Chart 11). Precious Metals: Bullish As economies around the world reopen and growth rebounds, car manufacturing will revive. Stricter emissions regulations mean the demand for autocatalysts – hence platinum and palladium – will rise with the recovery in automobile production. Platinum is also used in the production of green hydrogen, making it an important metal for the shift to renewable energy. On the supply side, most platinum shafts in South Africa are back to pre-COVID-19 levels, according to Johnson Matthey, the metals refiner. As a result, supply from the world’s largest platinum producer will rebound by 40%, resulting in a surplus. South Africa accounts for ~ 70% of global platinum supply. The fact that an overwhelming majority of platinum comes from a nation which has had periodic electricity outages – the most recent one occurring a little more than a week ago – could pose a supply-side risk to this metal. This could introduce upside volatility to prices (Chart 12). Ags/Softs: Neutral As of 6 June, 90% of the US corn crop had emerged vs a five-year average of 82%; 72% of the crop was reported to be in good to excellent condition vs 75% at this time last year. Chart 11 Chart 12 Footnotes 1     Please see World Bank's Global Economic Prospects update, published June 8, 2021. 2     In fact, US Treasury Inflation-Indexed securities include the CPI-U as a factor in yield determination.  3    For our latest installment of this epic evolution, please see A Perfect Energy Storm On The Way, which we published last week.  It is available at ces.bcareserch.com. 4    Please see Higher Inflation Expectations Battle Lower Risk Premia In Gold Markets, which we published February 4, 2021. It is available at ces.bcareserch.com.     Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades

Weekly Performance Update For the week ending Thu Jun 03, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio Total Weekly Return BCA US Portfolio S&P500 TRI 0.08% -0.15% Top Contributors   FLO:US ET:US PSA:US WES:US UGI:US Weekly Return 18 bps 15 bps 10 bps 10 bps 9 bps Top Detractors   PCH:US WY:US LPX:US LH:US WAT:US Weekly Return -16 bps -15 bps -14 bps -11 bps -7 bps Top Prospects   TX:US BRK.A:US ANAT:US UHAL:US ESGR:US BCA Score 99.36% 98.92% 98.48% 97.15% 95.72% BCA Canada Portfolio Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 0.24% 0.89% Top Contributors   PXT:CA DSG:CA LNR:CA WEED:CA TOU:CA Weekly Return 27 bps 19 bps 11 bps 10 bps 10 bps Top Detractors   AUP:CA CS:CA IFP:CA CFP:CA TOY:CA Weekly Return -30 bps -24 bps -20 bps -16 bps -14 bps Top Prospects   CS:CA IFP:CA CFP:CA RUS:CA GWO:CA BCA Score 99.89% 99.69% 99.24% 98.78% 96.02% BCA UK Portfolio Total Weekly Return BCA UK Portfolio FTSE 100 TRI 1.29% 0.71% Top Contributors   ROSN:GB CNE:GB MTO:GB BYG:GB HSBK:GB Weekly Return 23 bps 18 bps 13 bps 11 bps 11 bps Top Detractors   NLMK:GB FDM:GB FDEV:GB SVST:GB RMG:GB Weekly Return -6 bps -5 bps -4 bps -3 bps -3 bps Top Prospects   SVST:GB NLMK:GB RMG:GB GLTR:GB BPCR:GB BCA Score 99.82% 98.66% 96.97% 96.53% 95.28% BCA Eurozone Portfolio Total Weekly Return BCA EMU Portfolio MSCI EMU TRI 1.05% 1.13% Top Contributors   CNV:FR OMV:AT GTT:FR MONT:BE MELE:BE Weekly Return 24 bps 19 bps 15 bps 12 bps 12 bps Top Detractors   RIN:FR NOS:PT TIETO:FI IRE:IT SOL:IT Weekly Return -13 bps -11 bps -7 bps -6 bps -4 bps Top Prospects   SOLV:BE STR:AT POST:AT BB:FR SOL:IT BCA Score 99.19% 98.49% 98.20% 97.47% 97.09% BCA Japan Portfolio Total Weekly Return BCA Japan Portfolio TOPIX TRI 1.78% 2.57% Top Contributors   5021:JP 1925:JP 8117:JP 7958:JP 6345:JP Weekly Return 26 bps 23 bps 16 bps 16 bps 15 bps Top Detractors   4694:JP 9436:JP 2281:JP 4544:JP 3291:JP Weekly Return -11 bps -7 bps -5 bps -5 bps -3 bps Top Prospects   5930:JP 9436:JP 4966:JP 3291:JP 5451:JP BCA Score 99.06% 99.01% 98.65% 98.59% 98.38% BCA Hong Kong Portfolio Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI 2.91% -0.39% Top Contributors   3600:HK 316:HK 6118:HK 3329:HK 2232:HK Weekly Return 92 bps 51 bps 44 bps 31 bps 23 bps Top Detractors   856:HK 148:HK 435:HK 1798:HK 303:HK Weekly Return -18 bps -10 bps -9 bps -9 bps -8 bps Top Prospects   990:HK 323:HK 1606:HK 1258:HK 811:HK BCA Score 99.47% 98.75% 98.69% 97.22% 97.19% BCA Australia Portfolio Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 0.92% 2.28% Top Contributors   PDN:AU GRR:AU BLX:AU CAJ:AU AST:AU Weekly Return 42 bps 18 bps 12 bps 9 bps 6 bps Top Detractors   JLG:AU MNF:AU HSN:AU PIC:AU SRV:AU Weekly Return -15 bps -14 bps -8 bps -5 bps -3 bps Top Prospects   GRR:AU MGX:AU CIA:AU JLG:AU BFG:AU BCA Score 98.95% 98.89% 98.55% 96.96% 96.83%

Highlights Our long-term FX REER models suggest the dollar remains overvalued, especially against the Chinese yuan.  The cheapest currencies are the yen and the Russian ruble. The Scandinavian currencies are surprisingly expensive, according to these models. This has been due to falling relative productivity. Other notable expensive currencies are the Hong Kong dollar and Saudi riyal. That said, we do not expect the peg in the former to break anytime soon. Our limit-sell on the yen was triggered at 109. Place stops at 112. We are looking to buy a basket of petrocurrencies that include the COP and RUB. These have significantly lagged the rise in oil prices.  Feature This week’s report focuses on our long-term fair value models. But a few words first on currency developments. In our view, currency markets are likely to remain driven by five important trends in the coming months. A rotation of growth from the US to other parts of the world (dollar bearish): This has been the dominant theme that has played out since the peak in the DXY index in March. The manufacturing sector in other countries first caught up to the buoyancy we saw in the US, and their service sectors are now recovering as the world vaccinates its population and reopens. In the developed world, Japan, which has been a laggard, could witness a bout of positive surprises. Market focus on inflation, and the potential of an overshoot (dollar bearish): Most market participants have been paying close attention to the inflation overshoot in the US, and whether it is transitory. Currency markets however, specifically the dollar, have been paying close attention to the inflation differential between the US and other countries, and what that means for relative real rates. A rising inflation differential between the US and its trading partners has been negative for the dollar (Chart I-1). We have noted that the US will continue to provide relative upside surprises in inflation as the US output gap closes ahead of other countries. This has been in part due to the most generous fiscal stimulus in the developed world. Chart I-1The Dollar And Relative Inflation Move Opposite Ways A Federal Reserve that stays ultra-accommodative (dollar bearish): Most market participants are again focused on the Fed tapering and what that will mean for asset markets. The reality is that the Fed has started to lag many other central banks, like the Bank of Canada, the Reserve Bank of New Zealand and the Bank of England in tapering asset purchases. This could suggest it would also lag in the speed and magnitude of lifting policy rates in the medium term. This will keep US real rates depressed relative to many of its trading partners. A risk event (dollar bullish): We have been highlighting that a risk event, like a market reset, is a strong positive for the dollar, given the negative correlation with risk assets (Chart I-2). A dollar that remains expensive (dollar bearish): Our medium-term (12-18 month) target for the DXY index is 80. This will bring the currency towards fair value, according to our purchasing power parity models. As we highlighted last week, the trade balance in the US continues to deteriorate, which is one of the symptoms of an overvalued currency. Chart I-2The Dollar And Risk Assets Move Opposite Ways Despite our bearish dollar view, it is important not to overstay our welcome. This week, we are updating our long-term models, another technical tool we use to help us navigate FX markets. These models are mostly driven by relative productivity, but we have also fine-tuned the models for each currency to account for other factors such as terms-of-trade shocks, real rate differentials and proxies for global risk aversion. These models cover 22 currencies, incorporating both G10 and emerging FX markets. The dollar remains expensive according to these models (Chart I-3). Chart I-3The US Dollar Remains Expensive It is important to note that these models are very poor timing tools and are not designed to generate short- or medium-term forecasts. Instead, they reflect imbalances in the current equilibrium fair value of a currency. For example, a currency might be flagged as overvalued now, but a productivity boom in the next few years could allow the currency fair value to gravitate higher. So will a commodity boom. From a technical perspective, these models are like the ones we published in our last report, but with a very important change – the weights assigned in calculating relative productivity are based on dynamic trade weights. This has allowed China (which has much better productivity growth) to impact the currency fair values significantly. For all countries, the variables are highly statistically significant and are of the right signs. Finally, as housekeeping, we were triggered into a short USD/JPY position this week as our limit-sell at 109 was touched. The yen is one of the cheapest currencies according to these models. It will also benefit from all of the five key drivers for currency markets we listed above, especially real rates that are likely to stay very favorable in Japan, compared to the US (Chart I-4). Chart I-4Less Inflationary Pressures In Any Japanese Economic Rebound The US Dollar Chart I-5 The dollar is expensive by 7% according to the long-term fair value model. This is despite the 13% drop in the US dollar DXY index since the March 2020 highs. In hindsight, strong reversals in the dollar occur when the currency is about two-standard deviations above the mean, which occurred with last year’s rally. Our bias is that the dollar has entered a multi-year downtrend, which will only be supercharged by expensive valuations. The big driver for the uptrend that started in 2011 was positive real interest rate differentials. As US real rates continue to rollover, relative to its G10 counterparts, this will lower the greenback’s fair value. The Euro Chart I-6 The euro is slightly cheap according to our fundamental models. More importantly, the euro’s fair value has been rising in recent quarters. This has been driven by a nascent improvement in the trade balance (and current account balance), following the Covid-19 crisis. Historically, when the euro has hit its fair value bands, it has tended to mean revert. Therefore, this model does a better job of catching intermediate turns in the euro, compared to the US dollar model. Our bias is that the long-term fair value for the euro sits near 1.35, something that should continue to be reflected in future model updates. The Yen Chart I-7 The fair value of the yen has been relatively flat over the last few years. Given that the real exchange rate has not fluctuated much either, the yen has been chronically undervalued by about one standard deviation below the mean. The yen is cheap by most measures of relative prices. We believe the yen sits at a beautiful juncture. A pickup in economic activity will keep the fair value rising, from an improvement in the current account. Meanwhile, any deterioration in economic data will lead to higher risk aversion and a higher fair value (the yen is a risk-off currency). We are short USD/JPY as of 109 this week.   The British Pound Chart I-8 This model shows that the pound is fairly valued, while cable remains cheap by most of our other models. That said, at fair value, the pound can still overshoot to at least 1.5 standard deviation above/below the mean, as it has in prior episodes. The key reason the pound is not cheap in this model is due to a deterioration in the UK’s productivity growth, relative to its trading partners. In this iteration of the model, China’s larger share of British trade has exacerbated the downtrend in the fair value. However, a turnaround seems underway, as the UK puts the Brexit woes behind it (and Scottish independence is not an immediate concern). The Canadian Dollar Chart I-9 The loonie has overshot its fair value. More importantly, the fair value for the Canadian dollar has been falling since the peak of the commodity cycle in 2011. If we are indeed entering a new commodity super-cycle, then the model should begin to turn around, and assign a higher fair value to the loonie. However, Canada’s terms of trade will face strong headwinds as we move away from fossil fuels, especially oil. As such, the productivity gains in other sectors (such as metals) that will benefit from new green investments will need to be sufficiently high to offset falling productivity in crude oil.  The Australian Dollar Chart I-10 The Australian dollar has been rising along with the improvement in its fair value. The rising fair value has been due to the exceptional rise in commodity prices (iron ore and coal) that have boosted the current account. However, like the Canadian dollar, the fair value of the Aussie has also been dropping in recent years on the back of previously depressed commodity prices. Given the growing importance of liquified natural gas in Australia’s export mix, we believe terms of trade will remain a tailwind for the Aussie over the longer term. The New Zealand Dollar Chart I-11 The kiwi is slightly more expensive than its antipodean neighbor. But like other commodity currencies, its fair value has fallen in recent years. The catalyst has been the drop in commodity prices and the fall in relative real rates. More recently, the fair value of the kiwi has taken a positive turn as real rates improve, and risk aversion recedes. With the RBNZ striking a hawkish tone, this remains positive for the kiwi for now, but could adversely impact financial conditions later. The Swiss Franc Chart I-12 On a fundamental basis, the Swiss franc is as cheap as the yen, with our models showing it as about one standard deviation undervalued. The biggest driver for the rise in the fair value of the franc has been the structural trade surplus, driven by rising productivity. The Swiss franc is traditionally a defensive currency. As such, the fair value has taken a small hit due to the fall in the gold-to-oil ratio, a proxy for risk aversion. Should the market experience some turbulence in the coming months, the franc will benefit. The Swedish Krona Chart I-13 The Swedish krona is showing up as expensive in our models, together with the Norwegian krone. Paradoxically, on a PPP basis, the Swedish krona is one of the cheapest currencies in our universe. The key model inputs for the Swedish krona are interest rate differentials and relative productivity trends. With the rise of China as a trading partner, the productivity differential for Sweden has fallen even more steeply in this iteration of the model. It also means that the currency is no longer massively undershooting fair value, as had been the case in previous iterations. The Norwegian Krone Chart I-14 Like the Swedish krona, the Norwegian krone is showing up as expensive in our models. However, it is one of the cheapest currencies on a PPP basis, which presents a paradox. We will be looking at the Norwegian economy in-depth next week, to help explain this paradox. A more immediate explanation is that the trade balance for Norway has been nosediving in recent years, which helps explain why the model judges the currency as becoming incrementally expensive. With the rise of China as a trading partner, the productivity differential for Norway has also fallen. The Chinese Yuan Chart I-15 The Chinese yuan is currently at about one standard deviation below fair value. Since the history of our model, the fair value of the yuan has been mostly rising. This is driven by rising relative productivity in China. Concurrently, real interest rates in China have also shot up, which has led to a strong rally in the Chinese RMB. We expect the RMB to keep appreciating in the coming years, as the fair value keeps rising.  The Brazilian Real Chart I-16 The Brazilian real is slightly above fair value, according to our fundamental models. Meanwhile, the fair value has been falling since 2011, in line with other commodity currencies. However, if we are indeed in a new commodity super cycle, the fair value of the real should start to rise. The Mexican Peso Chart I-17 The Mexican Peso is trading a nudge above fair value, but the fair value has been rising since 2019. This means going forward, we could see a rising peso, coinciding with a rapid rise in its fair value. The peso is highly cyclical, so two key drivers have been working in favor of the currency. First, a falling in risk aversion (proxied by a decline in the gold-to-oil ratio) has been positive. Meanwhile, the cumulative current account will also continue to improve should global growth remain strong in the near term, especially US growth. The Chilean Peso Chart I-18 The Chilean peso is currently at fair value, according to our fair value model. The fair value of the Chilean peso has been falling in recent years, but this decline was even sharper when Chinese productivity gains were given a greater weight in the modelling exercise. Going forward, Chilean exports of copper will be in a structural uptrend, due to the green technology revolution. As such, the fair value of the peso should begin to gradually rise. The Colombian Peso Chart I-19 The Colombian peso is cheap, and so constitutes an attractive play if oil prices remain strong in the medium term. The reason is that it has one of the strongest correlations to oil prices among commodity currencies. That said, structurally, the fair value of the Colombian peso has been falling, like many other petrocurrencies. The South African Rand Chart I-20 The South African rand is now trading slightly below its fair value, a positive contrast to the BRL which is slightly expensive. Meanwhile, the fair value of the rand is gradually picking up, after a structural decline over the last decade.   The correlation between precious metal prices and the South African rand is picking up again, as the current account moves back into surplus. We are positive gold (and silver) as inflation hedges. Meanwhile, platinum and palladium will continue to benefit from a push towards better environmental standards among traditional autos. The Russian Ruble Chart I-21 The Russian ruble is now sitting around one standard deviation below its fair value. We are constructive on oil, which will boost the fair value of petrocurrencies, including the Russian ruble. Meanwhile, real interest rates are at relatively high levels in Russia, even though this does not have significant explanatory power. Given cheap valuations, we are looking to buy a petrocurrency basket, including the RUB and the COP. The Korean Won Chart I-22 The Korean won has underperformed this year, and has been trading at a negligible divergence from its fair value over the last few years. The fair value of the Korean won has also been flat over the years. This suggests that Korean productivity growth has kept pace with its trading partners. Going forward, it also suggests the next move in the Korean won is likely to be driven by the trend in the currencies of its trading partners, especially China and the US. The Philippine Peso Chart I-23 The Philippine peso is expensive by about one standard deviation. This has been partly due to a decline in the fair value of the peso, a process that began in 2015.  The Philippine peso is one of the few currencies whose REER tends to have well-defined and long cycles that last 5-8 years. It will be important to watch if the recent appreciation in the currency has more room to run, given expensive valuation. The Singapore Dollar Chart I-24 The Singaporean dollar is another currency whose REER tends to have long cycles, probably a feature of the managed float. The Singaporean dollar is a defensive currency, and so the appreciation in other emerging market currencies has brought relative valuations back towards fair value. The Hong Kong Dollar Chart I-25 The REER of HKD has been rising in recent years, meaning inflation in Hong Kong SAR has been outpacing that elsewhere. This has made the HKD expensive, according to our models. However, the fair value has started to fall suggesting productivity gains in the city state have also been lagging, probably a result of political unrest. That said, we expect the peg to remain in place for some time, as we highlighted in a previous special report. The Saudi Riyal Chart I-26 The fair value of the Saudi Riyal has been falling for quite a while on declining relative productivity. This has made the Riyal incrementally expensive. However, oil prices are currently elevated, which means it might take much more stretched valuations to begin to cause greater tensions for the peg.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights China's high-profile jawboning draws attention to tightness in metals markets, and raises the odds the State Reserve Board (SRB) will release some of its massive copper and aluminum stockpiles in the near future. Over the medium- to long-term, the lack of major new greenfield capex raises red flags for the IEA's ambitious low-carbon pathway released last week, which foresees the need for a dramatic increase in renewable energy output and a halt in future oil and gas investment to achieve net-zero emissions by 2050. Copper demand is expected to exceed mined supply by 2028, according to an analysis by S&P, which, in line with our view, also sees refined-copper consumption exceeding production this year (Chart of the Week). A constitution re-write in Chile and elections in Peru threaten to usher in higher taxes and royalties on mining in these metals producers, placing future capex at risk. Chile's state-owned Codelco, the largest copper producer in the world, fears a bill to limit mining near glaciers could put as much as 40% of its copper production at risk. We remain bullish copper and look to get long on politically induced sell-offs as the USD weakens. Feature Politicians are inserting themselves in the metals markets' supply-demand evolutions to a greater degree than in the past, which is complicating the short- and medium-term analysis of prices. This adds to an already-difficult process of assessing markets, given the opacity of metals fundamentals – particularly inventories, which are notoriously difficult to assess. Chinese Communist Party (CCP) jawboning of market participants in iron ore, steel, copper and aluminum markets over the past two weeks has weakened prices, but, with the exception of steel rebar futures in Shanghai – down ~ 17% from recent highs, and now trading at ~ 4911 RMB/MT –  the other markets remain close to records.  Benchmark 62% Fe iron ore at the port of Tianjin was trading ~ 4% lower at $211/MT, while copper and aluminum were trading ~ 5.5% and 6.5% off their recent records at $4.535/lb and $2,350/MT, respectively. In addition to copper, aluminum markets are particularly tight (Chart 2). Jawboning aside, if fundamentals continue to keep prices elevated – or if we see a new leg up – China's high-profile jawboning could presage a release by the State Reserve Board (SRB) of some of its massive copper and aluminum stockpiles in the near term. In the case of copper, market guesses on the size of this stockpile are ~ 2mm to 2.7mm MT. On the aluminum side, Bloomberg reported CCP officials were considering the release of 500k MT to quell the market's demand for the metal. Chart of the WeekContinue Tightening In Copper Expected Chart 2Aluminum Remains Tight Brownfield Development Not Sufficient Our balances assessments continue to indicate key base metals markets are tight and will remain so over the short term (2-3 years). Economies ex-China are entering their post-COVID-19 recovery phase. This will be followed by higher demand from renewable generation and grid build-outs that will put them in direct competition with China for scarce metals supplies for decades to come. Markets will continue to tighten. In the bellwether copper market, we expect this tightness to remain a persistent feature of the market over the medium term – 3 to 5 years out – given the dearth of new supply coming to market. Copper prices are highly correlated with the other base metals (Chart 3) – the coefficient of correlation with the other base metals making up the LME's metals index is ~ 0.86 post-GFC – and provide a useful indicator of systematic trends in these markets. Chart 3Copper Correlation With LME Index Ex-Copper Copper ore quality has been falling for years, as miners focused on brownfield development to extend the life of mines (Chart 4). In Chart 5, we show the ratio of capex (in billion USD) to ore quality increases when capex growth is expanding faster than ore quality, and decreases when capex weakens and/or ore quality degradation is increasing. Chart 4Copper Capex, Ore Quality Declines Chart 5Capex-to-Ore-Quality Decline Set Market Up For Higher Prices Falling prices over the 2012-19 interval coincide with copper ore quality remaining on a downward trend, likely the result of previous higher prices that set off the capex boom pre-GFC. The lower prices favored brownfield over greenfield development. Goehring and Rozencwajg found in their analysis of 24 mines, about 80% of gross new reserves booked between 2001-2014 were due not to new mine discoveries but to companies reclassifying what was once considered to be waste-rock into minable reserves, lowering the cut-off grade for development.1 This is consistent with the most recent datapoints in Chart 5, due to falling ore grade values, as companies inject less capex into their operations and use it to expand on brownfield projects. Higher prices will be needed to incentivize more greenfield projects. A new report from S&P Global Market Intelligence shows copper reserves in the ground are falling along with new discoveries.2 According to the S&P analysts, copper demand is expected to exceed mined supply by 2028, which, in line with our view, sees refined-copper consumption exceeding production this year. Renewables Push At Risk Just last week, the IEA produced an ambitious and narrow path for governments to collectively reach a net-zero emissions (NZE) goal by 2050.3 Among its many recommendations, the IEA singled out the overhaul of the global electric grid, which will be required to accommodate the massive renewable-generation buildout the agency forecasts will be needed to achieve its NZE goals. The IEA forecasts annual investment in transmission and distribution grids will need to increase from $260 billion to $820 billion p.a. by 2030. This is easier said than done. Consider the build-out of China's grid, which is the largest grid in the world. To become carbon neutral by 2060, per its stated goals, investment in China’s grid and associated infrastructure is expected to approach ~ $900 billion, maybe more, over the next 5 years.4 The world’s largest fossil-fuel importer is looking to pivot away from coal and plans to more than double solar and wind power capacity to 1200 GW by 2030. Weening China off coal and rebuilding its grid to achieve these goals will be a herculean lift. It comes as no surprise that IEA member states have pushed back on the agency's NZE-by-2050 plan. This primarily is because of its requirement to completely halt fossil-fuel exploration and spending on new projects. Japan and Australia have pushed back against this plan, citing energy security concerns. Officials from both countries have stated that they will continue developing fossil fuel projects, as a back-up to renewables. Japan has been falling behind on renewable electricity generation (Chart 6). Expensive renewables and the unpopularity of nuclear fuel could make it harder for the world’s fifth largest fossil fuels consumer to move away from fossil fuels. Around the same time the IEA released its report, Australia committed $464 million to build a new gas-fired power station as a backup to renewables. Chart 6Japan Will Continue Building Fossil-Fuel Back-Up Generation Just days after the IEA report was published, the G7 nations agreed to stop overseas coal financing. This could have devastating effects for emerging and developing nations‘ electricity grids which are highly dependent on coal. In 2020 70% and 60% of India and China’s electricity respectively were produced by coal (Chart 7).5 Chart 7EM Economies Remain Reliant On Coal-Fired Generation Near-Term Copper Supply Risks Rise Even though inventories appear to be rebuilding, mounting political risks keep us bullish copper (Chart 8). Lawmakers in Chile and Peru are in the process of re-writing their constitutions to, among other things, raise royalties and taxes on mining activities in their respective countries. This could usher in higher taxes and royalties on mining for these metals producers, placing future capex at risk. In addition, Chile's state-owned Codelco, the largest copper producer in the world, fears a bill to limit mining near glaciers could put as much as 40% of its copper production at risk.6 None of these events is certain to occur. Peruvian elections, for one thing, are too close to call at this point, and Chile has a history of pro-business government. However, these are non-trivial odds – i.e., greater than Russian roulette odds of 1:6 – and if any or all of these outcomes are realized, higher costs in copper and lithium prices would result, and miners would have to pass those costs on to buyers. Bottom Line: We remain bullish base metals, especially copper. Another leg up in copper would pull base metals higher with it. We would look to get long on politically induced sell-offs, particularly with the USD weakening, as expected Chart 8Global Copper Inventories Rebuilding But Still Down Y/Y   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com     Commodities Round-Up Energy: Bullish Next Tuesday's OPEC 2.0 meeting appears to be a fairly staid affair, with little of the drama attending previous gatherings. Russian minister Novak observed the coalition would be jointly "calculating the balances" when it meets, taking into account the likely official return of Iran as an exporter, according to reuters.com. We expect a mid-year deal on allowing Iran to return to resume exports under the nuclear deal abrogated by the Trump administration in 2019, and reckon Iran has ~ 1.5mm b/d of production it can bring back on line, which likely would return its crude oil production to something above 3.8mm b/d by year-end. We are maintaining our forecast for Brent to average $64.45/bbl in 2H21; $75 and $78/bbl, in 2022 and 2023, respectively. By end 2023, prices trade to $80/bbl. Our forecast is premised on a wider global recovery going into 2H21, and continued production discipline from OPEC 2.0 (Chart 9). Base Metals: Bullish Our stop-losses was elected on our long Dec21 copper position on May 21, which means we closed the position with 48.2% return. The stop loss on our long 2022 vs short 2023 COMEX copper futures backwardation recommendation also was elected on May 20, leaving us with a return of 305%. We will be looking for an opportunity to re-establish these positions. Precious Metals: Bullish We expect the collapse in bitcoin prices, the US Fed’s decision to not raise interest rates, and a weakening US dollar to keep gold prices well bid (Chart 10). China’s ban on cryptocurrency services and Musk’s acknowledgment of the energy intensity of Bitcoin mining sent Bitcoin prices crashing. The Fed’s decision to keep interest rates constant, despite rising inflation and inflation expectations will reduce the opportunity cost of holding gold. According to our colleagues at USBS, the Fed will make its first interest rate hike only after the US economy has reached "maximum employment". The Job Openings and Labor Turnover Survey reported that job openings rose nearly 8% in March to 8.1 million jobs, however, overall hiring was little changed, rising by less than 4% to 6 million. As prices in the US rise and the dollar depreciates, gold will be favored as a store of value. On the back of these factors, we expect gold to hit $2,000/oz. Ags/Softs: Neutral Corn futures were trading close to 20% below recent highs earlier in the week at ~ $6.27/bu, on the back of much faster-than-expected plantings. Chart 9 Chart 10     Footnotes 1     Please refer to Goehring & Rozencwajg’s Q1 2021 market commentary. 2     Please see Copper cupboard remains bare as discoveries dwindle — S&P study published by mining.com 20 May 2021. 3    Please see Net Zero by 2050 – A Roadmap for the Global Energy Sector, published by the IEA. 4    Please see China’s climate goal: Overhauling its electricity grid, published by Aljazeera.  5    We discuss this in detail in Surging Metals Prices And The Case For Carbon-Capture published 13 May 2021, and Renewables ESG Risks Grow With Demand, which was published 29 April 2021.  Both are available at ces.bcaresearch.com. 6    Please see A game of chicken is clouding tax debate in top copper nation, Fujimori looks to speed up projects to tap copper riches in Peru and Codelco says 40% of its copper output at risk if glacier bill passes published by mining.com 24, 23 and 20 May 2021, respectively.    Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades

Highlights Global oil markets will remain balanced this year with OPEC 2.0's production-management strategy geared toward maintaining the level of supply just below demand.  This will keep inventories on a downward trajectory, despite short-term upticks due to COVID-19-induced demand hits in EM economies and marginal supply additions from Iran and Libya over the near term. Our 2021 oil demand growth is lower – ~ 5.3mm b/d y/y, down ~ 800k from last month's estimate – given persistent weakness in realized consumption.  We have lifted our demand expectation for 2022 and 2023, however, expecting wider global vaccine distribution and increased travel toward year-end. The next few months are critical for OPEC 2.0: The trajectory for EM demand recovery will remain uncertain until vaccines are more widely distributed, and supply from Iran and Libya likely will increase this year.  This will lead to a slight bump in inventories this year, incentivizing KSA and Russia to maintain the status quo on the supply side. We are raising our 2021 Brent forecast back to $63/bbl from $60/bbl, and lifting our 2022 and 2023 forecasts to $75 and $78/bbl, respectively, given our expectation for a wider global recovery (Chart of the Week). Feature A number of evolving fundamental factors on both sides of the oil market – i.e., lingering uncertainty over the return of Iranian and Libyan exports and the strength of the global demand recovery – will test what we believe to be OPEC 2.0's production-management strategy in the next few months. Briefly, our maintained hypothesis views OPEC 2.0 as the dominant supplier in the global oil market. This is due to the low-cost production of its core members (i.e., those states able to attract capital and grow production), and its overwhelming advantage in spare capacity, which we reckon will average in excess of 7mm b/d this year, owing to the massive production cuts undertaken to drain inventories during the COVID-19 pandemic. Formidable storage assets globally – positioned in or near refining centers – and well-developed transportation infrastructures also support this position. We estimate core OPEC 2.0 production will average 26.58mm b/d this year and 29.43mm b/d in 2022 (Chart 2). Chart of the WeekBrent Prices Likely Correct Then Move Higher in 2022-23 Chart 2OPEC 2.0 Will Maintain Status Quo The putative leaders of the OPEC 2.0 coalition – the Kingdom of Saudi Arabia (KSA) and Russia – have distinctly different goals. KSA's preference is for higher prices – ~ $70-$75/bbl (basis Brent) to the end of 2022. Higher prices are needed to fund the Kingdom's diversification away from oil. Russia's goal is to keep prices closer to the marginal cost of the US shale-oil producers, who we characterize as the exemplar of the price-taking cohort outside OPEC 2.0, which produces whatever the market allows. This range is ~ $50-$55/bbl. The sweet spot that accommodates these divergent goals is on either side of $65/bbl for this year. OPEC 2.0 June 1 Meeting Will Maintain Status Quo With Brent trading close to $70/bbl, discussions in the run-up to OPEC 2.0's June 1 meeting likely are focused on the necessity to increase the 2.1mm b/d being returned to the market over the May-July period. At present, we do not believe this will be necessary: Iran likely will be returning to the market beginning in 3Q21, and will top up its production from ~ 2.4mm b/d in April to ~ 3.85mm b/d by year-end, in our estimation. Any volumes returned to the market by core OPEC 2.0 in excess of what's already been agreed going into the June 1 meeting likely will come out of storage on an as-needed basis. Libya will likely lift its current production of ~ 1.3mm b/d close to 1.5mm b/d by year end as well. We are expecting the price-taking cohort ex-OPEC 2.0 to increase production from 53.78mm b/d in April to 53.86mm b/d in December, led by a 860k b/d increase in US output, which will take average Lower 48 output in the US (ex-GOM) to 9.15mm b/d by the end of this year (Chart 3). When we model shale output, our expectation is driven by the level of prompt WTI prices and the shape of the forward curve. The backwardation in the WTI forward curve will limit hedged revenues at the margin, which will limit the volume growth of the marginal producer. We expect global production to slowly increase next year, and the year after that, with supply averaging 101.07mm b/d in 2022 and 103mm b/d in 2023.  Chart 3US Crude Output Recovers, Then Tapers in 2023 Demand Should Lift, But Uncertainties Persist We expect the slowdown in realized DM demand to reverse in 2H21, and for oil demand to continue to recover in 2H21 as the US and EU re-open and travel picks up. This can be seen in our expectation for DM demand, which we proxy with OECD oil consumption (Chart 4). EM demand – proxied by non-OECD oil consumption – is expected to revive over 2022-23 as vaccine distribution globally picks up. As a result, demand growth shifts to EM, while DM levels off. China's refinery throughput in April came within 100k b/d of the record 14.2mm b/d posted in November 2020 (Chart 5). The marginal draw in April stockpiles could also signify that as crude prices have risen higher, the world’s largest oil importer may have hit the brakes on bringing oil in. In the chart, oil stored or drawn is calculated as the difference between what is imported and produced with what is processed in refineries. With refinery maintenance in high gear until the end of this month, we expect product-stock draws to remain strong on the back of domestic and export demand. This will draw inventories while maintenance continues. Chart 4EM Demand Will Recovery Accelerates in 2022-23 Chart 8China Refinery Runs Remain Strong COVID-19-induced demand destruction remains a persistent risk, particularly in India, Brazil and Japan. This is visible in the continued shortfall in realized demand vs our expectation so far this year. We lowered our 2021 oil demand growth estimate to ~ 5.3mm b/d y/y, which is down ~ 800k from last month's estimate, given persistent weakness in realized consumption. Our demand forecast for 2022 and 2023 is higher, however, based on our expectation for stronger GDP growth in EM economies, following the DM's outperformance this year, on the back of wider global vaccine distribution year-end (Table 1). Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) Our supply-demand estimates continue to point to a balanced market this year and into 2022-23 (Chart 6). Given our expectation OPEC 2.0's production-management strategy will remain effective, we expect inventories to continue to draw (Chart 7). Chart 6Markets Remained Balanced Chart 7Inventories Continue To Draw CAPEX Cuts Bite In 2023 In 2023, we are expecting Brent to end the year closer to $80/bbl than not, which will put prices outside the current range we believe OPEC 2.0 is managing its production around (Chart 8). We have noted in the past continued weakness in capex over the 2015-2022 period threatens to leave the global market exposed to higher prices (Chart 9). Over time, a reluctance to invest in oil and gas exploration and production prices in 2024 and beyond could begin to take off as demand – which does not have to grow more than 1% p.a. – continues to expand and supply remains flat or declines. Chart 8By 2023 Brent Trades to /bbl Chart 9Low Capex Likely Results In Higher Prices After 2023 Bottom Line: We are raising our 2021 forecast back to an average of $63/bbl, and our forecasts for 2022 and 2023 to $75 and $78/bbl. We expect DM demand to lead the recovery this year, and for EM to take over next year, and resume its role as the growth engine for oil demand. Longer term, parsimonious capex allocations likely result in tighter supply meeting slowly growing demand. At present, markets appear to be placing a large bet on the buildout of renewable electricity generation and electric vehicles (EVs). If this does not occur along the trajectory of rapid expansion apparently being priced by markets – i.e., the demand for oil continues to expand, however slowly – oil prices likely would push through $80/bbl in 2024 and beyond.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com   Commodities Round-Up Energy: Bullish The Colonial Pipeline outage pushed average retail gasoline prices in the US to $3.03/gal earlier this week, according to the EIA. This was the highest level for regular-grade gasoline in the US since 27 October 2014. According to reuters.com, the cyberattack that shut down the 5,500-mile pipeline was the most disruptive on record, shutting down thousands of retail service stations in the US southeast. Millions of barrels of refined products – gasoline, diesel and jet fuel – were unable to flow between the US Gulf and the NY Harbor because of the attack, which was launched 7 May 2021 (Chart 10). While most of the system is up and running, problems with the pipeline's scheduling system earlier this week prevented a return to full operation. Base Metals: Bullish Spot copper prices remained on either side of $4.55/lb (~ $10,000/MT) by mid-week following a dip from the $4.80/lb level (Chart 11). We remain bullish copper, particularly as political risk in Chile rises going into a constitutional convention. According to press reports, the country's constitution will be re-written, a process that likely will pave the way for higher taxes and royalties on copper producers.1 In addition, unions in BHP mines rejected a proposed labor agreement, with close to 100% of members voting to strike. In Peru, a socialist presidential candidate is campaigning on a platform to raise taxes and royalties. Precious Metals: Bullish According to the World Platinum Investment Council, platinum is expected to run a deficit for the third consecutive year in 2021, which will amount to 158k oz, on the back of strong demand. Refined production is projected to increase this year, with South Africa driving this growth as mines return to full operational capacity after COVID-19 related shutdowns. Automotive demand is leading the charge in higher metal consumption, as car makers switch out more expensive palladium for platinum to make autocatalysts in internal-combustion vehicles. Ags/Softs: Neutral Corn prices continued to be better-offered following last week's WASDE report, which contained the department's first look at the 2021-22 crop year. Corn production is expected to be up close to 6% over the 2020-21 crop year, at just under 15 billion bushels. On the week, corn prices are down ~ 15.3%. Chart 10 Chart 11     Footnotes 1     Please see Copper price rises as Chile fuels long-term supply concerns published 18 May 2021 by mining.com. Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades