Peak Copper Demand; Passed?

Very Independent Research: The Long Slide in Copper Demand

John Tumazos of Very Independent Research has made more than 40 appearances in the II analyst rankings in a 35-year career. He does fundamental research on commodities markets and common stocks in the metals, fertilizer and forest products sectors, and he operates with a limited distribution list of clients. Based in New Jersey, he spends a large part of his year traveling the world. Earlier this month, Tumazos published 3 excellent reports related to cooper supply and demand, and their respective growth prospects. These are impressive pieces with strong numbers to back the views expressed. In the first report he shows how supply and demand are both tight, with output on both sides less than expected. This comes amid a global softening of demand for copper from traditional technology markets, that is now a multi-year trend, Tumazos reveals in the second report. Meantime, the potential growth expected from electric cars isn’t nearly enough to counteract this slide. Indeed, less than a quarter of the markets Tumazos tracks, experienced any sort of demand growth. In the third piece, Tumazos then tests the sensitivity of 15 copper or copper-related stocks to scenarios more optimistic than the $3.50/lb long-term copper he forecasts, instead, at a price of of $4.50/lb.

A Lower AUD in 2018

In terms of AUD near term, it’s hard not to note that the A$ looks to have been singled out for some pretty rough treatment of late, observes Rob Ronnie, head of markets research at Westpac in Sydney. Strong global growth, solid metals/commodity markets and positive risk sentiment is not normally a combination of factors that drives the AUD lower, but that’s exactly what’s happened. However, it’s clear that the collapse in yield spread in recent weeks has been a huge weight on the currency. Westpac have produced an interesting chart in this note that apportions the recent 4 big figure drop Across various asset markets around the world. This chart makes it pretty clear that most of this move can be explained by observable factors. Westpac find that about half of the move lower can be explained by relative interest rates moves. Whilst it is hard to separate US rate movements from the USD (noting that the USD is not an input into Westpac’s fair value model) the move higher in the US$ accounts for another one and half big figures of the move. Other factors including the move higher in equity markets, a modest move lower in commodity prices and movement in credit markets combined accounts for about one half of one big figure. Using this fair value concept, it seems fair to argue that if the Fed does tighten as we expect in Dec 17, June 18 and Dec 18, and the RBA remains on hold for some time as RBA Governor Lowe suggested last night, Westpac says the market should expect to see further weakness in the AUD through next year. However, it does feel as if the currency has come a long way in the near term and Rennie suggests that it should see something of a base building for the AUD near 0.7500 for now. Click the link below to request this chart from Westpac directly.

Supply Side Reform: No Effect on Commodity Prices

China’s “Supply Side Reform” (SSR) program has been credited with boosting prices. It has not, writes Tim Murray from J Capital Research. If anything it has been a side show, because the real driver has been demand and that has been driven by stimulus, and that is where investors should look when considering supply and demand dynamics. The real motive of SSR has been to increase to the market share of SOEs in the commodity sector, because SSR has targeted the private sector, and SOEs have come in to fill the gap. The reality is that, capacity cuts net-net are quite small, yet they have created market distortions. Construction steel prices for instance have soured, because of increased demand for houses (stimulus) outstripped supply because a great proportion of private sector capacity was taken out by SSR than in other sectors. The also occurred in the coal and aluminium markets too. A very interesting view which suggest reduced stimulus will be a drag of commodity prices. This note can be purchased on RSRCHXchange, alternatively contact the provider directly.

Between Bust and Boom

Despite the length of the recovery and the flattening yield curve, strategists at TD Securities see only about a 20% chance of a US recession in 2018. Possible triggers include policy mistakes and overdue equity or corporate debt market corrections. Conversely, they see a slightly higher chance that US growth could surprise to the upside, in the event that tax reform and deregulation lead to a sizable boost to 2018 activity. Therefore the risk for global markets in this case would be higher US real yields, a stronger USD, and possibly a faster Fed tightening cycle, the report says. This piece has been republished as part of the “What Could Possibly Go Wrong?” series from TD’s 2018 Global Outlook: This Time with Feeling, which clients can access via the research portal. Click below.

Australia’s Old Economy Blues

Around two decades ago, AUD was languishing at record lows labelled an old economy left out by the ‘new IT economy.’  It feels a bit like its happening all over again, writes Greg Gibbs, from Amplifying Global FX Capital.  Australia’s interest rate advantage has slipped, and its equity market is under-performing, Gibbs adds. Yesterday, US 2-yr swap rates rose to a cyclical high and converged with falling Australian rates for the first time since 2001.  Equity capital flows are playing a bigger part in driving currencies in the last year, and on that front Australia looks equally underwhelming. If you’d like to access the full note, click below to contact Gibbs directly.

Solid Growth and Attractive Markets in 2018. Caution for 2019

Unicredit forecast a continuation of strong global growth in 2018, with the US enjoying a short-term boost from tax cuts, the eurozone retaining solid momentum and EM being in generally good shape. Major central banks are likely to withdraw stimulus very gradually. Growth prospects look less favorable in 2019 however.  Breaking down the asset classes, Unicredit see 10Y USTs probably peaking around 2.75% in 2018 (Currently 2.36%), with curve-flattening remaining the dominant theme, meanwhile they see the 10Y Bund yield rising to 0.80% by end-2018 (Currently 0.34%). As pressure from the ECB’s QE program recedes, the upward move should be primarily driven by an increase in real yields, the report says.  Unicredit rake a bullish stance on the euro in 2018, where they see it as undervalued, and where it should approach its fair-value level of 1.25 by the end of 2018, supported by the ECB’s QE tapering and a return of portfolio flows in the euro area. As a result of these portfolio flows, the uptrend in eurozone equities is likely to extend into 2018 despite already expensive P/E valuations, Unicredit argue. These gains will be front loaded in the first half of the year, perhaps by rallying by as much as 15%, before consolidating into the back end of the year. In the credit space, Unicredit warn of potential volatility in credit spreads due to very stretched valuations. Finally, in its core region, CEEMEA, Unicredit remain constructive on flows into EM FI and EM FX, although increasing differentiation is required; more specifically, they prefer externally-balanced countries with improved domestic fiscal positions and high real rates. In corporate EM credit, they maintain a preference for sub-investment-grade credit. Unicredit clients can view the full report via the bank’s research portal.

European Outlook 2018, Growth to Moderate, Political Risk to Continue

Goldman Sachs underestimated the European growth profile this year. In fact they’ve just upgraded their near-term growth profile. But looking into 2018, their economists now think the acceleration of activity is already behind us, and expect the path of sequential quarterly growth to moderate from mid-2018 onwards. Alongside this, they forecast Euro area inflation to remain substantially below-target in 2018 and they remain dovish on the ECB. This does not come without risk, the outlook report says. It will probably raise the spectre of a build-up of financial imbalances and risks, and the prospect of the introduction of macro-prudential measures could be considered. Across the English channel, Goldman’s base case for UK remains that a “status quo” transitional deal that paves the way to containing uncertainty and thereby to a gradual tightening of both monetary and fiscal policy. In Scandinavia, some economies face many of the same issues highlighted in the Euro area outlook, but they are at a more advanced stage. Growth has run substantially above potential for some time in Sweden, where a significant positive output gap now prevails, and this will warrant the attention of investors. By contrast, Switzerland is lagging continental Europe, the report says. Turning to politics, the report characterises European populism as a fundamental driver of European political dynamics. They say the underlying appeal of populism is tied to socioeconomic and cultural factors, which are not likely to dissipate in the medium term. Finally, drawing on these themes, they’ve updated  their “conviction views” which are: (1) Euro area core inflation will remain below target over their forecast horizon; (2) the ECB will keep policy rates on hold until H2 2019; (3) the BoE will hike more than two times over the coming three years; and (4) a Brexit transition deal will be reached, but on the EU-27’s terms. Goldman clients can read the full note by clicking below.

Brexit Trade Deal; EEA or Crash Out

The only sensible arrangement for the UK is an EEA-type status writes Gerald Holtham from Llewellyn Consulting, a London-based political and economic research firm. Uncertainty being the common factor in Brexit negotiations continues to be present, as the public agrees that the UK cannot close an adequate deal with the EU in two years. This note explains the political downside, sovereignty and the bottom line of either; a crash out or being in the EEA. With either option having equal chances of happening, the UK obsession with sovereignty could alter the odds argues This piece can be purchased on RSRCHXchange, alternatively contact the provider.

Zimbabwe: The Impasse; Equity Premium Falls

Exotix, the frontier market specialists, have been following the Zimbabwe situation very closely. In this a report published this morning, they write that the army needs Mugabe to reappoint Mnangagwa before he goes and Mugabe knows this, hence the delay. The army and the war veterans (represented until his recent dismissal by Mnangagwa and his Lacoste faction) have exerted a sufficient show of strength to undermine the rival G40 faction (e.g. Grace Mugabe, Saviour Kasukuwere, Jonathan Moyo, Ignatius Chombo, Kudzanai Chipanga) in government, but now face two constraints: (1) the need to avoid a full-blown coup because of the negative extra-constitutional precedent it sets within Zimbabwe and the international opposition it would trigger from the Southern African Development Community and the African Union; (2) they need Mugabe to reappoint their preferred Presidential successor, Mnangagwa, as Vice President, before he goes, whether through resignation or impeachment (Exotix run through the constitutionally compliant scenarios for his exit in this report). For access to the full report, and it’s market implications for capital flows and the equity market, click below.

China in the New Xi Era; The Law of the Land

Trivium China was founded in 2017 by Andrew Polk and Trey McArver, with offices in London and Beijing. Prior to Trivium, McArver was Director China Research for Trusted Sources, while Polk was head of the Medley Global Advisors China practise. They provide research and consultancy services to institutional investors and corporations. The focus is on politics and macro, with an emphasis on China’s financial system, including monetary policy, currency and credit. Included within the service is analyst access with bi-weekly calls. In this report they outline the context of the key planks of the Congress and what they mean from a policy and economic stand point. The central argument is that core elements of policy are now embedded into the Party constitution, which essentially means there’s no going back, and failure to achieve these goals could have serious consequences for those implementing policy. This implies sharpened policy focus and determination. Trivium home in on Supply-Side Structural Reform, which they say will be the primary economic policy framework for the foreseeable future, while the Belt and Road initiative will move from being, in their words, a ”fairly ill-defined 100-year vision” to a firmed up plan that is already beginning to have a significant impact on Asian capital markets, as SoE pre-funding commences. There’s also some very interesting colour on the role of Liu He, whose elevation to the Politburo will see him take charge of policy implementation. In a separate report (available on request), Trivium present profiles of the new Politburo Standing Committee. Since these are the guys are now running the second-biggest economy on the planet, it’s worth knowing who they are. They’ve outlined their responsibilities, policy views and biographies. Click below to contact provider directly to request access to these reports.