Commodity Markets Say…

Amid all the discussion surrounding this stock market melt-up, I haven’t had a look at commodity markets in recent weeks.

Well, you’re probably not surprised to hear that commodities in general are happy recipients of the central bank sponsored global surge in liquidity we’ve seen so far in 2019.

Even though the US Federal Reserve has not lowered rates, the market’s perception about where rates are going has a huge impact on liquidity. Central banks help create confidence, and confidence creates liquidity.

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Chinese stocks have rallied

And then there’s China. It got back on the stimulus train early this year and the impact has been enormous. Asian stock markets have rebounded to seven month highs, Chinese stocks have surged, and, not surprisingly, commodities have enjoyed a big rally too.

Markets are still celebrating the prospect of ongoing stimulus from the Middle Kingdom. Reuters reports today that the People’s Bank of China hinted at more stimulus over the weekend:

In a document published on the central government’s website late on Sunday, Beijing said it would step up a policy of targeted cuts to banks’ required reserve ratios to encourage financing for small and medium-sized businesses.’

That comes on top of a number of already hefty programs. In late January, the South China Morning Post reported that:

China’s state planner has been rapidly approving big infrastructure projects, as it looks to give its flagging economy a shot in the arm.

Since the start of December, the National Development and Reform Commission (NDRC) has approved 16 projects, worth at least 1.1 trillion yuan (US$163.2 billion) in total, according to South China Morning Post analysis of official data.

Then, at the National People’s Congress in early March, Chinese Premier Li Keqiang announced more programs. As CNBC reported:

During his opening speech, Li announced cuts in taxes and fees worth nearly 2 trillion yuan ($289.28 billion).

In addition, Li announced plans to increase the country’s infrastructure financing: Around 2.15 trillion yuan worth of local government special bonds will be issued this year to meet spending needs for key projects.

That’s about US$600 billion in stimulus right there. No wonder iron ore prices just hit their highest price since 2014, and BHP and RIO shares are trading at multi-year highs.

But it’s not just iron ore (and coal) that are benefitting.

Copper has rebounded nicely this year too, as you can see in the chart below…

Copper - HG2Spot 10-04-19

Source: Optuma

[Click to open in a new window]

It’s trading up around resistance now. If it can break through, it will tell you that’s China’s stimulus measures are gaining traction. If prices do break through that resistance level, expect the rally to continue back to the recent highs around US$3.30/lb.

Industry sentiment is certainly bullish. The Financial Review reports today that:

Industry analysts and executives descending on Santiago this week for the Cesco conference, one of the [copper] industry’s biggest events, are in bullish spirits: a key indicator of the market for semi-processed copper ore — known as concentrates — is pointing to the tightest market in more than five years, and banks and brokers such as Morgan Stanley and Macquarie Group rank the metal as one of their top picks.’

The chart below shows the Thomson Reuters Industrial Metals Equity Index, which tracks companies producing industrial metals like copper, aluminium, nickel, lead tin, and zinc.

As you can see, in the past few weeks the index broke out to its highest level since September last year.

Thomson Reuters CRB Industrial Metals Equity Index 10-04-19

Source: Optuma

[Click to open in a new window]

Oil prices are also rebounding strongly. Brent crude this week traded above US$70 a barrel, the highest price since early November last year. Note also the moving average cross over, which is an indication of a change in the medium term trend.

Crude Oil Brent NYMEX 10-04-19

Source: Optuma

[Click to open in a new window]

Slightly less convincing is the final chart for today, which shows the broader CRB commodities index. After a very sharp decline at the end of 2018, it has put in a decent recovery. But given the stimulus thrown at the Chinese economy, it is not overly inspiring.

Thomson Reuters/Jeffereies CRB Commodity Index 10-04-19

Source: Optuma

[Click to open in a new window]

Stimulus measures are especially tricky to interpret

Still, all these charts point to improving global economic growth. The question is just how sustained that growth will be.

In my view, you’re witnessing an unprecedented attempt to manage the business cycle at the top. Normally, our all-seeing central planners would come in and provide stimulus at or near the bottom of the cycle.

But now, they’re shamelessly trying to eradicate the cycle altogether.

The way I see it, with debt levels across the global economy now so high, stimulus measures are especially tricky to interpret. High debt levels mean the global economy is highly leveraged to one-off injections. This effect of this leverage shows up in a large upswing in equity prices.

But the debt continues to absorb large parts of the income produced by economic growth. When the stimulus measures fade, the leverage works the other way.

Once again, we’re seeing unelected global bureaucrats playing out a grand experiment they have no idea about. It’s raising the risk for all investors, with outcomes increasingly uncertain.


Greg Canavan,
Editor, The Rum Rebellion

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