Shit just got real.
So as regular readers know, Goldman is rapidly losing its patience with you on the whole crashing commodities thing.
Yes, tightening in China and a simultaneously crackdown on shadow banking is acting as a giant margin call and yes, the macro data is rolling over, but if you think that’s something Goldman is worried about when it comes to their Overweight commodities call you’re wrong.
And see they tried to warn you. They tried and they tried. Note after fucking note. Day after fucking day.
But did you listen? No, you didn’t. You kept selling the metals and you kept asking questions and so on Wednesday Goldman brought out the big guns.
You forced their hand so they had to bring Jeff Currie into this.
Because you asked for it…
Commodities had a dismal week last week. From April 28 to May 5, the S&P GSCI total returns index fell 3%, with iron ore down 13%, crude oil down 6%, and copper down 3%. In sharp contrast, other risk assets performed well: S&P 500 gained 1% and US high-yield corporate spreads stayed roughly flat. Much of the commodities sell-off was driven by technical factors, including the liquidation of spread positions in the oil market and the LME inventory build in the copper market.
But the broad-based energy and metals underperformance also reflected resurfacing China fears. As MK Tang pointed out earlier, the Chinese government has adopted tightening policies. The annualized 7-day repo rate shot up to 5.5% on March 21 (Exhibit 1). Most recently, all four PMIs coming out of China last week disappointed (Exhibit 2), fueling worries about policy tightening negatively affecting real activity. Given the outsized footprint of China in the commodities market, commodity prices fell in response.
Is the commodity sell-off on China fears warranted? We think not for two reasons.
First, the latest round of policy tightening in China comes from a point of strength rather than weakness. Q1 real GDP grew 6.9% year-over-year, notably above the 6.5% target. March industrial production increased the most since 2014.
Second, much of the recent tightening in China is aimed at reining in financial excesses and hidden leverages rather than forcefully hitting the brakes on the real economy. A phrase often used by Chinese officials lately is “Tuo Xu Xiang Shi”, loosely translated into “ensuring that the financial market serves the real economy”