Daily price moves suggest the current focus is squarely on China data.
That’s a quote that could apply to a lot of things these days (including Apple), but in this case, it’s a reference to recent price action in industrial metals.
The market has obviously been hyper-sensitive to ongoing sings of weakness in the Chinese economy and for good reason. China is the global engine of growth, trade and, perhaps as importantly, credit creation, so once that starts to slow against a backdrop where DM central banks are throttling back the liquidity spigots and the trade war continues to weigh on the outlook, it creates a severe psychological overhang for all manner of assets.
Naturally, this is showing up in the metals. As you’re hopefully aware, both the official and Caixin manufacturing PMIs fell into contraction territory in December, the latest in a string of underwhelming data out of China.
(Bloomberg)
As Goldman writes in a new note, “China growth decelerated notably in 2018Q4 and the latest miss in manufacturing PMI sparked a 7% sell-off in industrial metals.” For the bank, other factors that “should” be playing into metals prices (e.g., the dollar and ostensibly positive news on the trade front) have simply “taken a back seat.”
(Bloomberg)
“Our China Metals Consumption Index — which summarizes the production growth of 38 metal-intensive industrial sectors — also reached its lowest level since April 2016,” the bank adds, on the way to underscoring the notion that because a weaker dollar (“on the margin”) and signs of a thawing in trade tensions haven’t done anything to help copper and aluminum, “China growth is the key driver of the metals market right now.”
(Goldman)
Indeed, a quick look at the China Economic Policy Uncertainty index shows it’s sitting at a record high, even as the US trade policy uncertainty index has come off a bit.
(Bloomberg)
The read-through, from where Goldman is sitting anyway, is that “metals [will] stay under pressure in Q1 [and] given the lingering impact from the ongoing deleveraging and de-risking efforts, China activity data [won’t] improve until Q2.” Here are the bank’s revised targets:
Our new 3/6/12-month copper price targets are $6100/6400/7000/t versus $6500/7000/7000/t previously. Our new 3/6/12-month aluminum targets are $1900/1950/2000/t versus $2100/2000/2000/t previously.
It goes without saying (or at least it should), that it’s impossible to completely disentangle the trade war from China’s ongoing economic deceleration. Beijing was already in a precarious spot when it comes to squeezing leverage out of the shadow banking complex while ensuring credit stays flowing to the real economy while simultaneously attempting to mark a tenuous transition from a smokestack model to a more consumption-driven dynamic. Trump’s trade war made that already delicate tightrope walk even more difficult.
In any event, this doesn’t make for the most compelling reading material, but it’s worth mentioning, given that it speaks to how demand destruction appears to be materializing as the global economy decelerates, led by China.
Was looking at VALE, so it is interesting material to me. It jumped 9% on Friday. On China optimism. Icahn got out of significant metals holdings like Flynn prior to Trump initiating the trade war, and more recently sold his ferrous mining holdings to VALE. Your recent articles revealing the potential for a weaker dollar led me to the above knowledge. So if one of your goals is to get guys like me and the plumber thinking and researching. Back pat sir.
“Our new 3/6/12-month copper price targets are $6100/6400/7000/t”
These are 4%, 10%, and 18% above Friday’s close.
Sometimes I don’t understand them, they say metals will be under pressure, things don’t improve till Q2 and then they give targets above current levels.