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The commodities supercycle has been dismissed as out of favour as an asset class since its decline, and with China repeatedly reiterating their slowdown from the start of the year.
Since then, things have changed. China reported a slight uptick in manufacturing in August due to increased output in Europe, led by Germany. The eurozone is out of recession and the question of the Fed tapering still hangs in the air. China and Europe were the wildcards and the recent developments support our view that global growth will stabilise further which will be positive for industrial commodities.
Looking at China first: the preliminary PMI by HSBC and Markit showed an expansion of 50.1 from 47.7 on 22 August. When the official manufacturing PMI was announced on 1 August at 50.3, it was largely ignored and viewed with scepticism as the HSBC/Markit manufacturing PMI was out on the same day showing a contraction of 47.7.
The government officials have been busy addressing issues such as supply overhand and coming up with initiatives for SMEs to prevent further deterioration in economic growth. The advantage of a centralised government and a fast response were just what investors were looking for. Further supporting this is industrial production. There’s been a steep decline since the peak in February 2010, and the important point is that it’s flat for most of the year.
The latest figure in April, 9.4%, indicates production is moderating without any sharp declines. The recent stronghold in copper prices further supports our view that China’s economic growth is not coming to a screeching halt.
The eurozone has been in the limelight with Germany and the UK showing stronger-than-expected GDPs. Germany’s GDP was 0.7% in Q2, an expansion after six quarters of contraction. The country’s growth can also be seen in factory orders, private, corporate and government spending. Investor confidence has increased, the Bundesbank predicts the German economy will expand 0.3% this year and 1.4% in 2014.
The eurozone’s economy expanded 0.3% last quarter. Although the peripheral countries are still struggling and the large debt and unemployment rate have not been addressed, the moderate growth of the eurozone and the continued strength of Germany’s economy could have a trickledown effect in the long run.
In the case of copper, Europe accounts for 20% of consumption while China, the US and Japan account for 60% of global copper demand. US durable goods order overnight was worse than expected, dropping to 7.3%, the most in almost a year. Questions resurfaced over the health of the US economy and whether it is ready for tapering. We expect US growth to be patchy and if China and Japan continue to grow at a steady pace, this would be reflected in the copper prices.
The prospect of the Fed scaling back asset purchases will be viewed as positive for the US economy, thus supporting industrial metal. The US central bank has emphasised interest rates will be kept low for an extended period of time. Other central banks such as Bank of Japan are expected to keep stimulus in place for a period of time.
While the recent taper fears have sent jitters into global markets, commodities have come through pretty much unscathed. Our copper view from 16 August still holds: bullish tone with our resistance level at $340 and support at $320.
Gold prices have extended higher since our bullish view in July. We are tempted to shift towards neutral for the week as it faces multiple levels of resistance at the $1405 levels. Gold price action underwent a shakeout early this year and has ultimately found a floor. Since July it has gained 12%. The underlying roots of the attraction in gold still hold: uncertainties in global fiat currencies, economic growth in the ASEAN region being under stress, store of value, inflation.
Last week, reports of strong demand for gold in places such as Indonesia were supported as the rupiah plunged. We expect the selloffs of the rupee and rupiah to level off for now, along with the buying of gold. Gold prices are likely to consolidate towards $1375 if it doesn’t close above $1410.
The end of the driving season is nearing and analysts are expecting inventories to rise in the US. Inventories are expected to increase by 0.2% to 700,000 barrels according to a Bloomberg survey, ahead of the EIA report tomorrow. Ship tracking of VLCCs sailing to China showed Olie - VS Crude shipments rose 1.6% this week.
Exports resumed in Libya’s Brega terminal, which had been halted due to labour strikes. This is estimated to add about 90,000 barrels a day to the 500,000 that Libya is currently exporting. We expect Olie - Brent Crude to possibly consolidate towards $110 before moving towards a $112 target.