Earlier in the week, commodities analysts at BarCap were rather bewildered by data showing the Chinese are now importing substantially small quantities of wheat and soya and copper?
Well, the BarCap analysts have now got it together. The bull case remains on track! After a two day hiatus, the commods team are back with the BarCap programme:
Not for turning
- Commodity price appreciation has slowed and risks to the recovery have grown, although we do not see recent events as signalling a turning point for prices.
- Chinese import demand for some commodities is slowing, but signs of an imminent recovery in OECD are building and we expect this to take up the slack.
Has the commodity market reached a turning point or is it simply pausing before the next leg higher? After a strong recovery this year, the recent sideways movement and underperformance relative to equities suggest some market fatigue. Indeed, with a lot of macro good news already priced in, market participants are understandably concerned about the next direction. So is there still further upside from here? If history is of any guide, the answer is a resounding yes.
This comes as a relief. BarCap clients have just received the bank’s latest Global Outlook, titled Still in the Sweet Spot, while their chief global asset allocator, Tim Bond, has just declared that he only really sees a risk that he’s not being bullish enough in terms of the short term outlook for growth.
What the commods team now understand is that Western economies will now drive prices higher, taking over from China.
Which is brilliant, or heroic, or both:
Recent moderation in price gains has largely been rooted in evidence that China’s import demand for some commodities is easing. The potential for a strong cyclical rebound in OECD economies is likely to help offset this and suggests improvement in demand for many commodities still lies ahead.
With this broad macroeconomic picture in mind, we continue to favour commodities that will gain most leverage from the sharp rebound in OECD economies. With that in mind, our key recommendations would be long positions in crude oil, copper, nickel and cocoa, all of which should benefit disproportionately from the OECD regions restocking cycle, as well as eventual demand recovery. There may yet be some hiatus until the flow of data regarding this recovery dynamic becomes consistent and persuasive enough to offset concerns over weaker Chinese import demand, and until then, sustained price gains may prove difficult to attain. However there are some signs, for example in nickel, that recent sustained inventory declines may indicate the initiation of this OECD recovery in more visible terms.
Related links:
Faber on China: Still right after all these years… – FT Alphaville
ChiNext: China’s next shiny, new thing – FT Alphaville
China’s bad debts – Lex