Treasure Chest | Dec 11 2012
By Greg Peel
China's new regime is now in place. It will not be settled in until into the new year so there is no expectation of any fresh stimulus measures just yet, however the transition has been sufficiently smooth to remove uncertainty, the analysts at ANZ Bank suggest.
Meanwhile, the mid-year interest rate cuts provided by the outgoing regime appear to having an impact, with China's manufacturing PMI now back in expansion territory and housing numbers improving. Markets have spent 2012 anxiously watching the Chinese economic slowdown but fears of a hard landing have been allayed, suggesting a more confident tone as we move into 2013. Stronger Chinese demand for commodities is expected, and this should provide sufficient offset to US fiscal cliff-related fears as we approach the January 1 deadline, ANZ believes, albeit the combination of the two may lead to choppy conditions.
ANZ expects a resolution to the fiscal cliff by the deadline but warns the market will continue to second-guess all the way up to the death.
The mood of global commodity investment funds turned more positive in November, with commodity index positions rising by 7% or US$21bn in November following a US$20bn reduction in October. The US commodity futures market has been a little more cautious, with positions in copper and oil reduced while many agricultural positions remain long.
ANZ suggests those commodities currently underweighted in fund portfolios should enjoy the greatest support heading towards the new year as fund managers preempt commodity index rebalancing at year's end. Agricultural commodities will see mixed results depending on their 2012 performance, with South American weather-watching still critical at this point. ANZ is looking for strength in crude oil (West Texas), coffee, cotton and sugar with offsetting selling likely in the year's outperformers corn, wheat, soybeans and natural gas.
ANZ expects support for base metals in general but cautions that near-term liquidity issues for Chinese traders suggest caution with regard to the bulks (iron ore, coal). China's power and steel industries were unseasonably strong in October and probably followed through in November but December may see weaker imports.
Looking outside of China, US economic data have been clipped in November due to storm impact but while this effect should subside into the new year, the typical Christmas slowdown means an immediate rebound is unlikely, says ANZ. The Europe story has been uneventful over the same period while Japan is still suffering from Chinese boycotts related to territorial disputes and these are yet to subside.
Northern hemisphere energy demand typically picks up in the winter but may not have as great an impact in 2013, ANZ warns, given high levels of Chinese coal stocks and increased US domestic oil production dampening the effect. China has also spent the year stockpiling grains, oilseeds and sugar to record levels, which has supported prices. ANZ believes grains will continue to be supported but oilseeds and sugar levels now look sufficient.
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