Treasure Chest | Jun 17 2016
By Greg Peel
Earlier in the year it appeared as if Beijing’s stimulus measures, both monetary and fiscal, may have been starting to have their desired impact on the Chinese economy. The data began to improve. Mind you, one always has to be wary of misleading Chinese data fluctuations before, during and after the Lunar New Year holiday.
China’s May data now suggest things have taken a turn for the worse once more. Commodity price rebounds out of the February dip have to a degree been driven by stronger Chinese demand for the likes of iron ore, oil, and to some extent, base metals. There have been fears of such demand simply reflecting a re-stocking phase which must eventually come to an end, but analysts have been surprised that this had not yet become apparent.
Reality bit last weekend when Beijing released a weak number for May fixed asset investment, which reflects infrastructure spending. Industrial production was also uninspiring. The weakness in China’s financing numbers for May released earlier this week was notable, ANZ’s commodity strategists point out.
Loan growth was stronger than expected but total social financing was quite subdued, ANZ notes, corroborating the fall in fixed asset investment growth. A decline in the money supply and aggregate finance suggests the Chinese economy has peaked. Yet the data is not so poor as to press the PBoC into more aggressive monetary easing. ANZ nevertheless believes the government will likely launch further fiscal policies and speed up infrastructure approvals.
While the Chinese story is an ongoing one, of more immediate threat to commodity prices is next week’s Brexit vote. A “go” vote will likely send stock and commodity (ex-gold) markets into a tailspin. The impact may only prove temporary, ANZ suggests, but losses could be steep.
Commodity prices should otherwise be supported on the downside now that the Fed has returned to a more dovish stance, in line with market perception. Three anticipated US rate hikes this year have now become one, and that’s not a given either. Rate hikes would have placed upward pressure on the US dollar and thus by default, downward pressure on commodity prices.
It is still likely a Brexit “go” vote will result in US dollar strength as a safe haven for funds following out of the UK and Europe, adding to downside pressure on commodity prices irrespective of general volatility.
The exception is gold, which is more currency than commodity and as a safe haven, can move independently of the US dollar if circumstances warrant. Gold has already challenged the US$1300/oz mark, which will no doubt be breached were the Brexit vote to throw the world into turmoil.
The latest polls have the “stay” vote in front. It will be a nervous week.
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