COMMODITIES NOW Global Manufacturing PMI & GDP Growth
30 35 40 45 50 55 60
GlobalManufacturing PMI (LHS) WorldGDP (% q/q, annualised, RHS)
00 01 02 03 04 05 06 07 08 09 10 11 12
-8 -6 -4 -2 0 2 4 6 8
46 47 48 49 50 51 52 53 54 55
Manufacturing PMIs November Expanding December January February
50 Contracting Eurozone UK China Japan US
“Purchasing managers’ surveys for February suggest that, although activity has recovered from late-2011, the global manufacturing recovery may be losing momentum already” Andrew Kenningham, Capital Economics.
Sources: Markit, Thomson Datastream, Capital Economics
of supply-side sufficiency combined with low prices”. BarCap believe that we are at an
‘inflexion point’ ... a new accent in market sentiment after a period of hiatus and reversals. This is because the flow of macroeconomic data has improved, and the implied probability of a sudden economic calamity has been downgraded. It is this macroeconomic transition
which has brought consideration of the supply side back into focus for commodities. In some areas (most particularly base metals) this is strongly positive for prices, given that the supply-side response is taking place at considerably higher price levels. Macro data (particularly in developed economies) has surprised on the upside of late – an important support for equities specifically, and risk assets generally.
“While leading indicators have
stabilised, or moved marginally higher, they remain soft”
“However, while macro surprises
matter for equities, it is the pace of growth that affects commodities,” Morgan Stanley’s global cross-asset management team recently remind us. “While leading indicators have stabilised, or moved marginally higher, they remain soft. Global purchasing manager indices, for example, remain near the growth- contraction threshold. It may be that
8 March 2012
global commodities [particularly industrial commodities which are most directly tied to industrial activity] are suggesting that the pattern of positive surprises will not be sustained.” The lacklustre performance of commodities also suggests that
upstream inflation pressures will moderate (barring, any supply- related disruptions in energy).
Five Keys to 2012 The extent to which the upside potential in commodity prices
is realised depends on the interaction of a number of variables. As BarCap note, five key questions will prove decisive in shaping commodity market prospects in 2012.
– What’s priced in? – Will China’s commodity imports recover? – How will supply constraints evolve? – When will investors return to commodity markets? – Will this year mark the end of risk on, risk off?
For now, the US economy continues its gradual recovery.
Eurozone tail risks have decreased, and China is taking steps to ease its monetary policy and simulate domestic consumption. However, even if the period of extreme weakness in Europe has passed – for now – the world does not seem to be beginning a sustained and rapid recovery. Furthermore, oil price spikes will slow global growth and exacerbate inflation risks. Looking ahead, several forces could further undermine growth.
“Fiscal consolidation will be at least as big a drag on demand this year as last. Households are likely to continue to deleverage given the size of their debts, the continued high unemployment, and the weakness of the US housing market,” according to Andrew Kenningham Senior Global Economist at Capital Economics. More importantly says Kenningham “... the troubles in the eurozone are likely to re-escalate before too long.” This could make for a re-run of the ‘risk-on/risk-off’ market of
late, sidelining many investors. With market volatility here to stay, magnified by elections and power hand-overs in key countries, politics will matter more than ever in commodity investing. •
www.commodities-now.com
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