Not Smooth Sailing
As the world’s new leaders face up to the challenges of the global slowdown, the same intractable problems look set to confront us as we head into 2013
AS WE NEAR the end of 2012, there are increasing signs that the global economy is starting to recover. Could we be at a macro turning point? While recovery is uneven and potential tail risks persist, leading indicators point to an upturn in the global economic cycle, with the two main engines of global growth – the US and China showing clear signs of recovery. “Increasing signs of improving global growth
and continued strong central bank commitment to highly accommodative monetary policy indicates that the first part of next year has the potential
to be a good one for cyclical and risky assets,” according to Nicholas Brooks, Head of Research and Investment Strategy at ETF Securities. Goldman Sachs analyst Jeffrey Currie seems to
agree. “As economic growth improves into the latter half of 2013, we believe that current fundamentals are likely to remain tight, increasing the positive carry in forward curves with near-term prices above long-term prices, which will likely create significant investment returns despite our view for more stable long-term prices.” This would generate a positive carry in the forward curves (or backwardation) and likely create significant investment returns despite Goldman’s outlook for more stable long-term prices for key commodities. “This dynamic is simply a return to the way commodity markets traded during the 1980s and 1990s, when long-term commodity prices were anchored around stable price levels – $20/bbl for crude oil and $2000/mt for copper – and all the price movements around these levels were driven by short-term demand fundamentals,” says Currie.
... three key risks to this benign global scenario could unfold
In this environment, commodities could perform
Manufacturing PMIs: Europe, China and US Index level, Monthly Data, From October 31, 2007 to October 31, 2012
25 30 35 40 45 50 55 60 65
well as an asset class, with more growth-sensitive commodities such as base metals and the white precious metals having the potential to perform most strongly, according to Brooks. Within equities, basic resources and mining companies could outperform. “Commodity currencies such as the Australian, New Zealand and Canadian dollars may rise in this environment and, barring a major sovereign debt-related accident, the Euro should benefit. Conversely, funding currencies such as the Japanese yen and the US dollar may come under pressure.” However, he cautions that three key
EU PMI US PMI China PMI Sources: ETF Securities, Bloomberg 4 December 2012
risks to this benign global scenario could unfold: a sharp rebound in sovereign risk in Europe – Greece and Spain in particular; the US fiscal cliff issue and possible US sovereign downgrade; and further political and military deterioration in the Middle East. So too does Morgan Stanley’s commodity specialist Hussein
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