The Short-Term Rally In Industrial Metals Has Peaked

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Includes: BDD, BDG, BOM, BOS, CPER, CUPM, DBB, FOIL, HEVY, JJC, JJM, JJN, JJT, JJU, LD, LEDD, NINI, RJZ, UBM
by: Societe Financiers

Summary

The currency war in the Asia-Pacific region contributes to the strengthening of the US dollar, which has made a negative impact on the prices of base metals.

The Chinese manufacturing sector has stabilized but still has not reached the necessary level of expansion.

Higher oil prices are unlikely for the short-term, so industrial metals have lost their main incentive for growth.

Sudden measures from the Central Bank of Singapore

The Central Bank of Singapore has recently lowered interest rates to 0%, triggering a drop in a number of Asian currencies and raising serious concerns about future economic development in the region. The currency war in Asia is in full swing, and the ceasefire demands decisive and united actions from the authorities of the Asian emerging countries.

The representatives of the Central Bank of Singapore said that the measure to reduce the interest rate has been adopted because of concerns over the significant reduction in the rate of economic growth in the region. The devaluation of the Singapore dollar has fueled the ongoing currency war in the Asia-Pacific region, and provoked devaluation of a number of currencies against the US dollar. These measures were allegedly necessary, since the Singapore's services sector declined in Q1 2016 for the first time since Q3 of 2015. It should be noted that the services sector accounts for two-thirds of all produced goods and services in Singapore.

The chain reaction, conducive to competitive devaluations in Asian countries, leads to a decrease in foreign direct investment and an increase in household debt. Thus, the monetary and fiscal incentives realized in 2009 - 2010's were again demanded by the authorities. These events envisage the output of negative statistical data in the economies of developing countries.

However, we think that these measures will decrease the Services' PMI, as well as other indicators that monitor the situation in the private sector. The lack of an acceptable rate of inflation and the slowdown in the economies of the Asia-Pacific region, in this case, will lead to stagnation in the industrial metals by the end of Q2 2016.

China's exports and imports of base metals will not reach peak values due to the reorientation of the Chinese economy

Currently, the main influence on the change in the base metals' prices comes from condition of the Chinese economy, as China accounts for almost 50% of global demand for copper and zinc, and is the largest exporter of aluminum.

Based on the latest data from China's manufacturing sector, business activity has increased from 48.0 points to 49.7 points. This surge has made a strong positive impression on the market and has contributed to the growth base metals' prices. Also, the increased Chinese imports and exports in February have attracted speculators to the metals market. The Chinese imports amounted to USD 130.96 billion in March 2016 which significantly exceeds the February's value of USD 93.6 billion. The Chinese exports totaled USD 160.86 billion in March 2016 which is considerably larger than the February's value of USD 126.15 billion. China's GDP was also able to produce a positive effect and showed growth of 6.7% instead of the projected 6.5% in March 2016.

However, investors should pay particular attention to the Chinese Services' PMI. As readers may know, it has the largest share in China's GDP and exceeds values of the manufacturing sector or any other industry's for that matter. The Services' PMI is now steadily above the level of 50 points, which indicates the expansion mode. Based on the fact that the Chinese government intends to focus on domestic consumption rather than exports, the manufacturing sector will continue to decline, and the labor resources will be gradually moving to the services sector.

Conclusion

The current rally in prices of base metals can mostly be explained by a short-term momentum, provoked by the recent rally in the oil market and the stabilization of the Chinese manufacturing sector. However, deflationary fears in Eurozone, the Asia-Pacific region and Japan, raise strong doubts about the possibility of a long-term bull market in base metals.

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