China

European profits margins are elevated. Will a mild recession be enough to bring them down?

This year’s rise in commodity prices represents a blow-off rally rather than the start of a durable bull market. The global economy is heading for a recession. Stocks, commodities, and other risk assets are vulnerable.

This year’s cash for clunkers program will have only a mildly positive impact on domestic demand for automobiles and home appliances in China. In the meantime, the equipment renewal program will prop up domestic manufacturing moderately as well as help the country reduce its reliance on high-end equipment imports. We recommend continuing to overweight onshore auto stocks relative to the A-Share Index.

In the near term, favor oil and oil producers outside the Gulf Arab states. Over a 12-month horizon, favor US and North American equities, defensive sectors over cyclicals, and safe-assets. Within cyclicals, stick to energy and defense.

In the short run, global risk assets are vulnerable due to rising oil prices and bond yields. Cyclically, a global economic downturn will weigh on global risk assets.

EUR/USD collapsed in the wake of last week’s hotter-than-expected US CPI report. Is this pessimism warranted and will the euro’s trading range that has prevailed since 2023 breakdown?

Copper markets are fast approaching a price breakout, as Chinese smelters scramble to find ore to meet increasing refined-copper demand in the wake of a global manufacturing rebound. We are holding fast to our expectation of $4.50/lb (COMEX) this year. We remain long the XME ETF to retain exposure to copper miners and refiners, and the COMT ETF to retain exposure to commodity flat price and the copper backwardation we expect.