Base Metals & Iron Ore
Against a backdrop of continuing supply destruction, particularly in the U.S., and a pick-up in crude demand, markets will remain in balance this quarter and go into a deficit in 2016H2.
This month's <i>Special Report</i> reviews the literature on equity market timing, and identifies the key indicators that historically have had the best track record. We then aggregate the indicators into an overall scorecard that should prove to be valuable for investors in these volatile times.
Risks to global growth remain to the downside. Selling pressure in cyclical markets and assets will escalate. EM currencies will make new lows versus the U.S. dollar, the euro and yen. Take profits on our long JPY/short KRW and long JPY/short SGD trades. Short KRW versus an equal-weighted basket of the U.S. dollar, yen and euro. Continue underweighting Peruvian equities.
Australia's equities and currency are driven largely by industrial commodities prices, Canada's by the oil price. Given our more positive view on oil, we prefer Canadian assets, though both markets face risk from stretched property prices and household debt.
The pace of U.S. oil supply destruction accelerated at the end of April, as yoy losses increased to 470 thousand barrels per day (Mb/d) for the week ended April 29.
China's underlying final demand for crude and oil products (excluding changes in inventories) has been weaker than is suggested by its imports of crude oil. The government has used lower oil prices to accumulate strategic petroleum reserves (SPR). Commodities prices are at a risk from weaker China/EM demand going forward.
China's reflation policies have succeeded in reviving iron ore and steel prices, which are up 45.6% and 52.6% from their January lows, along with the profitability of domestic steelmakers.
A weaker USD resulting from more dovish forward guidance from the Fed, and evidence of continued production declines in non-OPEC and OPEC countries will continue to buoy oil prices.
These general themes - along with our assessment that markets were overestimating downside price risk and underestimating upside risks arising from supply destruction and geopolitical instability - supported the best-performing strategic recommendations we made last quarter.
Risk assets are stuck in a range driven by the Fed feedback loop. But the current rally may continue for another quarter or two.