Slumbering markets seemed to have woken up this week, and not in a particularly good mood.
It’s true that the S&P 500
on Thursday did manage a rise, barely. Small-caps
struggled, the dollar
reached a nine-month high (and lodged a new one on Friday), and bonds remain in demand. The VIX
volatility measure had jumped 40% this week, and is surging again.
Tom Price, head of commodities strategy at U.K. brokerage Liberum, said there are three factors contributing to what he says is the end of the reflation trade.
The first is the Federal Reserve’s planned tapering of its bond purchases this year, which created upside risks for inflation-adjusted rates and the dollar, and downside risks for globally traded commodities. Another is China’s continued actions to restrict domestic activity, including credit controls, property taxes and the release of strategic stockpiles, that he said is intended to reduce growth to between 6% and 7%, from 8% in the second quarter. And finally, there is the coronavirus, with the delta variant impacting the U.S., Australia and other countries.
Price has for months dissented with the commodity supercycle view, espoused by many on Wall Street. “Reopening of the global economy saw a synchronized resurrection of demand and restocking activity, at odds with a still-dormant supply-chain,” he said. The broad-based rally resembles those of 1984, 1991, 2001 and 2009 — and typically lasts six to 18 months.
Price said traders should stay from commodities that have attracted lots of speculative inflow — namely copper and iron ore.
he said even after this week’s pullback, he sees more downside for prices. “While copper’s market signals indicate strengthening fundamentals in recent weeks, a global macro-reversal appears to be overwhelming the physical support,” he said, highlighting U.K.-listed Chilean miner Antofagasta
as a popular copper pure play to avoid.
Iron ore is having an even tougher time than copper, hurt both by the Fed taper risk as well as China-led steel production cap, as he highlighted a sell rating on Rio Tinto
which is predominantly an iron-ore play.
As to which commodities offer correction protection, he offered up four. One is thermal and metallurgical coal, as China has been boosting imports, highlighting commodities trader Glencore
and recent spinoff Thungela
as ways to play that theme. Another is U.S. aluminum and steel, as the industrial recovery in the U.S. has revealed it is short these commodities, with local capacity capped and imports marginalized by tariffs. U.S. Steel
are ways to play that theme.
Price also likes crude oil
as OPEC and Russia offset weakness with its production and inventory management strategy, and gold
which should benefit from investor uncertainty, and benefit Shanta Gold
a U.K.-listed Tanzania miner.
Dallas Fed President Robert Kaplan — one of the more hawkish members at the central bank — said he may adjust his call for a taper if the delta variant is slowing down demand.
U.S. stock futures
turned modestly higher after Kaplan’s remarks.
Chip equipment maker Applied Materials
reported a stronger-than-forecast 79% profit rise and guided to stronger current-quarter results than anticipated.
j umped in premarket trade after the athletic-apparel retailer reported stronger-than-forecast earnings on a surprise jump in same-store sales.
The U.K. approved an antibody cocktail for COVID developed by Regeneron
and Roche CH:ROG. AstraZeneca AZN said it will file for regulatory approval of a COVID antibody cocktail, which it says reduces the risk of getting COVID-19 by 77%.
Johnson & Johnson
said its chief executive, Alex Gorsky, will cede that role and become executive chairman. Joaquin Duato, a company insider, will take on the CEO role.
The Hang Seng
suffered through another rough session, falling 1.8%, as the index is now 19% below its February highs on the continued regulatory crackdown in China.
A theater putting on “The Rocky Horror Show” accidentally ordered 52 cans of hot dogs instead of “Frank-N-Furter” wigs.
There’s never a great time to encounter a python, but a supermarket is surely an unusual place to do so.
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