China's Upbeat Industrial Output, Retail Sales Tempered by Frail Property

Economic

Summary:

Monday's data join recent better-than-expected exports and consumer inflation indicators...

China's factory output and retail sales beat expectations in the January-February period, marking a solid start for 2024 and offering some relief to policymakers even as weakness in the property sector remains a drag on the economy and confidence.

Monday's data join recent better-than-expected exports and consumer inflation indicators, providing an early boost to Beijing's hopes of reaching what analysts have described as an ambitious 5.0% GDP growth target for this year.

"China's activity data broadly stabilised at the start of the year. But there are still reasons to think some of the strength could be one-off," said Louise Loo, China economist at Oxford Economics.

Industrial output rose 7.0% in the first two months of the year, data released by the National Bureau of Statistics (NBS) showed on Monday, above expectations for a 5.0% increase in a Reuters poll of analysts and faster than the 6.8% growth seen in December. It also marked the quickest growth in almost two years.

Retail sales, a gauge of consumption, rose 5.5%, slowing from a 7.4% increase in December but beating an expected 5.2% gain.

The eight-day Lunar New Year holiday in February saw a solid return of travel, which supported revenue of tourism and hospitality sectors. That also led to a 3% growth in oil refinery throughput to meet strong demand for transport fuels.

The NBS publishes combined January and February industrial output and retail sales data to smooth out distortions caused by the shifting timing of the Lunar New Year.

"Consumers were buoyed temporarily by festivities-related spending at this start of the year. In the absence of decisive consumption-related stimulus this year, we think it would be difficult to sustain a robust consumer spending pace this year," Oxford's Loo said.

Loo's cautious comments reflect broader consensus among China watchers that Beijing has its work cut out in achieving its 2024 economic growth target of "around 5.0%". While the goal was similar to 2023, analysts note last year had a lower base effect due to COVID curbs in 2022.

Investors were relieved by the better-than-expected data, with Asian shares firming and Chinese blue chips up 0.4%.

Property Pains

A protracted crisis in the property sector, a key pillar of the economy, remains a major concern for policymakers, consumers and investors.

Monday's data offered little relief on that front with declines in property investment narrowing in January-February, but still far from levels of reaching stability.

The frailty of the sector was highlighted by the poor demand. Property sales by floor area logged a 20.5% slide in January-February from a year earlier, compared with a 23.0% fall in December last year.

Goldman Sachs economists said China's sequential growth momentum remained solid in the first quarter despite notable divergence across sectors.

"However, to secure the ambitious 'around 5%' growth target this year, more policy easing is still necessary, especially on the demand-side (e.g., fiscal, housing and consumption)."

On the brighter side, fixed asset investment expanded 4.2% in the first two months of 2024 year-on-year, versus expectations for a 3.2% rise. It grew 3.0% in the whole of 2023.

Notably, private investment grew 0.4% in the first two months, reversing the decline of 0.4% in the whole year of 2023

Structural Challenges

The job market, another area closely watched by authorities and investors, showed mixed results having deteriorated sharply during the COVID years.

The nationwide survey-based jobless rate rose to 5.3% in February from 5.2% January, which NBS spokesperson Liu Aihua attributed to seasonal factors associated with the Lunar New Year.

Premier Li Qiang promised at the annual parliamentary meeting earlier this month to transform the country's growth model and defuse risks in the property sector and local government debt.

The country's central bank governor Pan Gongsheng also said earlier this month that there was still room to cut banks' reserve ratio requirement (RRR), following a 50-basis points cut announced in January, which was the biggest in two years.

Global monetary easing expectations may also offer some relief for China's hopes of strengthening its vast manufacturing sector although economic conditions in many key developed nations look gloomy over the near term. Britain slipped into a recession in the second half of last year, while Japan and the euro zone have shown meagre growth.

Policymakers have pledged to roll out further measures to help stabilise growth after the steps implemented since June had only a modest effect, but analysts caution Beijing's fiscal capacity is now very limited and note Li's address to the annual parliamentary meeting failed to inspire investor confidence.

Many economists say there is a risk that China may begin flirting with Japan-style stagnation later this decade unless authorities take steps to reorient the economy towards household consumption and market-allocation of resources.

"We expect economic momentum to improve further in the near-term given the tailwind from policy stimulus," said Zichun Huang, China economist at Capital Economics.

"But this recovery may prove short-lived due to the economy's underlying structural challenges".

Source: Reuters

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Devin

Economic

Energy

Russia-Ukraine Conflict

People who live in glass houses shouldn't throw stones, as the saying goes. Having waged a missile and drone campaign against Ukraine's electricity supply and heating plants from the outset of the war, Russia now finds its oil refineries on the receiving end of attacks.

When the Norsi refinery on the Volga River, east of Moscow, cut operations in January, owner Lukoil gave little explanation. Also in January, the Tuapse refinery, located near the Black Sea, and the Ust-Luga facility, a Baltic Sea export terminal near St Petersburg were damaged.

After an explosion on Tuesday, local authorities this time admitted that drones had bombed Norsi, which produces 11 per cent of Russia's petrol, putting half of its capacity out of action.

The major Kirishi plant, run by Surgutneftegaz, has also been targeted several times this month. Ryazan, south-east of Moscow, suffered damage on Wednesday, although it continues to operate partially. On Saturday, the Syzran and Novokuibyshev refineries in the Samara region of south-eastern European Russia came under attack.

Ukrainian drones have now hit 13 Russian refineries since the start of the year. Some are reported to have been repaired, but, including Syzran, more than 500,000 barrels per day has been damaged, a 10th of Russian capacity.

Russian refining throughput has hovered between 5.5 million bpd and 5.9 million bpd over the past decade, or about half of its oil production. About 2 million bpd of refinery output goes to exports, the rest being consumed at home.

Of these exports, most is diesel, fuel oil and naphtha (a light petroleum liquid mostly used in petrochemicals or as input to petrol). Even prewar, Russia exported little motor petrol (or gasoline, as it's usually referred to by the industry), and already banned its export in February.

The appeal of such attacks to Ukraine are clear. Refineries are large, fragile facilities full of flammable liquids and gases, which are easy to disrupt. Few civilians are likely to be killed. The loss of refining capacity doesn't prevent Russia from exporting crude oil, therefore, it limits diplomatic pressure on Kyiv from other countries that might object to a spike in oil prices.

The Russian system is designed to export refined products, not to import them. Financial barriers and sanctions will make it difficult for Russia to source technically sophisticated spare parts. The attacks, therefore, may disrupt fuel supplies within the country, cost it money and divert air defence assets.

Russia's refining capacity is concentrated in the western part of the country, where most of its population and industry resides. Having previously struck as far north as St Petersburg, the Ukrainians have shown they can hit almost any refinery west of the Urals. Eighteen refineries are within this range, holding 3.5 million bpd of capacity. The important Ufa complex, east of Samara, might be out of the 1,000km range of the latest Ukrainian drones – for now.

Russia has made battlefield advances in recent months, albeit at a high cost of lives. Ukraine's stocks of artillery ammunition have run low. US Republicans are blocking a further package of military support, and a victory in November's presidential election for Donald Trump would bring to power a president decidedly friendlier to the Kremlin.

On the other hand, Russia's Black Sea fleet has been sunk or confined to port by drone and missile attacks. It has lost numerous warplanes, including airborne radar. If Kyiv comes under pressure from its western supporters to negotiate an unwanted ceasefire, or if its military situation deteriorates, it could increase its attacks on Russia's petroleum sector.

The main Russian oil and gasfields are in West Siberia, a long way from Ukraine. Numerous dispersed wells and processing facilities mean it would be difficult to deal a decisive blow to production.

However, Ukraine has other options. For instance, it could target oil export terminals, with those around Novorossiysk on the Black Sea particularly vulnerable. It could hit pumping and compressor stations along oil and gas pipelines. Or, it could emulate Houthi forces in Yemen and strike tankers originating from Russia, perhaps using its new naval drones. It did hit oil and chemical tankers in the Black Sea with maritime drones in August, but does not seem to have repeated that approach – for now.

Such a shift in strategy would spread the impact of the conflict to international oil and gas consumers. It would be a diplomatically risky move, but understandable in extremis.

Ukraine's use of drones expands a threatening trend for energy infrastructure, as I noted in October. In the Second World War, then in the Iran-Iraq War from 1980 to 1988, oil facilities were bombed. But bombers and missiles were expensive, inaccurate and vulnerable to being shot down.

Iran's organised attacks on the giant Abqaiq oil processing facility in Saudi Arabia in September 2019 changed that. Drones and guided missiles hit with great – and in this case, non-lethal – precision, putting the plant out of action without wrecking it. Subsequent strikes by Iran or its allied groups on gas operations in the Kurdistan region of Iraq have been calibrated as political warnings. The Houthis have used both drones and missiles against shipping in the Red Sea.

In the latest special refinery operations, numerous Ukrainian drones were shot down by Russian air defences, but enough got through to damage their targets. Their explosive payloads are small, not enough to cause devastation, but they can be guided to vulnerable spots such as gas compressors and distillation columns that take months to repair or up to two years to replace.

Attacking refineries won't bring Russia's economy or war machine to its knees. But it could bring domestic fuel shortages and spill over into international petroleum markets. Most importantly, it gives Kyiv some leverage, less against Moscow but more with its wobbly western friends.

Source: The National News

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Samantha Luan

Bond

Treasury yields spiked in recent days and are on the cusp of setting new highs for the year as data continues to point to persistent inflation, which is causing traders to push back their timetable for US monetary easing.

Interest-rate swaps now reflect market expectations for fewer than three quarter-point rate cuts this year. That’s less than the Fed’s median projection in December and a shade of the six reductions that were priced in at the end of 2023. And the first move lower? Investors are no longer confident that it’ll even happen in the first half of the year.

The shift underscores mounting worries that US central bankers led by Fed Chair Jerome Powell may signal an even shallower easing cycle at this week’s two-day gathering, which begins on Tuesday. Already, economists at Nomura Holdings Inc. scaled back their estimate for Fed rate reductions this year to two cuts from three. And recent trading flows in options markets show investors are seeking protection against the risk of higher long-term yields and fewer rate cuts — even if their longer-term view is for rates to eventually come down.

Bond Traders Surrender to Higher-for-Longer Reality From the Fed_2

“The Fed wants to ease but the data isn’t allowing them,” said Earl Davis, head of fixed income and money markets at BMO Global Asset Management. “They want to maintain optionality to ease in summer. But they will start to change, if the labor market is tight and inflation remains high.”

US 10-year yields jumped 24 basis points last week, the most since October, to 4.31% — nearing their year-to-date high of 4.35%. Davis sees 10-year yields rising toward 4.5% a move that would eventually offer an entry point for him to buy bonds. The benchmark rose above 5% last year for the first time since 2007.

Both two- and five-year US yields surged more than 20 basis points, for their biggest rise since May. The selloff extended Treasuries’ losses for the year to 1.84%.

Bond Traders Surrender to Higher-for-Longer Reality From the Fed_3

As recently as December, bond traders were all but certain the Fed would start to ease at this week’s meeting. But after a raft of surprisingly strong data on growth and inflation, they see zero chance of action this week, slim odds of a move in May and only a 60% possibility of a cut in June. For the year, traders have penciled in expectations for a total reduction of 71 basis points, meaning a three full-quarter-point cut is no longer seen as guaranteed.

For its part, Nomura now sees the Fed easing in July and December, instead of in June, September and December. “With little urgency to ease, we expect the Fed will wait to see whether inflation is slowing before beginning a rate-cut cycle,” economists including Aichi Amemiya wrote in a note.

The margin to shift the Fed’s median rate projections on its so-called dot-plot is thin. It would take only two policymakers switching to two cuts this year from three for the central bank’s median forecast to move higher.

“It’s not going to take a lot” for the median dots to move higher, said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment. “What I am nervous about is the front end of the curve. It’s super-sensitive to the near-term policy path.”

Even if 2024 median rate projections remain intact, the dots in 2025 and 2026 as well as the long-term “neutral” rate — the level seen as neither stoking growth or holding it back — may move higher, a scenario will prompt traders to price in less rate reductions, according to Tim Duy, chief US economist at SGH Macro Advisors LLC.

“We don’t think market participants need to wait for the Fed’s permission” to price in less cuts, wrote Duy. If the two-cut scenario doesn’t materialize this week, it may come by the June meeting, “or at least that market participants will price it as coming by June,” he added. “The risks at this moment are decidedly asymmetric.”

What Bloomberg Intelligence Says ...

“Changes are likely to be incremental, though the knee-jerk reaction to a move higher in the 2024 dot may be quickly discounted if the 2025 dots are largely unchanged. ...the market is sensitive to the end of next year dots, meaning rate markets may focus on 2025.”

— Ira Jersey, chief US interest-rate strategist

Instead of sweating over two or three reductions, investors shouldn’t lose the big picture that the Fed’s next move is a cut, not a hike, said Baylor Lancaster-Samuel, chief investment officer at Amerant Investments Inc. That means it’s time to buy bonds and take the interest-rate, or “duration” risk, in Wall Street parlance.

“You can debate the timing, but in our opinion, the Fed is still likely to cut sometime this year,” said Lancaster-Samuel. “In that environment, we think the level of rates does not have too much risk of ratcheting higher from here. So we believe the opportunity cost of not taking duration is higher than the risk of taking it.”

Options traders are less sanguine. On the heels of last week’s stronger-than-expected data on producer prices, traders rushed to buy hawkish protection for this year and next in options linked to the Secured Overnight Financing Rate, a measure which closely tracks the central bank policy rate.

“Higher inflation readings, coupled with outsize deficits, the potential for the Fed to remain on hold longer, lends itself to another move toward the 2023 yield highs,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.

Source: Bloomberg

Risk Warnings and Disclaimers

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Thomas

Economic

Japan's core machinery orders fell more than expected in January on the back of a weak manufacturing sector, data showed on Monday, prompting the government to downgrade its view on the indicator for the first time in more than a year.

The data, released on Monday by the Cabinet Office, follows recent data that highlighted concerns about the sluggish recovery in the world's fourth-biggest economy.

It comes as the Bank of Japan (BOJ) kicks off its two-day monetary policy meeting, although core machinery orders data is unlikely to have a significant bearing on the central bank's decision, according to an economist.

Core orders, a highly volatile data series regarded as a leading indicator of capital spending in the six to nine months ahead, fell 1.7% in January from the previous month, the data showed.

The decline was bigger than a 1.0% drop expected by economists in a Reuters poll and followed a 1.9% gain in December.

Weak production against a backdrop of weak demand for goods and production suspension at automakers and uncertainty over the impact of the New Year's Day earthquake in Noto Peninsula might have motivated manufacturers to push back capital investment, said Kota Suzuki, an economist at Daiwa Securities.

"The risk of a slowdown in future capital investment will be significant," Suzuki said.

The government lowered its view of machinery orders for the first time since November 2022, changing to "showing some weakness" from "stalling".

It made the downward revision after factoring in the October-December three-month average on the data, a Cabinet Office official said.

On a year-on-year basis, core orders, which exclude volatile numbers from shipping and electric utilities, contracted 10.9%, slightly smaller than the forecast 11.2% slump.

"The risk of a slowdown in future capital investment will be significant," Suzuki said.

The government lowered its view of machinery orders for the first time since November 2022, changing to "showing some weakness" from "stalling".

It made the downward revision after factoring in the October-December three-month average on the data, a Cabinet Office official said.

On a year-on-year basis, core orders, which exclude volatile numbers from shipping and electric utilities, contracted 10.9%, slightly smaller than the forecast 11.2% slump.

By sector, manufacturer orders fell 13.2% in January from the previous month, led by chemicals and motor vehicles.

It was unclear whether irregularities in certification testing by Toyota Motor’s subsidiary Toyota Industries had any impact, the Cabinet official said.

Orders in the services sector increased by 6.5%.

ECONOMIC WEAKNESS CONTINUES

Larger-than-expected pay increases by major Japanese companies have significantly increased the likelihood that Japan’s central bank will end its negative interest rate policy at its meeting ending Tuesday.

An end to negative short-term interest rates would be Japan’s first rate hike since 2007. Daiwa Securities’ Suzuki said that since capital expenditures are actually still robust, the impact of Monday’s figures on the BOJ’s decision will be limited.

However, policymakers and the government have pointed to weaknesses in the economy.

BOJ Governor Kazuo Ueda said last week that the economy was recovering but also showing some signs of weakness, somewhat softening his assessment from January.

Revised government data showed Japan’s economy avoided a technical recession late last year, even though the upward change in the fourth quarter was weaker than expected.

Source: Reuters

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Economic

Stocks

US equity markets ended last week on the defensive, affected by strong inflation data and increasing bond yields. The Nasdaq declined by 1.17%, the S&P 500 fell by 0.13%, and the Dow Jones dropped by 8 points (-0.02%).

Market response to inflation and interest rate speculation

In anticipation of this week's Federal Open Market Committee (FOMC) meeting, the recent hot Consumer Price Index (CPI) and Producer Price Index (PPI) data will be at the forefront of Fed members' considerations. Although the prevailing view is that the Fed will disregard the robust inflation data due to seasonal and New Year effects, there is a risk that the Fed's median projections will indicate only two rate cuts in 2024, a reduction from the three cuts forecasted in December.

Currently, the interest rate market is factoring in 71 basis points of cuts for 2024, the lowest since October 2023 and 100 basis points less than what was anticipated two months ago. The possibility of a rate cut at the June FOMC meeting is now uncertain.

We must allow for the possibility that last week's firmer inflation data and rising bond yields could have a lasting impact on equity markets, with Nvidia potentially influencing the sentiment once more. Nvidia's GPU Technology Conference (GTC), featuring CEO Jensen Huang as the keynote speaker, is notable for its history of revealing new product developments and is scheduled for this week.

What is expected from FOMC meeting

At its previous meeting in late January, the FOMC maintained the Federal Funds rate at 5.25%-5.50% for the fourth consecutive meeting. The Fed indicated its openness to interest rate cuts but expressed a desire for more substantial evidence that inflation is consistently moving towards the 2% target.

The Fed has stated it will not consider reducing the target range until it is confident that inflation is on a steady path towards 2%.

In the upcoming meeting, the FOMC is anticipated to maintain the Federal Funds rate at 5.25%-5.50%. The accompanying statement is likely to echo the sentiments from January, noting that while rate cuts are expected in 2024, there is no immediate urgency. The number of rate cuts projected for 2024 will be a focal point of interest. Inflation and FOMC meeting Influence Market Sentiment and Rate Cut Forecasts_1

Inflation and FOMC meeting Influence Market Sentiment and Rate Cut Forecasts_1

S&P 500 technical analysis

The "loss of momentum" candle that formed in the S&P 500 cash two weeks ago was followed by a second weekly candle last week, which indicates further indecision/loss of momentum.

While these types of weekly candles don't necessarily guarantee a pullback, they formed at new highs and in the area of a possible Wave V high within our preferred Elliott Wave Framework. As such we are watching closely for a turn lower.

After Friday's break and close below uptrend support from the October 4103 low, we are now watching for a sustained break of a band of horizontal support coming from recent lows at 5060/40ish, which warns that a deeper pullback initially towards 4900 is underway. Until then, a retest and break of the recent 5189 high is possible.

Nasdaq technical analysis

Similarly, the Nasdaq exhibited a 'loss of momentum' candle two weeks ago, with subsequent downside movements leading to a close below the uptrend support from the October low of 14,058.

Should the Nasdaq sustain a break below the uptrend support and recent lows at approximately 17,800/750, it could indicate an impending pullback towards 17,000. However, there's still potential for a retest and surpassing of the recent 18,416 high. Inflation and FOMC meeting Influence Market Sentiment and Rate Cut Forecasts_3

Inflation and FOMC meeting Influence Market Sentiment and Rate Cut Forecasts_3

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Thomas

Central Bank

Economic

India's central bank is stepping up its fight against "exuberance" in retail lending, targeting new areas including mortgage-linked "top-up" loans, on concern about rising risks to the financial system, a dozen sources said.

The Reserve Bank of India (RBI) is tightening its supervision of the industry and nudging individual lenders to rein in credit in areas where it sees increased risks, although it has not taken any formal enforcement action, the sources with direct knowledge of the process told Reuters.

The RBI has taken a string of measures over the past six months to rein in some retail lending by banks and non-bank financial firms, and publicly warned them against "all forms of exuberance".

But the new scrutiny, essentially a shot across the bow for financial firms, marks a change for the central bank, which as recently as September said India's credit expansion did not point to building systemic stress.

"RBI is following a four-step approach on supervision now - monitor, warn, penalise and then act," one source said. "They want to give entities a chance to course-correct based on public or specific warnings, but also act when warranted."

The RBI typically uses moral suasion - speeches, calls to bank executives, individual meetings - as initial steps to prod banks, before considering more assertive enforcement.

In addition to the mortgage top-ups, the RBI is cautioning lenders about the risks of algorithm-based credit models and nudging a few institutions to slow co-lending, the sources said.

Don't Wait for The House to Catch Fire

The sources - including people familiar with central bank thinking, bankers and others in the industry - asked not to be named given the sensitivity of the matter. The RBI did not respond to an email seeking comment.

"We do not wait for the house to catch fire and then act," RBI Governor Shaktikanta Das said in December when asked about tougher rules the bank had announced for personal loans.

The central bank aims to ensure risks to the system do not escalate amid global economic uncertainty, analysts say.

"The RBI is also setting out regulatory expectations from the industry through its recent supervisory actions, which can act as a guidance for the entire sector," said Anil Gupta, senior vice president and co-group head of financial-sector ratings at ICRA.

Credit extended by India's banks has been rising about 16%annually, more than double the economy's scorching 7.6% forecast growth for the financial year ending this month, despite 2.5 percentage points of RBI interest-rate hikes over the past two years.

The central bank in November raised risk weights on personal loans, credit cards and bank credit to non-banking firms on signs of above-trend growth in those segments.

It has taken action against a two non-bank firms in the recent past, one for inadequate loan-related due diligence and the other for deficiencies in providing loans towards public issue subscriptions.

Banks' lending margins are expected to hold up this quarter, but the impact of the RBI's credit curbs are likely to be more pronounced in the coming three months, banking sources say.

'Source of risk'

The RBI is now closely monitoring mortgage top-ups. They are meant to fund home improvements or additions, but banks are advertising them for expenses such as weddings, vacations and business expansions.

"One can take a top-up of a home loan and start investing the share market or use it for consumption purpose," said Prashant Kumar, managing director and CEO at Yes Bank, a commercial lender. "That could potentially be a source of risk in terms of repayment."

Fintech and banking sources say the RBI has asked banks to conduct rigorous audits on algorithm-based lending models, which use indicators from cash-flows to home address to generate nearly instantaneous approvals for personal loans.

Central bank officials have asked multiple algo-based loan providers to ensure their models were "properly tested and validated", said a senior executive in the risk division of a private bank.

The RBI has urged some shadow banks and small finance banks to limit to 20% the growth of loans made through co-lending agreements, which allow banks to jointly lend to individuals to spread the credit risk, another source said.

Unsecured personal loans were up 21% at the end of January from a year earlier, central bank data shows.

Source: Yahoo

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SAXO

Commodity

Energy

The commodity sector recorded a third consecutive weekly gain, and while it was precious metals and softs attracting most of the attention at the beginning of March, we have during the past couple of weeks seen strength across all sectors with wheat and uranium being two of the notable exceptions. The Bloomberg Commodity Total Return Index, which tracks a basket of 24 major commodity futures spread evenly between energy, metals, and agriculture, reached a three-month high, and it has raised the question whether the year-long consolidation phase is ending?

Commodity Weekly: Green Shoots Seen Across Key Sectors_1

WTI and Brent crude oil reached four-month highs after the IEA flipped their 2024 supply and demand forecast to a deficit amid an expected prolonged period of production cuts from OPEC+. Supported by silver, gold meanwhile remains resilient, holding onto most of its recent strong gains despite dollar and yield strength following stronger-than-expected CPI and PPI prints this week. Data which led the market to conclude the US Federal Reserve will adopt a cautious stance and would like to see more evidence of inflation falling towards the 2% target. As a result bets on a 25 bp rate cut in June fell to 75% from 95% at the start of the week.

Copper and copper miners meanwhile attracted a great deal of attention after the King of Green metals reached an 11-month high following a 6% jump supported by already tight market conditions potentially made worse by the prospect for Chinese smelters cutting production. Iron ore (down 30% YTD) slumped below USD 100 per tonnes as China's property crisis will continue to keep a lid on steel demand. Uranium's long-term upside potential remains intact despite recent stop-loss selling from investors who got caught up in the January buying frenzy.

The agriculture sector saw cocoa reach a fresh record at USD 7700 per tonnes, more than three times the five-year average price. The New York futures contract trades up 87% on the year as a production shortfall in West Africa shows no signs of improving. Hedge funds, meanwhile, continue to hold onto a near-record grains sector short, led by corn and soybeans, a risky bet ahead of the Northern Hemisphere planting and growing season, where weather developments will become the key focus. Commodity Weekly: Green Shoots Seen Across Key Sectors_2

Commodity Weekly: Green Shoots Seen Across Key Sectors_2

Copper and copper miners break higher on China smelter curbs

Copper and copper mining stocks pushed higher this past week with HG copper breaking above USD 4 per pound and LME above USD 8700 per tons to reach 11-month peaks, while ETFs tracking copper mining stocks surged by more than 6%. Over the past month, the metal has steadily climbed, buoyed by a weakening dollar, optimism in post-Lunar holiday demand in China, and material downgrades to 2024 mine supply increasingly tightening market conditions. Several mining companies have announced production downgrades due to factors like increased input costs, declining ore grades, rising regulatory expenses, and weather-related disruptions.

The latest rally pushing prices higher, was fueled by Chinese smelters reaching a rare agreement to jointly cut production of refined metals to cope with shortages of raw material. China, the world's largest copper production hub, has witnessed smelters vie for scarce supply by slashing their processing fees, resulting in a downward trend in treatment and refining charges to near zero.

Furthermore, the ongoing green transformation is augmenting demand from traditional sectors like housing and construction. An anticipated initiation of a US rate-cutting cycle later this year may prompt companies, which depleted inventories last year to mitigate funding costs, to restock. We maintain our long-standing bullish stance on copper, and with copper miners also exhibiting signs of resurgence, the possibility of a fresh record high in the second half of the year appears achievable.

The Global X Copper Miners UCITS ETF tracks the performance of 37 copper-focused miners, such as Antofagasta, Ivanhoe, Lundin Mining, Southern Copper and Zijin Mining Group. From a geographic perspective the exposure is primarily in Canada (37%) followed by the U.S. (10%) and Australia (10%). The ETF trades up 8% YTD and 12% YOY.

Lithium sector stabilising amid production cutbacks

Lithium, a key component in rechargeable lithium-ion batteries, shows signs of stabilising after producers, responding to an 80% price collapse last year, have started to trim production, potentially by as much as one-third according to analysts. During the past month, we have seen similar initiatives by US natural gas producers who have made temporary cutbacks to support prices and to bring down an overhang of stocks, currently more than 37% above the five-year average. Developments that for both commodities support the old saying that the best cure for low prices is low prices as it lowers production while for some commodities stimulates demand.

While spot Lithium has stabilized it is interesting to note that the China Lithium Carbonate 99.5% benchmark has rallied by 21% so far this year, potentially signaling improved fundamentals. Meanwhile, the Solactive Global Lithium Index, which tracks the performance of 40 of the largest and most liquid lithium-related companies, trades down around 11% during the same period. The index includes well-known names like Albemarle Corp, TDK Corp, and Pilbara Minerals, some of which have been weighed down by heavy short selling from hedge funds, but with sentiment showing signs of improvement, these shorts are now at risk, leaving the sector exposed to further gains should the recent recovery continue.

Crude oil at four-month high on IEA flip

In our mid-week crude update, we highlighted how the recent lack of a price catalyst had pushed the four-week rolling average trading range in WTI and Brent to a ten-year low. Crude has nevertheless been seeing a steady but calm ascent since December, when Houthi attacks on ships in the Red Sea raised the geopolitical temperature while supporting tighter market conditions with millions of barrels of crude and fuel products being stuck at sea for longer.

However, since then the combination of Ukrainian drone strikes on Russian refineries, which according to estimates may reduce Russia's refinery runs by 300k barrels per day in 2024, and not least the IEA flipping their 2024 forecast to a deficit, both help drive WTI and Brent higher. In their latest Oil Market Report (OMR) for March, the International Energy Agency (IEA) raised their global oil demand forecast to 1.3 million barrels per day, while shifting their balance for the year from a surplus to a deficit based on the assumption OPEC+ will maintain current production curbs through 2024.

Ahead of the IEA news, crude prices had slipped after the Energy Information Administration (EIA) raised their US crude production forecast to a record 13.65m barrels/day in 2025 from 13.19m barrels/day this year, while OPEC in their latest monthly update wrote supply cuts had stalled as Iraq for a second month produced around 200k barrels/day above its quota.

Brent crude broke above former resistance in the USD 85 per barrel area, but lack of follow-through buying ahead of the weekend potentially highlighting a market that remains range-bound, but with a small upward bias. Using Fibonacci retracement levels, the next key resistance is located at USD 88 per barrel. Commodity Weekly: Green Shoots Seen Across Key Sectors_4

Commodity Weekly: Green Shoots Seen Across Key Sectors_4

Gold enjoys the tailwind from copper and silver strength

Gold continues to show a great deal of resilience, having so far given back less than 40 dollars of the 170 dollars it gained during the previous two weeks. This during a week that saw stronger-than-expected US inflation data from CPI to PPI potentially delaying the beginning of the US rate cut cycle. The data prints helped send US treasury yields higher while the dollar recorded its first weekly gain in four. However, countering these developments was the mentioned rally in copper which drove a gold-supportive run higher in silver.

Underlying support has for months been provided by central banks, some of which are buying gold to reduce their exposure to the dollar, and continued strong demand from retail investors in Asia, most notably in China where stock market weakness and falling property prices are forcing the middle class to look elsewhere. In the short-term, some of that demand may slow while investors adopt to the new and higher price level, but with heightened geopolitical tensions reducing short-selling appetite, we feel that gold's current buy-on-dips credentials has only been strengthened.

Without participation from ETF investors who remain net sellers, the recent rally has primarily been driven by under-invested hedge funds who rushed back onto the long side after several key resistance levels were broken. In the week to 5 March when gold rallied 4.8%, money managers such as hedge funds and CTAs bought 63k futures contracts (195 tonnes), the biggest one-week increase since June 2019, and with buying extending into the following period, this group of traders now hold an elevated position, that needs to be protected, potentially another reason why gold has not been allowed to fall in response to this week's yield and dollar rally.

While perplexed about the timing of the latest surge to a record, occurring despite the prospect for a delayed start to the US rate cutting cycle, we maintain our USD 2300 target with the technical picture potentially pointing to an even higher level around USD 2500. In the short-term the risk of a deeper correction to USD 2135, the December 4 high, can not be ruled out. Silver meanwhile needs to build a base in the USD 24 to 24.50 area from where it may attempt to mount a fresh attempt at the April 2023 highs around USD 26. Commodity Weekly: Green Shoots Seen Across Key Sectors_5