The sun may be about to shine again on commodity prices and sentiment. That’s the contrarian message from Capital Economics in their latest Commodities Economics Chart Book released this week.
Julian Jessop, Capital Economics head of commodities research, and his team said:
Commodity prices fell again in September on concerns about a hard landing in China despite many leading indicators of the Chinese economy, including credit growth and fiscal spending, suggesting that a pick-up in activity is on its way. We continue to expect that recent policy stimulus will feed through into the real economy and boost commodities demand by the end of this year.
That upbeat outlook on China reflects the position taken by Capital Economics back in late September and reiterated by John Higgins in the Capital Daily note released overnight.
Our proprietary China Activity Proxy (CAP) supports the view that the official GDP figures exaggerate the current rate of economic growth. Crucially, though, the CAP also suggests that conditions on the ground have actually firmed up since early 2015. With policy stimulus in the pipeline and room to ease further if needed, a pick-up in growth seems most likely in the near term, rather than the slump many are expecting.
In a world where traders, investors and markets are exponential discounting machines for all information, this is important because there’s a lot of bad news already priced in. The mooted reaction in global markets to yesterday’s Chinese PMI data is case in point. The data wasn’t strong but it wasn’t weaker than expected so it had little impact on traders.
Getting back to Jessop, and the outlook for commodities, his “Chart of the Month” neatly encapsulates the impact of sentiment on prices and highlights that all the bad news may be priced in for commodities.
As the prices of commodity-related equities, such as Glencore and Volkswagen, went into freefall in late September, it appeared a new low had been reached in investor sentiment towards commodities. Of course, this is often the time to take a more contrarian view. Indeed, the latest monthly survey published by the Frankfurt-based firm sentix suggests that investor sentiment may already be bottoming out.
Here’s the chart:
The Australian federal treasury and Glencore stock holders will be very pleased if Jessop and his team are correct.