Graphic Content – September; Watch commodity prices

Mike Riddell
Written by

11th September 2017

Industrial metal prices have been on something of a tear since July, and unlike in the weeks and months post Trump’s election, the relative stability in speculative positions means this rally smells like a cyclical bounce in global economic activity. We thought the most likely culprit was China, given it constitutes half of global demand for copper, iron ore and zinc, and is the world’s biggest buyer of a host of other commodities.

Sure enough, we had confirmation at the beginning of September that China’s PMI Composite index had edged higher to 52.4, having dropped to a 1 year low of 51.1 in June. What’s more, the economic bounce doesn’t seem to be limited to China, where most notably ISM survey data suggested US manufacturing is growing at the fastest pace since 2011.

The chart below goes to show just how close the correlation is between industrial metal prices (purple line) and Chinese economic data (dark blue line). We have also overlaid this with global government bond yields (green line). The correlation clearly isn’t perfect, and broke down from end 2012 to mid 2014 (although could argue at the time bonds were primarily driven by unexpected US policy tightening followed by unexpected Eurozone policy easing). But given the historical tendency for commodities – and China – to lead bond yields, it is another factor to make us a bit nervous about bond valuations at the moment.

Chinese growth, commodities, and global government bond yields

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