Copper prices have long been a diagnostic tool to gauge the strength of the global economy’s heartbeat, so bullish traders who have driven the metal higher could be forgiven for feeling a few palpitations following the latest credit data from China.
China’s credit impulse, a measure of credit growth, has served as the electrocardiogram of commodities demand. Beijing’s stop-go use of credit injections has been a significant influence on the tempo of prices for industrial metals, such as copper and aluminium, and bulk commodities, such as iron ore.
But welcome to Xi Jinping’s China, where de-risking rather than re-leveraging is the top priority, a reversal of Beijing’s well-thumbed playbook where credit has been the policy weapon of choice to counter economic weakness.
The latest credit data has taken some steam out of the rally in commodities, which has been powered by the same “risk on” rally that has driven global stocks higher, a bond market sell-off, and a steepening of yield curves.
Total social financing, a broad measure of credit, was 618.9 billion yuan last month compared to about 2.27 trillion yuan in September. The fall was mainly driven by declines in off-balance sheet financing and local government special bond financing. New loans fell to their lowest level in almost two years.
Commodity markets don’t like it. After rallying 6 per cent from its October lows, copper has dropped about 2 per cent over the past two days. Similarly, iron ore continues to deflate: 62 per cent grade iron ore is trading about $US78 a tonne, from $US120 a tonne earlier this year.
The rally then pullback in global commodity prices underscores the crosscurrents at play.
On one hand, traders are bullish that a possible US-China trade deal will help stabilise growth and then lead to a recovery in 2020. On the other, there is a bullish downdraft from a range of indicators showing that all is not well in global manufacturing and trade.
Said Westpac senior economist Justin Smirk: “A resolution of the trade war gives some positives for growth and when it disappears it fades back to what the indicators are telling us at the moment, which is that industrial production is slowing, world trade orders are well below long run averages. All the cyclical signs are negative at the moment.”
The JPMorgan Global Manufacturing purchasing managers index highlights the headwinds confronting providers of raw materials to the world’s factories.
It bounced to 49.8 last month, up from a low of 49.3 in July, but still remained below the critical threshold of 50 that delineates between contraction and expansion.
Taking a more granular look at the world’s two biggest economies ain’t so pretty either. The Institute for Supply Management’s purchasing managers index bounced to 48.3 last month (from 47.8 in September) and China’s official PMI fell to 49.3 last month from 49.8 in September.
There is no doubting the strength of the rally in global markets based on hopes that the two trade war belligerents will ink a phase one deal. But that’s the issue – the deal hasn’t been agreed to yet.
The exuberance that propelled markets higher last week has been tempered by comments from US President Donald Trump about the rollback of tariffs in contrast to expectations telegraphed by Beijing.
Rally amid stimulus push
The rally in commodity markets comes as the world’s most powerful central banks have been providing stimulus, hardly a ringing endorsement for the growth outlook.
For commodity markets, the focus is clearly on the ability of the People’s Bank of China to deftly navigate the need to support growth without exacerbating the latent systemic risks posed by the rapid accumulation of debt that followed Beijing’s last great growth binge.
President Xi Jinping has so far resisted the siren call of another surge in credit, instead pushing through policies encouraging China’s banks to recognise overdue loans as non-performing.
Policy support has been more targeted. A cut in the increasingly important medium-term lending facility rate will help push down the loan prime rate, but that affects just a small proportion of loans.
Beijing needs to deliver a minimum growth rate of 5.8 per cent in 2020 if it is to meet its goal of doubling the size of its economy between 2010 and 2020.
Commodity markets will be hoping Beijing decides a little more oomph may be needed to underwrite that outcome, because right now the actual numbers coming out of China, including wholesale deflation, suggest commodity traders should tread cautiously.