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Commodity Monthly

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Still some upside left

Fri, Aug 21 2009, 07:19 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S

During the summer optimism has returned with financial markets now feeling more confident that the worst of the economic and financial crisis is over and that the recovery has finally taken hold.

The improvement in the global growth outlook is notably reflected in the global PMIs that are heading for, and in some instances are already above, the magic 50-level. The indicators are pointing towards a recovery. We argue that the global economy should experience a manufacturing boost in Q3 as stocks were run down significantly over the last six months and now need to be rebuilt. The cyclical recovery together with the weaker dollar turned out to be a very potent combination for the commodity markets. Both copper and oil prices have doubled since the cyclical trough in February. Even aluminium has recovered strongly, trading close to USD 2,000/tonne despite stocks at an all-time high.

But the rally might not be over yet. We look for more dollar weakness and a further improvement in the economic growth numbers during Q3 and Q4. It increasingly looks like the recovery is going to surprise on the upside and that we are going to see a vshaped recovery. The fact that both Germany and France moved out of recession in Q2 is just the latest proof that the demand picture is improving.

The economic recovery has not least been evident in Asia spearheaded by China. In Q2 Chinese GDP rose an impressive 7.9% or approximately 16% annualised. Growth in China is still driven mainly by very strong domestic demand. In particularly investment demand looks extraordinarily strong due to the huge Chinese stimuli packages.

Government investment was the sole driver behind the increase in investments in late 2008 and early 2009. However, this is no longer the case. Private investment including real estate has accelerated sharply in recent months. This is important as it diminishes the risk that we will see a sharp slowdown in growth when the impact from fiscal easing starts to wane. But for now the outlook looks encouraging. The latest set of PMI numbers once again surprised on the upside and the indices continue to be well above the 50- expansion level. But the market is quite nervous about signs that might point to future Chinese weakness. The market fears that Bank of China will have to curb lending going forward. We believe monetary policy will be kept loose in the foreseeable future, but the market will continue to stay alert to Chinese news. The Chinese stock market, which rose strongly earlier this year as cheap money poured in, briefly turned into a bear market with prices down 20% at one point this week compared to the 4 August level.

But growth optimism and improved risk appetite need to be measured against the fundamental picture for the different commodities. Here, a few eyebrows have been raised that, e.g. aluminium stocks are at an all-time and yet prices continue to march higher, and oil stocks are not falling despite OPEC production cuts. The fact that spare capacity in the oil market is also pretty high also counts as one of the downside risks in the energy complex.

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Published on  Fri, Aug 21 2009, 07:34 GMT