A concise summary of what’s moving markets, including Theme of the Day.
What’s moving markets?
- Wall Street sank into the red as the sell-off broadened beyond tech stocks amid lingering concerns about higher inflation. Investors fear that the Fed might alter its ultra-loose monetary policy to curb a spike in prices as the economy reopens and activity rebounds firmly. The bond market has lifted the five-year inflation outlook to the highest since 2006, while one of the oldest hedges, gold, is holding near three-month highs. The yield on the US 10-year Treasury note has been rising since last week on worries that soaring commodity prices and supply chain issues could create inflationary pressures. Lael Brainard, a Fed governor, has called on the US central bank to be “patient” in pursuing its ultra-loose monetary policy, dismissing inflation worries while highlighting “uneven” improvements in the labour market. The USD remained under pressure.
- In the US, Q1 earnings are wrapping up; about 87% of the S&P 500 have reported and have resoundingly beat estimates. Q1 earnings are expected to be up by about 51% from the depressed levels of a year ago, their strongest showing since 2010.
- Chinese factory gate prices rose at the fastest pace in three-and-a-half years in April as the country’s rapid economic recovery from the pandemic continued. China’s producer price index rose 6.8% YoY in April (forecast 6.5%), up from a 4.4% increase in March, according to the National Bureau of Statistics (NBS). This is the sharpest rise in China’s factory gate prices in more than three years and was mostly caused by the expectation of infrastructure projects in China and the US. Consumer prices rose 0.9% YoY in April (forecast 1%) as demand continued to improve, the NBS said. That was up from a 0.4% increase in March.
- Precious metals were mixed; the PGMs were lower but gold and silver gained slightly amid a weaker USD and rising inflation expectations.
- In base metals, upside momentum remains in place as enthusiasm about rest-of-the world metals demand has replaced concern about any slowdown in China. However, the disconnect between global equities and LME metals continues. The copper market remains concerned about a strike possibility at the Escondida and Spence copper mines in Chile. For the time being, the “trend is your friend” and it would be hard to stand in the way of the current stampede. At some point, funds will have to liquidate some of their length, but we need to see a trigger to prompt them to do so. Although there are some cautionary signs on the horizon, these do not seem to be having much of an impact just yet, as there are equally persuasive arguments to stay the course.
- Ferrous prices remain on the boil; Chinese steel rebar and hot rolled coils futures remain at record highs, as output curbs are causing concern about adequate supply. Iron ore futures fell from record highs as exchanges seek to curb speculative activity with higher margins and more supervision. The housing and construction sectors have been strong, while steel demand outside of China is also picking up. Supply-side issues have come to the fore, with weather-related disruptions at Australian ports being the latest – China gets more than 60% of its iron ore from Australia.
Theme of the Day: Copper must rally 50% for supply to meet demand, says Glencore
- Copper prices have soared 90% over the past year to trade above $10,000/t for the first time in a decade but will not be enough to induce more supply. The price of copper needs to rise 50% to encourage enough new supply to meet projected demand from the global green revolution, says Ivan Glasenberg, the CEO of Glencore.
- Ivan Glasenberg said the mining industry would need to produce an extra 1mn tonnes of the metal a year to meet many governments’ goals of reaching net zero carbon emissions by the middle of this century, yet most of the world’s easy deposits had already been mined. “You will need $15,000/t copper to encourage a lot of this more difficult investment. People are not going to go to those more difficult parts of the world unless they’re certain.” Glasenberg added new projects would need to be in “riskier areas” including Russia and parts of Africa.
- Freeport-McMoRan said that all the easy projects have been done and more use of scrap would help to meet rising demand. China Molybdenum said the electric vehicle sector would need about 2.4Mt of copper by 2030 if electric cars make up 30% of the market by then.
- Trafigura also reckons copper will exceed $15,000/t over the next decade as the greening of the global economy boosts demand and supply struggles to keep up. It said that capacity utilization rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow. The US and Europe were becoming significant factors in the consumption of copper for the first time in decades. Before, it’s effectively been a China-only story. That is changing fast.
- There are only a few large projects in development, while most of the world’s easily produced copper has already been mined. The current pipeline of projects likely to start producing in the next few years represents only 2.3% of forecast mine supply. This is well down on previous cycles, including 2010-13 when it reached 12%.
- Bearing in mind that it typically takes approximately 7-10 years to take the discovery of a new deposit through to production (although lead times can vary greatly between metals) mining companies need to approve new projects sooner rather than later. Lead times might even be longer given the need to comply with ESG issues.