China dictates global commodities prices
Abraham George Macro View
Trump spent the better part of his presidency fighting China’s rise to global economic superpower. He waged a trade war with China and was able to gain some concessions. A month later a global pandemic originated from China. Very soon, Secretary of State Pompeo clearly declared the Chinese communist party “the greatest threat to everyone in the free world”.
So what is the policy stance of the new President. In Biden’s first foreign policy speech, he positioned China as a cut-throat economic competitor. As per the new administration, Russia is the threat to democracy.
With Biden in power, the Chinese Communist Party is the big winner in the American election. China should soon ramp up the global supply chain and continue to manipulate the currency to ensure that they maintain global dominance in exporting.
But in the last 12 months, China has been focused on importing as well. They have been stockpiling global commodities at very low prices, just as they did in the aftermath of the GFC. China has bought record volumes of crude oil, copper, iron ore and coal in 2020. They have also imported a record amount of corn, wheat and soybeans.
Commodity prices have a long way to go. Oil prices are in a perfect storm and so are oil companies. The new administration wants to kill the US fossil fuel industry. The global climate activists have coordinated to choke off capital flows to new oil exploration projects. This is forcing China to buy oil around the globe at the fastest pace on record.
This could create two problems:
higher energy prices will weigh on the economic recovery, and
higher energy prices will feed into the inflation data, which will force the Fed and other central bankers to get to work on reversing the 5000 year old low interest rate environment which in turn will weigh on the economic recovery.
Equities
The S&P carried to new highs last week . So did the NASDAQ and other secondary indexes. However, the Dow just remained below the intraday high of Jan 21 at 31,272. The market is in a melt up mode. Short term resistances should come around 3915 in the S&P 500. Only a move below 3840 in the S&P and a move below 30,700 can give some indication that the top may be in.
Bonds
Bonds declined to 166^13 on Friday. A relief rally should have ended at 167^20 or it can go slightly more higher. The next move down should target 163-164.
Euro
Euro made a low at 1.1952 and has rallied to a target area of 1.2050 to 1.2100. There may be more sideways trading before it makes a top. The next move down could be much stronger and deeper.
Gold
Gold declined to 1785. The ongoing corrective rally should top out under 1830. The next leg of the down move could be much stronger than what we have seen so far.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.