Keeping ones metal (握住你的金属)

After a small reversal at the start of the year, the divergence between the performance of the FTSE 100 and the S&P 500 has resumed in March. The FTSE 100 so far this month is down about 2%, whereas the S&P 500 remains fractionally higher than it was at the start of March. The performance of the FTSE 100, as I have pointed out before, is very much influenced by the resource and mining sector, and recently a lot has been made of the weakness of the copper price. 

The Copper price reached a 44-month low in London, and is now down nearly 10% year to date. The weakness in the recent China data is taking a lot of the blame. Although the weakness in the copper price could be seen as an indication of a weakening global economy, the FT attributes part of the fall to the fact that copper has become increasingly popular as a source of collateral for Chinese traders wanting US dollar loans. If financing deals unwind, then copper will be dumped onto the open market, causing the price to fall. The fall in the copper price could therefore be partly due to technical reasons. 

Iron ore prices have also been hit recently; prices have fallen to an 18-month low. There is some expectation that, as China starts to focus on making environmental improvements, steel furnaces will be shut down and therefore reduce demand for iron ore.

China concerns will continue to weigh on investor’s minds, and the recent data has not been encouraging. I take the overall view that the Chinese government is conscious of what happened in Japan after a period of excessive growth, and wants to prevent the same thing happening to its own economy. They are therefore trying to balance growth with excessive risk taking. Most analysts agree that, should the Chinese government need to, they have plenty of fiscal and monetary tools at their disposal to ensure they meet their target of 7.5% GDP growth this year. 

A lot of the weakness in the US data has been attributed to the weather. Merrill Lynch has studied how severe the weather has been in the US this winter to judge whether this is a fair assumption. They have concluded that the weather has been severe enough to impact economic activity and economic data should start to pick up in March, if history is anything to go by. I noticed yesterday, US-10 year treasury yields have moved higher recently, which may be a sign the bond market is also expecting the data to improve in the coming weeks.

Note: Apologies if I have incorrectly translated the title into Chinese.

Posted on March 13, 2014 .