Monday, May 2, 2022

Morning Note: Commodities Continue to Correct, But the Long-Term Setup Remains Extremely Bullish!

Global equity and commodity markets are starting off what will be a tense week (at least until Wednesday when the Fed wraps up its May policy meeting) on the back foot. China's PMI's (Purchasing Managers Indices) weak readings are exacerbating global demand fears.

Coincidentally, I, among other things, once again touched on China in our internal market log over the weekend. 

Here are a couple snippets:


"Just performed the monthly scoring of our equity market conditions index, which saw notable deterioration vs a month ago (-58 vs 0).

In a nutshell, conditions (both fundamental and technical) have odds favoring further downside in equities as 2022 plays out. With, I suspect, large counter-trend rallies (like last Thursday) occurring along the way.

Looking across the global landscape, there’s one particular setup that continues to jump out at me: The dynamics surrounding China. My redundant logging on this narrative (yes, I keep repeating the same case) has to do with my constant revisiting of the major macro themes. Again, this one stands out among many global setups…

Presently Xi is forcing draconian measures to show what he views as strength of leadership with regard to China’s Omicron outbreak. The present lockdown of a not-small percentage of the country’s citizens harkens back to spring 2020."


"With Xi up for reappointment sometime during the second half of this year, Chinese equities down ~20% year-to-date, and the likelihood of the country’s economy growing at the 5.5% authorities’ targeted for the year notably diminishing, suffice to say that a massive amount of stimulus will soon be on its way to the Chinese economy.

And being that China’s preferred fiscal stimulus is all about infrastructure, industrial commodities (read copper) are likely to regain their positive momentum as we move forward as well… However, at the moment, the recent corrective phase continues to play itself out… Commodities are presently suffering over China’s lockdowns and the fear over the potential for a marked global slowdown…

Nevertheless, the overall macro setup behooves us to stay the course on commodities for the time being. Per my 4/25 long entry:
“While we’ll continue to hedge our commodities exposure against a major collapse (i.e., we’ll definitely feel the “corrective” moves), we’ll not react to the current negative price action. Nor will we react with regard to our weightings to commodity-centric countries at this point.”"

Speaking of industrial commodities, here's the latest from BCA's Chief Commodity and Energy Strategist Bob Ryan:

"As we've pointed out, the base metals markets, as the world starts preparing for and investing in more and more renewable energy to phase out hydrocarbon sources of energy, the world is starting on the back foot. Inventories are low, reflecting the low capex in these markets that force the level of supply to remain consistently below the level of demand, which pulls down inventories, as you see here:"

"Our estimate for new copper supply that's going to be required just between 2021 and 2030 calls for a doubling of production. So we go from a 25 million metric ton market per year to a 50 million metric ton per year. Which is going to be very difficult to pull off when you're starting out primarily in physical deficit and falling inventories across the board.
You can see it in aluminum physical deficit: 


You can see it in zinc physical deficit, falling inventory:

And you can see it in Nickel, especially, physical deficit, falling inventory:"

What an epic setup for higher metals prices in the years to come! 

Asian equities leaned red overnight, 7 of 13 open (3 were shuttered) markets we track closing lower.

Europe's getting hammered this morning, with all of the 19 bourses we follow trading lower as I type.

US stocks are bouncing around to start the day; going from green at the open to notably red to back to green as I type: Dow up 48 points (0.14%), SP500 up 0.11%, SP500 Equal Weight up 0.32%, Nasdaq up 0.61%, Nasdaq Comp up 0.52%, Russell 2000 up 0.55%.

The VIX sits at 34.33, up 3.62%.

Oil futures are down 3.50%, gold's down 2.07%, silver's down 2.47%, copper futures are down 3.72% and the ag complex (DBA) is down 0.72%.

The 10-year treasury is down (yield up) and the dollar is up 0.49%.

Among our 39 core positions (excluding cash and short-term bond ETF), 14 -- led by AMD, AT&T, SOXX (semiconductors), Disney and Verizon -- are in the green so far this morning. The losers are being led lower by uranium miners, silver, gold, base metals futures and Latin American equities.

". . . some of the most important lessons concern the need to (a) study and remember the events of the past and (b) be conscious of the cyclical nature of things. Up close, the blind man may mistake the elephant’s leg for a tree—and the shortsighted investor may think an uptrend (or a downtrend) will go on forever. But if we step back and view the long sweep of history, we should be able to bear in mind that the long-term cycle also repeats and understand where we stand in it." 

Marks, Howard. Mastering the Market Cycle: Getting the Odds on Your Side

Have a great day!

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