Prices & Review

Overview (June 2021)

June has seen markets, in general, become more nervous, although, for most markets, the underlying trends remain intact for now, with the possible exception of gold and, to some extent, the U.S. dollar. The number one factor that has caused an increase in jitteriness concerns that inflation may not be as transitory as the Federal Reserve wants the market to believe. While some Federal Open Market Committee members and the U.S. Treasury Secretary, Janet Yellon, have been saying the Fed should at least start to discuss tapering or talk about raising interest rates, the official stance is that the Fed will remain accommodative until 2023. And, luckily for the Fed, enough of the U.S. employment data, while it has shown healthy improvement, it has not been so strong as to produce an awkward situation for the Fed to defend their stance. The underlying sup-porting themes underpinning commodity prices, even where there are bearish signs, such as rising stocks, is that global trade is still suffering significant logistical tightness, with longer than standard shipping times, a shortage of container availability and sky-high shipping rates. As more economies, especially in the U.S. and Europe, emerge from various stages of lockdown, de-mand is expected to recover, which could put even more pressure on the supply chains, thereby lifting prices further. In some instances, it looks like consumers, who restocked last year, as was seen in China, or earlier this year, are now cutting back purchases as they baulk at paying these high prices. But, this does not mean demand is necessarily weaker. It could be that consumers have opted to rely on their stocks rather than chase prices higher. If this is the case, as we think it is, this destocking is only going to be able to last so long. Combining an end to destocking and more robust demand as economies open up more could produce bullish tailwinds. This is especially so if we are in the early stages of significant global restructure driven by de-globalisation, de-carbonisation, electrification and stimulus measures targeting infrastructure. If all these changes run in parallel and start after a period of low CAPEX since 2012, then the chances of us being in the early stages of a super-cycle seem very likely.
The pullback in gold prices suggests the increase in nervousness is unfounded. Other safe-havens such as the yen and crypto-currencies also have weakened. In contrast, the dollar has started to recover on a combination of short-covering and as the Fed brought forward its expected first rate rise to 2023, from earlier predictions of 2024. U.S. ten-year-treasuries are challenging to read – at 1.49 percent, in from 1.57 percent a month ago. If the most significant fear the market has is the Fed tapering, then if the Fed does sit on its hands until 2023, combined with broader-based recovery from the pandemic, the supply tightness and stimulus measures could produce a Goldilocks set-up for markets. However, before getting too complacent, given the massive build-up of government, corporate and, in many cases, household debt, that happened because of the pandemic, when central banks start to tighten monetary policy, the cost of servicing the debt will be a significant headwind for demand. Moreover, many asset prices are already elevated in the near term so that corrections may be seen, so there is little room for complacency. Still, the overall set-up strongly supports the view that a super-cycle could be underway backed by some powerful global restructuring themes.