Prices & Review

Overview (January 2020)

Markets, in general, started 2020 on an upbeat mode and were looking forward to economic activity accelerating in the Lunar New Year, especially after the Phase 1 trade deal between the US and China had been signed. But, that has been dashed by the outbreak of Coronavirus in China, with the market now worried that the epidemic could hit the recovery in China and at worse could turn into a pandemic that triggers a global recession. While equity markets have slipped with US equities down by around 3.4 percent (Dow Jones Industrial Average -3.7% & S&P -3.1%), the EuroStoxx 50 down by 4.4 percent and China's CSI down 4.3 percent (up until it closed on January 23), metal prices have fallen more. Losses in the base metals have an average 11.1 percent and are ranged between 5.8 percent for aluminium and 13.3 percent for nickel.
Given so much uncertainty about the impact of the virus, as it is still early days and the collection of data may be being delayed as it is happening over the holiday period, the next reaction by the markets remains to be seen. The virus was first reported to the World Health Organisation on December 31, since then some 6,000 people have been infected and 132 deaths have been reported (as of January 29). Has Doctor Copper and its ten percent price correction understood the likely impact more accurately than the stock markets? Unfortunately, this is likely to be a case of having to wait to see how things unfold, although working out one’s contingency plans during this lull would be recommended. What are other markets saying? Gold prices at $1,570 per oz are climbing, but have not shot higher - indeed they are not as high as they were in the aftermath of the US’s assignation of Iranian General Qasem Suleimani in early January. The US dollar has continued to rally, the dollar index was recently at 98.15, up from 96.20 at the start of the year, perhaps the strong dollar is acting as a drag on gold. US ten-year treasury yields are at 1.92 percent, compared with 1.94 percent at the time of the December report, so only show a slight pick-up in safe-haven buying. Overall, while it will take time for the fallout from the virus to be ascertained, the near term impact can be estimated. Firstly, the lockdown of people in several cities will, at best, mean people return to work in dribs and drabs and that will impact the gearing-up of the economy. Second, movement restrictions are likely to affect the movement of goods and services along the supply chain, which could further disrupt economic activity in China, but if exports are also affected then that could hit the global market too. Thirdly, if ports are slow to start up then that could see shipments into China being delayed, which would lead to the build-up of inventory waiting to be sent to China and that could have financing and cash-flow issues for exporters.
If the virus does look set to hit China’s manufacturing base hard, then given the global economy has generally been on a back footing due to the trade war that had been underway for two years, the supply chain is likely to be running with low stocks, which should mean there is not too much room for panic destocking, as was seen in the 2008 financial crisis, which came straight after the super-cycle. If business confidence resumes its recover then supply chains are going to have to restock. The combination of restocking and a pick-up in actual demand can be powerful forces, especially when visible stocks are low. What is more, given low levels of capital expenditure by producers over recent years, a supply response is likely to be slow.