Prices & Review

Overview (March 2021)

Markets became more choppy in March, and one of the main reasons for that was because differences in opinion have arisen about the inflation outlook. While markets have been saying watch out for inflation, central bankers have said they do not see inflationary pressures. US Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell played down inflation, with Yellon saying "While we're seeing signs of recovery, we should be clear-eyed about the hole we're digging out of." And, Powell said, "We've been living in a world of strong disinflationary pressures for the past quarter-century. We don't think a one-time surge in spending leading to temporary price in-creases would disrupt that." It was also noted that bottlenecks in the global supply chain could put upward pressure on prices, but any resulting inflation would not be sustained. Judging by the sharp rise in bond yields, it would suggest that the market sees things differently. US ten-year treasury yields climbed to a high of 1.75 per-cent in March, from 1.43 percent in late-February, up from the end of 2020 levels of 0.91 percent and last year's low of around 0.5 percent. Even if central bankers and treasury officials were worried about inflation, would they tell the market that they probably could not do much about it? Raising interest rates just as the recovery is getting underway and unemployment is still high, especially in the service sector, would probably scupper the recovery. Indeed, Powell's comments sug-gest they will probably let the economy run hot for a while and would not be that reactive even if they saw some inflation.
For the metals, the prospect of recent stimulus announcements is expected to be further increased with a US three billion-dollar "Build back better" stimulus package aimed at infrastructure, and climate change bodes well for actual metal demand. Given metals prices have been on the rise for a year now, which has seen the LME Index rise to a peak of $4,026, from a year-ago low of $2,232, which means a lot of the potential bullishness may already be priced in. If metal prices start to struggle to go higher, given what they have already done, then the chances of long liquidation could pick-up. This would be even more likely if there were a broader market correction. With the US vaccine programme being rolled out at a fast pace, sentiment for a US recovery is strong, and that combined with the rising bond yields is boosting the dollar index, which is likely to be another headwind for metals prices. The dollar index has climbed to 92.95, up from 90.93 in late-February and a multi-year low of 89.21 at the start of the year. Where the dollar is heading is another dilemma for the market, will growing US debt continues to undermine it and see the year-old downward trend resume, or will a market that had become too short, faced with rising bond yields, lead to another rally? But, while the US is recovering from Covid-19 at a faster pace under US President Joe Biden, Europe is not doing so well - the vaccine programme has been slow to roll out, and many countries report soaring infections and death rates. The fact that super-strong growth was seen in March hopefully means that Europe's economies can operate at a high utilisation rate despite lockdowns – time will tell.
The other exciting development has been the speed with which long-held views can change. In the lithium-ion battery space, three developments have changed the outlook for both nickel and cobalt. First, Tesla announced it would produce more standard-range EVs with lithium-iron-phosphate (LFP) batteries that use no cobalt or nickel. Second, VW announced that it would use LFP batteries for its entry-range of EVs and high-manganese batteries for its mass-market EVs, which also use no cobalt, with the latter using less nickel too. The third development was that two Chinese companies were looking to use nickel ores that would typically have produced class 2 nickel products to make nickel sulphate, which the market had generally thought would have to be made using class 1 nickel. These developments remind the markets that the markets have an uncanny way to solve potential problems, and there is no room for complacency. On this note, geopolitical relationships between China and some of its major trading partners also seem to be getting more strained again. The last thing the global economy needs after the Covid-19 hit is another trade war.