Weekly Wrap – 4 June 2021

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Written by Citadel Global Director, Bianca Botes


SUPER CYCLE – MYTH OR REALITY?

This week saw the dollar remain under pressure, leaving emerging markets and commodities to reap the benefit. As we review the week, four key points stand out:

  • Commodity super cycles
  • United States (US) monetary policy
  • Inflation concerns dampen stocks
  • The struggling dollar

IS THIS A COMMODITY SUPER CYCLE?

As global economies gradually come back online, commodity prices continue to rally. Many speculate that we are entering a commodity super cycle, as governments continue to pour trillions into infrastructure development as a means of stimulating economic growth and employment. But exactly what is a super cycle and are we really on the verge of one?

In essence, a super cycle is defined by an overdemand for commodities that triggers a rapid increase in commodity prices, far exceeding their long-term price trend. Super cycles can endure years, and in some instances, decades. Typically, super cycles are driven by a period of massive industrialisation and/or urbanisation. The most recent super cycle was in 2001, when China joined the World Trade Organisation.

While most countries have moved past their periods of industrialisation, we are now in a period of economic rebuild, following the pandemic that brought economies to a screeching halt. Some of the key indicators that may suggest we are on our way to a super cycle include:

  • A weak and continuously weakening dollar
  • Massive amounts of government spending to boost economic growth
  • Repressed demand as a result of subdued activity

Increased demand for commodities is usually driven by infrastructure development, with the building of bridges, roads and skyscrapers. However, as climate change is becoming a hot topic of conversation, we are seeing a trend towards renewable energy, both in the private and public sectors. This “new” area of interest has created demand for commodities such as cobalt, lithium and palladium.

While many producers, and even some analysts, make a case for a super cycle, there are also those who do not believe we are on the brink of one just yet. Geordie Wilkes, Head of Research at Sucden Financial, said at the online London Metal Exchange (LME) Asia Metals 2021 conference, that they are not convinced that we are in a super cycle, and that they do not believe that we will be entering one either. Wilkes was also quoted in the Mining Journal as saying, “The current bullish conditions for metals does not mean the red-hot commodities market is on the verge of a new super-cycle”.

Despite these disparate views, the performance of some commodities at the time of writing (year to date), remain impressive, whether we are in fact on the verge of a super cycle or not:

Brent oil:  +37.55%
Lumber:   +52.39%
Copper:    +28.26%
Lithium:   + 91.4%
Cobalt:     +35.6%

Some noteworthy moves in the commodity market this week, included the rally in oil prices. Markets are speculating that demand for oil might surpass supply in coming months, as economies ramp up following the pandemic. Gold moved to trade at a five-month high on Thursday morning, following statements by the US Federal Reserve (the Fed) Policymakers on Wednesday evening.

On Friday morning, gold traded at $1872.25, platinum at $1154.20 and palladium at $2832.25 an ounce.

TURNING HAWKISH…NOT YET

The spotlight remained on the US this week, as Fed policymakers sent waves through the market on Wednesday evening. They noted that there will be a drip tapering of bond purchases, with it being done in a slow and steady manner as to not disrupt markets. There is, however, still no signal from the Fed as to whether interest rates will be reconsidered anytime soon. US policymakers continue to rely on economic signals and the labour market to guide their hand in terms of monetary-policy decisions.

Privately-owned businesses in the US hired 978 000 workers in May 2021, well above a downward revised 654 000 in April. This is the highest reading since June 2020, as the labour market continues to recover. Companies of all sizes experienced a rise in job growth, indicating the improving nature of the pandemic and economy. In addition, US-based companies announced 24 586 job cuts in May 2021, slightly more than a 21-year low of 22 913 hit in April, with the most redundancies reported in health care/products (2 775) and education (2 617) including early childhood education.

Moving towards the United Kingdom (UK), where the economy is well on its way to getting back on its feet, following the double whammy of Brexit and COVID-19. The IHS Markit/CIPS UK Composite PMI was revised higher to 62.9 in May, from a preliminary estimate of 62.0, signalling the steepest rate of expansion since this series began in January 1998. Rapid rates of output growth were seen in both the manufacturing and service sectors, supported by business and consumer spending, while the pace of job creation was the highest since June 2014.

In Europe, a PMI survey showed eurozone business activity surged in May following the easing of COVID-19 restrictions, with input-cost inflation hitting a decade high and output prices rising the most on record. Meanwhile, hopes of a strong economic recovery in Europe continued to support sentiment, after European Commission President, Ursula von der Leyen, said on Wednesday that the European Union (EU) is on track to reach its target of vaccinating 70% of its adult population by the end of July.

An IHS Markit South Africa PMI survey showed Africa’s second-largest economy expanded at a slower pace in May. Earlier in the week, the country’s job report showed that the unemployment rate hit a record high in the first quarter of the year, as the country continues to battle the COVID-19 fallout, as well as structural economic concerns. The week also saw the country thrown back into the shadows, as state-owned power utility, Eskom, implemented loadshedding yet again, due to an increased demand for electricity as the country enters the winter months.

STOCKS BACKTRACK ON INFLATION WORRIES

US futures edged lower on Thursday after closing the previous session at near record highs. Inflation pressure and prospects of strong growth, as US businesses reopen, remain in the spotlight. Traders are looking to new data for clues as to the Fed’s next moves. On Wednesday, the Fed announced its plans to begin winding down the portfolio of the Secondary Market Corporate Credit Facility, a temporary emergency lending facility which supports credit for large employers through the COVID-19 pandemic. On Wednesday, the Dow Jones rose 0.1%, while the S&P 500 added 0.1%. Elsewhere the Nasdaq Composite gained 0.1%.

European shares fell from record-high levels on Thursday, as signs of higher inflation added to concerns about an early tightening of monetary policy. Elsewhere, traders around the globe awaited US job data, which could influence how long the Fed maintains its dovish monetary policy stance. On the corporate front, spirits group, Remy Cointreau, reported a higher-than-expected profit growth for its 2020/21 fiscal year, while retailer B&M said that pre-tax profits doubled last year after it stayed open during the lockdown.

The Japanese Nikkei 225 gained 0.39% on Thursday, extending gains of 0.46% in the previous session as investors demonstrated optimism in the midst of recent economic data while monitoring persistent inflation concerns. Looking at individual stocks, automakers also saw heavy gains, with Toyota Motor gaining 1.68%, while Honda Motor rose 2.08% and Nissan Motor picked up 1.5%.

The FTSE/JSE All Share Index fell towards the 68 000 mark on Thursday, after touching on a three-month high of 69 278 points on Wednesday, as investors remained vigilant ahead of US job data due Friday and South Africa’s first-quarter GDP data early next week.

NOT SO STEALTHY GREENBACK

The euro traded just below the $1.22/€ mark, with a near four-month high of $1.2265/€ reached last week, as investors digested new PMI data and worried about an earlier than expected tightening of monetary policy in the US, on signs of higher inflation.

The dollar index edged up to 90 on Thursday but remained close to multi-month lows as investors noted strong and sustainable economic recovery, fears of runaway inflation and risks for a quicker normalisation of Fed monetary policy.

The British pound traded at $1.418/£, after touching a three-year high of $1.425/£ earlier this week, amid worries that the wider reopening of the British economy, due on 21 June, could be delayed due to a spike in cases of the COVID-19 variant now known as Delta.

Anyone who takes an interest in the local currency, woke up to quite a surprise on Thursday morning, with the rand testing the R13.50 mark, reaching its highest levels in 26 months.

If we take a step back, and consider where the rand traded a year ago, the current levels are almost unbelievable.

From a rand recovery perspective, on Thursday morning, the rand gained against the dollar (at a level of R13.5150/$):

  • 20.1% over the past 12 months
  • 11.8% over the past 3 months
  • 3.8% over the past month

We started the day trading at R13.62 /$, 16.50/€ and R19.21/£.