Geopolitical Tension Dominates Market

The past week was a difficult one for metals as fears grow that financial problems in developing countries might spark a flight of capital globally.

Oct 22, 2018
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In a week marked by geopolitical tension, most metals were under pressure, with aluminium the weakest major metal for the second consecutive week, closing at US$2,100/t on Friday, down 2.2% over the week. Nickel was down 1.6% at US$12,580/t, with copper 1.4% weaker at US$6,234/t and zinc off 1.1% at US$2,629/t. In contrast, iron ore (62% Fe) was up 2.7% in the seven-day period, closing on Friday in the UK on US$73.5/t, with gold also higher, up 1.4% at US$1,223/oz.  

Although the global economy remains strong, there are growing fears that the financial problems in many emerging markets will spread to become a global flight of capital. Capital raised by emerging market governments fell to a seven-year low in the three months to end-September, and the funding drought appears to have extended into October.

Capital inflows also fell into the world's biggest asset manager, BlackRock, which saw inflows decline to a two-year low in the third quarter. The co-chief investment officer of Bridgewater, Bob Prince, said tighter monetary policy in the US is weighing on the financial market, and investors are concerned that economic growth and corporate earnings have peaked. In an interview with the Financial Times, he talked of a potential "inflection point" where the economy moves from hot to mediocre.

In its latest survey of 174 investors (with US$518 billion of assets under management), Bank of America Merrill Lynch (BoAML) reported that a record 85% of respondents believed the global economy is in the late stage of the current business cycle. Although global stocks stabilised during the past week, the sharp two-day sell off last week has intensified debate over whether the decade-long bull market in US equities may have peaked.

At the International Monetary Fund's annual meeting in Indonesia, Christine Lagarde pleaded for nations to "sail together" to keep the global economy on track. Despite the efforts of the IMF's managing director, the Financial Times warned of signs that co-ordinated action is becoming more difficult. Indeed, Indonesia's president, Joko Widodo, likened relations between the major economies to the 'Game of Thrones' TV series, with a "tragic price" to be paid by all.

Last week saw another extraordinary outburst from Donald Trump, with the US president publicly criticising the Federal Reserve as being "out of control". He blamed the organization for the recent fall in equity prices, saying higher interest rates were "a big mistake". Evidence came from the BoAML survey, which concluded that a yield of 3.7% on 10-year Treasury bonds would prompt fund managers to increase their bond allocation at the expense of stocks — the yield is currently 3.15%. The president of the European Central Bank, Mario Draghi, conceded that there could be a "snap back" in global asset values. 

Meanwhile, China's National Bureau of Statistics has announced that economic growth rose by a disappointing 6.5% in the third quarter (compared with a year ago); the country's slowest expansion since the March quarter of 2009. Nevertheless, the economy remains on course to reach its target growth this year of 6.5%. The country's exports are being boosted by a weak renminbi, which is near a 21-month low, making it the worst-performing currency in the Asia-Pacific region this year.

The US dollar, in contrast, has risen 5% against most of its peers since April. Buoyed by the strong US economy and rate increases by the Federal Reserve, many analysts believe the dollar bull market has further to run. However, as signaled by most speakers at last week's Mines and Money Americas conference in Toronto, the dollar is certainly overvalued, and there will be a correction, but no-one knows quite when. 

 

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.

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