Bonds Take a Pounding

Emerging market currencies and mining equities look over-sold, and an investment opportunity, as bonds are the latest market to take a hit following heightened concern over US interest rates.

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Nov 05, 2018
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As I wrote in last Thursday's Picks & Blasts ('Exploration Fright is Over'), October has a fraught investment history, being known as the 'jinx' on Wall Street. True to tradition, stock markets were awful in October this year, and despite a last-day rally it was the worst month for equities in more than six years.

In China, the government's manufacturing purchasing managers' index (PMI) fell to 50.2 in October from 50.8 in September. This gauge of Chinese factory output is at its lowest level since July 2016 and is a fresh sign that the local economy is under pressure. The renminbi closed lower as a result, touching a new 10-year low against the dollar, which itself is at a 16-month high against a basket of global currencies.

Despite the slip in Chinese factory output, the manufacturing PMI is still above the 50 'expansion' threshold, and the country is creating, on average, two new dollar billionaires each week. According to the annual survey by UBS and PwC, there are now 2,158 billionaires in the world, and China has overtaken the US as the place where wealth is being created at the fastest rate. There are currently an estimated 585 billionaires in the US and 373 in China, with a further 414 in Europe.

The eurozone also saw its slowest rate of growth for more than four years. Growth in the third quarter was just 0.2%, the European Union announced last week. A growth of 0.4% had been expected but the Italian economy, the third largest in the eurozone, has ground to a halt. The president of the European Central Bank, Mario Draghi, insisted the slowdown was due to temporary blips, such as the struggle of German carmakers to comply with new European emissions standards.

Wage growth in the US jumped to its highest level in almost a decade in October. The data are expected to strengthen the hand of the Federal Reserve in continuing to lift interest rates. In turn, this has hit bond prices, and investors withdrew US$36 billion from bond funds in October, the biggest monthly net redemption in almost three years. Even bond ETFs, which have become popular as cheap exposure to fixed income markets, suffered their first monthly outflow in two years. The US corporate bond market was also hit by its worst sell-off since February.

Emerging market currencies have now fallen so far against the US dollar that many are now undervalued, according to reports in the Financial Times. This was based on a survey of fund managers, with the 'too low' findings being the highest in the monthly survey's 14-year history.

On metals markets, it was a week of contrasts, with the price of two of the major metals rising significantly, and the price of another two falling heavily. Copper was a major beneficiary of increased media coverage of electric vehicle predictions, and expectations of the resultant wiring demand, with the red metal rising 2.2% to close at US$6,288/t in London on Friday. Similarly, nickel benefitted from renewed interest in the battery story, with the metal improving 1.4% week on week to reach US$12,045/t. Nevertheless, nickel's recent improvement is only relative as the metal had reached US$15,700/t in June. One of the reasons for the slump over the past four months is fears that batter-grade nickel can be made from laterite ore (a claim by China's Tsingshan Holding Group).

The losers last week were iron ore, with the 62% Fe benchmark down fully 3.8% at US$74.1/t, and zinc, off 2.5% at US$2,580/t. There was little change in aluminium, up 0.3% at US$1,992/t, and gold was unchanged compared with the previous Friday at US$1,231/oz. Mining shares have suffered even worse so far this year, with the Bloomberg World Mining index down 25% this year. The disconnect with the underlying metals prices has led many analysts to claim that mining equities are now cheap, and that this is a prime buying opportunity.

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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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