Darkening Skies

The president of the World Bank resigns unexpectedly, and the organisation's annual report on the global economy casts a shadow over what was otherwise a better week for metals prices.

Like Comment

At the beginning of last week, the World Bank warned of increasing risks, or what it called "darkening skies", for the world economy. The annual assessment coincided with an announcement that the World Bank's president, Jim Yong Kim, was resigning.

In its report of global prospects, the World Bank predicts continued, though somewhat slower, growth in the global economy this year and next, with forecasts of 2.9% and 2.8%, respectively. Overhanging this broadly favourable outlook, however, are rising concerns for the global economy.

The slowdown started in the middle of last year and has, so far, been "orderly", according to the World Bank. The slower growth is focused on the rich countries, particularly the US, and growth in emerging markets and developing economies is expected to gather pace somewhat despite the continued cooling of the Chinese economy. Growth of the latter is expected to have fallen to 6% by 2021, which is a marked change of gear for an economy that expanded by an average of 10% annually between 1980 and 2010.

Some of the clouds in the World Bank's darkening skies are familiar ones. International commerce is weakening, and conflict over trade is now a major risk. The World Bank calculates that 2.5% of global trade is affected by the new tariffs imposed in the trade dispute between the US and China — the two countries account for a combined 20% of global trade and 40% of global GDP.

Financial markets are also a risk according to the World Bank. Interest rates are rising again in the US, and a stronger dollar could have an impact on emerging and developing economies. Brexit appears in the World Bank's assessment as a possible risk for countries that are especially reliant on selling to Europe.

Jim Yong Kim's resignation as president of the World Bank was unexpected, and his departure on February 1 is three years ahead of schedule. The sudden vacancy is expected to trigger a debate about whether the US will be allowed to continue its decades-long tradition of picking the World Bank's leader.

Meanwhile the longest ever shutdown of the US government continues. In addition to the considerable financial hardship caused to government employees, the shutdown is now starting to hamper Wall Street. With no sign of a compromise from either side over funding of the wall along the border with Mexico, delays are increasing likely in any initial public offerings and takeovers that require national security clearance or competition approval.

Despite the market difficulties, last week was a much better one for metals prices. There were particularly strong performances from zinc (up 3.1% over the week to close in London on Friday at US$2,494/t) and nickel (up 3.8% at US$11,475/t). The latter was strong for a second successive week and is back to the level of early November after a weak final two months of 2018.

Gold (up 1.8% at US$1,290/oz), iron ore (the 62% Fe benchmark was up 1.0% at US%73.5/t) and aluminium (up 0.6% at US$1,840/t) all improved. Copper was the only major metal to retreat last week, down 3.3% at US$5,964/t.

Amongst other metals, palladium is a stand-out performer. The metal is enjoying its longest-ever bull run and last week hit a record high of US$1,329/oz. The metal's price has risen 140% since the start of 2016, and surpassed the price of gold in December. More than 70% of the demand for palladium is in catalytic converters for petrol-driven cars, which are gaining favour over diesel-driven vehicles. The upward pressure on the price is being helped by a lacklustre supply of the metal.

There was better news last week from Europe with confirmation that unemployment in the eurozone had fallen below 8% in November for the first time in a decade. According to data published by Eurostat, the jobless rate was 7.9%; economists surveyed by Reuters had forecast a rate of 8.1%.

Nevertheless, fears of a prolonged slowdown in the eurozone economy grew last week after it was revealed that there was a sharp fall in German industrial production in November. Industrial activity in the country fell by 1.9% between October and November — the third straight month of falling activity and far worse than predicted by economists.

A German-government task force is due to release a plan on February 1 to bring about the cessation of using lignite as a source of energy. The low-quality coal accounts for almost a quarter of the country's generation of electricity, and employs some 20,000 people.

Assessment of 2018

Last year was "calamitous" for hedge funds, according to a report by HSBC's Alternative Investment Group, which found that only 16 funds amongst the 450 monitored returned positive returns (even before fees) in 2018. Hedge funds run by GAM, Schroders and BlackRock were amongst those that delivered significant losses in 2018. The Financial Times wrote this raises "more questions about the performance claims of some of the industry's best-paid managers".

Embarrassing then that a report published last week from the European Securities and Markets Authority found that retail fund investors lose up to one-quarter of their gross returns in costs and charges. The EU's main securities regulator reported that EU-regulated funds sold to retail investors carried charges that "are a significant drain on fund performance".

Although hedge funds had their worst year since 2011, they beat the S&P 500 index for the first time in a decade. Hedge Fund Research's main index, which monitors funds across all strategies, was down 4.1% last year, compared with a 4.4% fall for the S&P share index. The last time that happened was in 2008, when the financial crisis saw hedge funds fall 19.0% and the S&P index 37%. 

Amongst the other losers last year were exchange-traded funds (ETFs), with global inflows dropping 21% to US$516 billion in 2018. BlackRock, Vanguard, State Street and Invesco, the four largest ETF providers, all reported sharp falls in sales. Analysts blamed the falling investor appetite for these low-cost index trackers on the first annual fall in the US stock market since the financial crisis.

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.