 "Five tests for the commodities bounce")
It's the best of times in commodities markets, it's the worst of times in commodities markets. Iron ore jumped by the most on record on Monday, while Brent crude broke through $40 a barrel for the first time in three months. Then, Chinese export data Tuesday showed dollar-denominated shipments falling 25 per cent, the worst decline since May 2009.
What is going on?
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There are reasons to take both sets of data with a pinch of salt. Market prices are prone to speculation, momentum trading and short squeezes, all of which could explain some of the movement in iron ore and oil. Economic indicators can also be tricky. How much of China's export collapse in February had to do with the timing of Lunar New Year? If exports to Hong Kong were inflated in December by fake invoicing, is it bullish for the yuan that they declined to a six-year low in February?
Here are five indicators worth watching for a clearer picture:
To understand the state of real commodities demand, Baltic Dry is invaluable. A benchmark for rates to charter the ships that carry iron ore, coal, and grain, the index is at particularly depressed levels. As it tracks real prices being paid to book ships, there's no speculative element. If real demand starts to pick up from Chinese consumers, the Baltic Dry will be one of the first places it shows up.
The post-2008 building boom showed that China's leaders were prepared to use the construction industry as a tool of economic management in the same way as Western central banks use debt markets. If Janet Yellen says the economy is looking weak, you'd do well to buy US Treasuries. If Chinese leaders say the same thing, pile into construction materials. It's possible that the surge in iron ore is showing the smart money betting on renewed construction stimulus.
Chinese economic numbers are so unreliable that even Chinese leaders don't always believe them. While working as a party boss in northeastern Liaoning province, Premier Li Keqiang is said to have told a US diplomat that he ignored GDP data. His favoured indicator is a growth measure tracking bank loans, rail freight volumes, and electricity production. Electricity production is timely, and hard to fake as a guide to real economic activity.
Tuesday's Chinese trade data suggested a positive demand outlook for oil, with a net 31 million tonnes of crude and refined products entering the country in February. Still, the picture is muddied by fuel flowing into public and private stockpiles - the country's strategic petroleum reserve, currently being built out, is intended to hold about 100 days' worth of imports by 2020. A useful cross-reference may be weekly run rate data, a measure of how Chinese refineries are operating relative to capacity limits.
JAPAN THERMAL COAL CONTRACT PRICE
While China has overtaken Japan as the world's largest coal importer, the contract prices Japanese utilities strike with Australian thermal coal producers in early April remain an important global benchmark.
Waiting for confirmation of your hunches is a good way to miss out on an upturn in the market, so there's a lot to be said for putting some faith in the wisdom of crowds. But it's always worth checking speculative moves against more fundamental indicators.
Source: Bloomberg
