Key Factors Influencing Commodities Markets
There are three important things when I think about commodities influencing the markets currently. First is the U.S./China trade dispute. Second is global central banks, which have shifted aggressively towards easing as a supporting factor, and lastly, it is the direction of the U.S. dollar which has been relatively range bound this year, but strong. Those are the three things that are most important when I think about macro influences for the outlook for commodities.
Implications on Demand
So when we think about really trade wars and the trade tariffs that the U.S. has imposed on China, it has really changed expectations for global growth. That is the main driver for demand for commodity sectors. When we look at the evolution this year of trade talks, at the beginning of the year we had some fairly positive sentiment. Then famously in early May, trade talks broke down. Again in June, we had a truce declared on trade talks and sentiment improved again at that point. Then most recently, we imposed tariffs on the remainder of the exports. That really is an important development and it is really hard to handicap how that is going to settle out. When I think of where central bank policy has shifted, early this year the U.S. Fed [U.S. Federal Reserve/Fed] announced that they were shifting towards an easing policy. They finally eased their first level, cut 25 basis points in early July, and they ended quantitative tightening.
Many other central banks have actually moved towards easing pretty aggressively. It looks like the ECB [European Central Bank] in Europe is going to ease next month in September. So really you have a global shift of monetary easing, which should support global growth when we look out into next year. So, you have those two competing forces that are really whipsawing investors' impressions of how demand is going to shake out.
Corporate profitability growth was good. The economy was good. We always used to say that the Chinese economic growth was balanced between the “Old China” and the “New China.” So why did equities fall so much?
I had expected the dollar to weaken a little bit after the Fed initiated its first ease. It has remained range bound. I do feel that going forward as the Fed eases to try to offset the negative impact of trade tariffs around the world on the global economy, and its pass through effect on the U.S. economy, I do feel that the dollar is set up to decline at some point.
In China, the reason that stocks fell, I think is a result of a deleveraging in their economy, that started a year or two earlier.
Expectation for 2019 and Beyond
A lot of things are really important when you think of all the different influences from a macro standpoint, but fundamentally at VanEck we really feel like the supply side is contained and the chance of really exciting commodity markets in the next few years is there. Additionally, I do feel with central banks easing pretty aggressively, or at least they have indicated that they will be easing aggressively, you set the stage for potential inflationary pressures. Particularly if we settle the trade dispute. That would set the stage for a situation where you have monetary easing as a support to global growth, at the same time, you have a release of expectations of negative growth built around tariffs. If we could settle our trade disputes, it could really set the stage for some strong expectations for commodity demand.
So, I am really looking forward to that in the next couple of years, and we do feel that we are very close to that point. This feels a lot like the late 90s to us at VanEck. That was a period of time where commodities had just been out of favor for a long period of time. A decade at that time, and global growth turned sharply higher in the early 2000s, and commodities were the lead asset class in that period.