Commodity Demand & Emerging Markets In 2019: Conflicting Fundamentals & How To Manage Them In Your Risk Plan

Which Headline Matters More? Is Asian Commodity Demand Stalling-Out AS We Approach 2019?

Two headlines popped-into my special filter over the past 24 hours, both contradictory, and both on the heels of the IMF’s most recent Global Economic Outlook. These conflicting headlines must be mutually exclusive, aren’t they?  In other words, like a coin toss, won’t one of these stories prove to be more accurate than the other? Neither can be true, right?

Second, is there a manner in which we can look-to some indicator to help us navigate through 2019 commodity demand? Yes, I think there is: and we’ll look at this in the final portion of this blog-post.

Which Headline Has More Sway? Can We Even Tell?

In its newly released Global Economic Outlook, the IMF suggests that, going forward into the final three months of 2018, a weakening of global trade is likely–in the aftermath of the U.S.-led trade sanctions. Thus, the headline above talking about further trade talk set-backs between the U.S. & China (the world’s top two economic powers) is almost bound to create some global trade–and therefore global commodity–headwinds. And recent IMF & World Bank data acknowledges this, as seen in the two charts below:

GDPGrowth_IMFExportVolumesGrowth_WorldBank

However, growth isn’t being damaged to the point where deflationary pressures are a concern for me yet. This suggests that global economic headwinds may not be as bad as what we experienced in 2014-2016, when it comes to a China-led slowdown which infects most of the ASEAN countries with it…and with it commodity demand as well as investor commodity sentiment.  Why? How? I Have Two Points To Make…

Point #1

IF (and it’s a big “if”) global interest rates don’t rise too much more than their current levels between now and the end of 2018, I think that there is a strong likelihood that China’s domestic consumption & recently announced stimulus can offset most if not all of the problems with their external trade/exports. How much is too much in terms of rising interest rates by year-end?  Call in if you are a client/subscriber, and I’ll give you more specifics.

  • In two separate recent releases on economic data in China, both suggest strongly that the increase in China’s domestic consumption versus last year could be as much as 50% more YTD; that means that in the 1st half of 2018, domestic consumption in China contributed almost 80% to GDP growth.
  • More specifically related to commodities, one of the reports–the DHL Global Trade Barometer, “which assesses commodities that serve as the basis for further industrial production, predicts that global trade will continue to grow in the next three months, despite slight losses in momentum.
  • And in a totally separate, recently-released report from the World Bank, they suggested, “Growth in China is expected to slow moderately in 2018–2020 as its economy continues to rebalance. China’s economy is continuing to transition away from investment- and export-led growth and toward consumption- and services led growth. The recently-implemented U.S. tariff measures are expected to have only a small direct contractionary effect on growth, which should be offset by recent accommodative monetary and fiscal policy measures. Over the medium term, the impact of escalating trade tensions on investor confidence could play a larger role and would need to be countered by accelerated structural reforms. Growth among the large ASEAN countries is expected to remain solid in 2018 and beyond. Robust private consumption will remain the key driver of growth. Private investment is expected to also support growth in Indonesia and Vietnam, while large, ongoing public works projects will boost economic activity in the Philippines and Thailand. By contrast, investment growth is projected to remain subdued in Malaysia, as slowing global momentum and the cancellation of two large public infrastructure projects weigh on the outlook. The cyclical moderation of global demand, combined with slowing demand from China along regional supply chains, is expected to moderate export growth during 2018–20.”  -World Bank October East Asia Economic Update
  • The chart below from the IMF clearly shows a weakening of the World Trade Volumes, as Industrial Production continues its gradual path higher; we see in this chart as a whole that, if the Industrial Production can maintain a slight upward trajectory, World Trade Volumes tend to recover, oftentimes within a 2-3 months. And it is here that currencies/interest rates play a significant role in my view.

GlobalActivityIndicators_IMF

Point #2

As we have come to realize about President Trump, his rhetoric is a form of diplomacy: in the case of China & North Korea–which are directly related to one another in terms of our economic and diplomatic policies with each country–the hotter the rhetoric by Pres. Trump, the more likely that he is trying to sway thinking by his political opponents/adversaries. Thus, I am of the increasing view that the better North Korean talks go toward their de-nuclearization, the more likely U.S.-China economic relations are coming-around/improving. I know this is a big stretch, but it has its foundation in my prior research on Pres. Trump and his similarities with Pres. Teddy Roosevelt (flamboyant “big stick” policy with a direction & purpose, at a time when regional disputes were as significant as they are in today’s geopolitics). Admittedly, Roosevelt said that he wanted to speak softly but carry a big stick; history would suggest he was more like President Trump in speaking directly and carrying a big stick…including his relationship with the GOP-Republican Party (and the creation of the Bull-Moose Party).

rooseveltimperialismcartoon

Which Indicators May Be Leading Indicators To Help Us Navigate Commodity Demand?  First & Foremost, The Currencies–Because They Help Guide Us Through the Interest Rate/Bond Yield/Debt Maze.

I think that it is wise to watch 5 primary charts: because this is an open blog-post, I am only going to show one–the US Dollar and its history in helping to point-out deflation (when it rallies) and inflation (when it falls). The chart below has quite a bit of explanation in it, so be sure to right-click it to open it in a bigger window.

USSpotDollarContinuation
US Spot Dollar–Let Me Know If You’d Like A Larger Image Sent To You Via Email: Just Go To The Contact Us Tab

–MZ

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