GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.

 

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AS THE FINANCIAL WORLD TURNS: COMMODITY AND OTHER MARKETPLACE DOMAINS © Leo Haviland April 2, 2018

Chuck Berry sings in “’Round and ’Round”:
“Well, the joint started rockin’
Goin’ round and round,
Yeah, reelin’ and a rockin’,
What a crazy sound,
Well, they never stopped rockin’,
’Till the moon went down”.

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OVERVIEW AND CONCLUSION

Many marketplace high priests enthusiastically proclaim proverbs on price relationships. For some heralds, these adages are only guidelines; however, for others, they represent high (or very high) probabilities. Such aphorisms include the links between the United States dollar and commodities “in general”, or between the US dollar and the S+P 500 or other stock indices. For example, one widely popular chant: “weak dollar equals strong commodities”, “strong dollar equals weak commodities”. For some, the word “equals” in this formula implies “is connected to”, or “associated with”.

Observers differ, often substantially, in their choice between as well as the assessment of the supposedly relevant variables (data, evidence) and analytical time horizons. Perspectives on past, current, and future convergence and divergence (lead/lag) relationships between financial marketplaces (and factors influencing them) likewise can vary significantly.

In practice, viewpoints regarding the role of the dollar in determining commodity price levels, trends, and turning points nevertheless differ, and often a great deal. After all, other financial marketplace realms (such as interest rates and stocks), diverse economic and political theaters, and a wide range of other phenomena interrelate with both the dollar (and other currencies) and assorted members of the commodities world. So a variety of competing stories and predictions about the dollar, commodities (whether in general or in regard to individual sectors such as petroleum or base metals), and other marketplaces exist and change.

Moreover, historical review indicates that trends for commodities “in general” can intertwine in various fashions with currencies (such as the United States dollar), as well as with interest rate benchmarks (picture the US 10 year government note), and stock playgrounds (the S+P 500 and related indices of advanced nations; emerging marketplace signposts). Moreover, marketplace history, whether for a given arena or the relationship between two or more fields, is not marketplace destiny.

For further related marketplace analysis of stock, interest rate, currency, and commodity fields, see other essays such as: “Global Stock Marketplaces: Winter of Discontent” (3/5/18); “There Will Be Blood: Financial Battlefields” (2/9/18); “Busload of Faith: Financial Marketplaces” (1/15/18); “Marketplace Vehicles: Going Mobile” (12/13/17); “History on Stage: Marketplace Scenes” (8/9/17).

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In any case, let’s now focus on the historical relationship between the broad real trade-weighted US dollar (“TWD”) and commodities in general over the past several years. The table below underlines that players should be on the watch for a fairly close coincidence in timing of major or other important turning points in those two wide realms. However, in the current context, they also should monitor TWD moves in relation to the critical height around 96.0. The broad real trade-weighted US dollar (“TWD”) recently fell decisively beneath crucial support around 96.2 to 96.6. The broad real TWD high during the global financial disaster was March 2009’s 96.6.

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What does an investigation of the petroleum, base metals, and agricultural commodity groups since their first quarter 2016 major lows unveil? Many marketplace turns have occurred around the same time. All these commodity battlefields made important highs in first quarter 2018; so did the S+P 500 and other important advanced nation and emerging marketplace stock indices.

Yet not all commodity sectors (or members within a group) necessarily dance (make turns) together. In principle and practice, potential divergence can develop and persist within the commodity universe.

However, whereas petroleum arguably very recently threatened to exceed its 1Q18 barriers, base metals and agriculture apparently did not. Determined and sustained crude oil output restraint by OPEC and its non-OPEC allies such as Russia has helped to draw down OECD petroleum industry inventories. Fears of supply interruption (Middle East tension, including the Iran nuclear issue; Libya; Nigeria; Venezuela) exist. Numerous prophets assert the world economy will remain robust. The further weakening of the dollar since around mid-year 2017 has inspired some petroleum bulls.

The net noncommercial long position of petroleum players (see the CFTC Commitments of Traders) expanded massively since mid-2017, and this net noncommercial buying probably played an important role in rallying oil prices. It remains very large and is vulnerable to liquidation.

Prices for the oil group probably will not break above their first quarter 2018 highs by much if at all. Neither will broad commodity indices such as the broad S&P Goldman Sachs Commodity Index or the Bloomberg Commodity Index. The 1Q18 peaks in the S+P 500 and MXEF stock indices are two year diagonal bull time moves from their 1Q16 major troughs. The GSCI and BCI’s first quarter 2018 highs likewise are two year diagonal ascents from their major bottoms of 1Q16.

Yet suppose the petroleum complex does attain new highs relative to those of 1Q18. As petroleum is an important part of many widely-watched commodity signposts (especially the broad S&P Goldman Sachs Commodity Index), that may boost such broad indices to levels above first quarter resistance.

It is important whether or not the base metals crew (copper, aluminum, zinc, and others) also achieves new highs, for both base metals and oil link closely to international economic growth trends (and arguably more “immediately” than agriculture does).

Many major highs (lows) for commodities “in general” have roughly coincided with major peaks (bottoms) in the S+P 500. But not all have. The 2007-2009 global economic disaster era displayed an exception. The major high in the S+P 500 (10/11/07 at 1576) preceded the GSCI’s pinnacle (7/3/08 at 894). However, the S+P 500’s final top, 5/19/08’s 1440, bordered the July 2018 commodities summit.

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Regardless of whether or not key commodity indices achieve highs above their first quarter 2018 plateau, the first quarter 2018 resistance for the S+P 500 and other advanced and emerging marketplace equity benchmarks probably will remain in place. As “There Will Be Blood: Financial Battlefields” (2/9/18) stated: “The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top.”

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As the Financial World Turns- Commodity and Other Marketplace Domains (4-2-18)

BASE METALS AND OTHER MARKETPLACE TRAVELS (c) Leo Haviland May 16, 2016

CONCLUSION

In the commodities constellation, base metals such as aluminum, copper, lead, nickel, and tin usually attract much less attention than the alluring stars of the petroleum complex. Nevertheless, base metals hold an important position in the global economic universe. Not only are they especially important for the economies of many emerging/developing countries (think of China, a huge base metals consumer), but also for several so-called advanced nations.

Of course history is not destiny. However, history reveals that major moves (trend changes) in the base metals complex (use the London Metal Exchange’s base metal index, “LMEX”, as a benchmark) nevertheless can offer important guidance for significant shifts in other marketplaces. Often LMEX major moves precede those in other financial realms.

The bear marketplace trend for base metals “in general” began in early 2011 and accelerated in 2014 and 2015. Base metals established an important bottom in mid-January 2016. This occurred alongside, though shortly before, troughs in commodities in general (and the petroleum complex in particular) and key lows in the S+P 500 and emerging marketplace stocks. The LMEX bottom also preceded the peak in the trade-weighted United States dollar and a significant yield low in the US Treasury 10 year note.

Emerging and developed countries closely interconnect in today’s international economy. So the base metals price rally since its first quarter 2016 low helped to spark optimism about improved global economic growth. However, the upward walk in base metals has been very modest compared to the sharp petroleum climb. In addition, recent LMEX highs roughly coincide with the April 2016 ones in the S+P 500 and emerging marketplace stocks. And US Treasury note yields have slipped lower since mid-March. Suppose noteworthy renewed weakness in base metals appears, with 1Q16 lows challenged or broken. This probably would signal (confirm) further slowing in real GDP expansion rates not only in China, but around the globe.

BASE METALS AND OTHER MARKETPLACES: 2007-09 REVISITED

Admittedly, in a review of several very important marketplace domains during the 2007-09 global economic crisis era, a notable time lag between the achievement of a crucial price point turning level (major high/major low) in a given arena in relation to those of various other arenas sometimes appears. Nevertheless, many significant trend changes in the LMEX base metal index, the broad Goldman Sachs Commodity Index, emerging marketplace stocks “in general”, the S+P 500, the broad real trade-weighted dollar, and the US Treasury 10 year note occurred around roughly the same time. Given the preceding analysis of the 2011-present period, this underscores the importance of watching base metals as a guide to (confirming indicator for) significant trend changes in these financial arenas.

The LMEX’s lofty May 2007 pinnacle preceded major highs in the broad GSCI (7/3/08 at 894), MXEF (11/1/07 at 1345), S+P 500 (10/11/07; 1576), and Shanghai Composite Index (10/16/07 at 6124), as well as the broad real trade-weighted dollar’s April 2008 major bottom. The LMEX’s high in early February 2011 also occurred prior to (although not long before) major peaks in the broad GSCI and MXEF. And quite significantly, the LMEX’s March and July 2008 very important secondary tops occurred close in time to the major low in the TWD, the final highs in the S+P 500 (5/19/08; 1440) and MXEF (5/19/08 at 1253), and the broad GSCI’s peak. In addition, the LMEX’s December 2008 major low occurred relatively near in time to turns in these marketplaces.

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Base Metals and Other Marketplace Travels (5-16-16)

THE METALS MARKETPLACE GAME: TOUCHING BASE (c) Leo Haviland March 16, 2015

Base metals such as aluminum, copper, lead, nickel, and tin capture far fewer headlines than the alluring stars of the petroleum complex. Nevertheless, base metals play an important position in the global economic game. Base metals are very significant not only to the economies of emerging/developing countries (think of China), but also to numerous so-called advanced nations. Despite assorted twists and turns, base metals “in general” (use the London Metal Exchange’s base metal index, “LMEX”, as a benchmark) have been in a bear path since early 2011. The renewed price meltdown in base metals over the past several months underscores recent and probable future slowdowns in real GDP growth rates in developing nations such as China. However, as emerging and developed nations closely interconnect in today’s international economy, base metal weakness probably also points to reductions in future output rates for advanced nations.

In the 2007-09 global economic crisis era and its aftermath up to the present, many significant trend changes in base metals, gold, the broad Goldman Sachs Commodity Index (and the petroleum complex), and the emerging marketplace stocks arena “in general” have occurred around roughly the same time.

The broad real trade-weighted United States dollar’s trend does not lock base metals prices, or those of any other playground, into a particular pattern. Nevertheless, the gradual strengthening of the dollar since mid-2011 roughly intertwines with the large bear move in base metals, gold’s bloody stumble since its September 2011 peak, and monumental declines in the broad GSCI (and the petroleum complex).

Emerging marketplace stocks in general, like benchmarks for base metals and commodities in general, have slumped in recent months. Further declines in the LMEX and the broad GSCI, especially when accompanied by US dollar rallies, will be a bearish warning sign (confirmation) for emerging marketplace stocks. Further noteworthy erosion in emerging marketplace stock prices likewise will be ominous for stock marketplaces of advanced nations.

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The Metals Marketplace Game-Touching Base (March 16, 2015)

METALS AND MELTDOWNS © Leo Haviland, September 26, 2011

The onset and acceleration of vicious bear trends in base metals “in general” such as copper in 2007 and 2008 preceded or coincided with meltdowns in other stock and many other commodity marketplaces. In late 2008, the London Metal Exchange’s base metal index’s bottom dawned only about three months before the major low in the S+P 500. What about 2011? Base metals reached their 2011 summits, as during the early stage of the global economic disaster, around the time of those in the S+P 500.

Erosion in base metal prices, especially as it now coincides with tumbles in stock arenas and in many other commodity playgrounds and some strength in the battered US dollar, confirms and points to further worldwide economic weakness. These intertwined marketplace trends underline that America’s policy actions (and related ones by many other nations) such as gigantic deficit spending, massive money printing, and sustained rock-bottom government interest rates have not sufficiently solved the severe debt and leverage problems that emerged into view in 2007 and 2008.

Although a repeat of the massive price declines of 2008 are unlikely, the current bear trends of 2011 in base metals probably will continue, as will those in equities and many other commodities.

The linkage of the base metal complex to stock marketplace and US dollar moves and interest rate policies and trends underscores the benefits of paying close attention to base metals. There has been a close bond in recent years between trends in the S+P 500, commodities “in general”, and the United States dollar. For example, in 2007, the LMEX major high on 5/4/07 at 4557 preceded the S+P 500 plateau on 10/11/07 at 1576. Eventually the crucial 2008 final tops in various marketplaces arrived. Note the timing coincidence in the final highs in the LMEX (3/5 and 7/2/08), the low in the broad real trade-weighted dollar (April 2008), the final top in the S+P 500 (5/19/08, midway between the LMEX 2008 tops), and the broad Goldman Sachs Commodity Index (7/3/08). Compare the 2011 timing coincidence in tops in these various marketplace domains. For example, the LMEX high on 2/14/11 at 4478 is very close in time to the initial S+P 500 top on 2/18/11 at 1344; compare 4/18/11’s 4469 LMEX high with the S+P 500 peak on 5/2/11 at 1371.

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Metals and Meltdowns (9-26-11)