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Goldman Spots A Historic Reversal In The Commodities Market: “China No Longer World’s Marginal Buyer”

China’s recent aggressive crackdown on soaring commodity prices (going as far as dragging the PBOC’s monetary regime into it, with…



Goldman Spots A Historic Reversal In The Commodities Market: "China No Longer World's Marginal Buyer"

China's recent aggressive crackdown on soaring commodity prices (going as far as dragging the PBOC's monetary regime into it, with the central bank stating this morning that the surging yuan is in no way a response to explosive commodity prices, honestly), has provided the world's deflationists with some hope that the recent huge spike in commodity prices may be coming to an end. To others, like Goldman's extremely bullish commodities team, China's intervention has led to a rather unpleasant hit to its thesis, and in response today's Goldman's head of commodities, Jeffrey Currie drafted a note saying that the pullback in commodities after China’s warnings over onshore speculation is a “clear buying opportunity,” as the "bullish commodity thesis is neither about Chinese speculators nor Chinese demand growth."

As Currie adds, while commodity prices retraced ~3% after Chinese warnings over onshore commodity speculation, "the fundamental path in key commodities such as oil, copper and soybeans remains orientated towards incremental tightness in H2, with scant evidence of a supply response sufficient to derail this bull market."

And just as some are worried that the Fed has lost control over inflation, with many openly mocking its repetitive pleadings that inflation is "transitory", Goldman makes a similarly bold claim, namely that "China has lost pricing power":

China is no longer the center of commodities. However, the most critical reason for viewing this China led dip as a buying opportunity is the mounting evidence that commodities are no longer China-centric. The velocity of the DM demand recovery means that China is no longer the marginal buyer dictating pricing, as it is crowded out by the Western consumer. The market is beginning to reflect this, as copper prices are increasingly driven by Western manufacturing data rather their Chinese counterparts (Exhibit 1).

This is a huge role reversal from the bull market of the 2000’s, with China now the incumbent consumer as the US was when emerging Chinese demand squeezed out marginal US consumers. Here is some more on this critical hypothesis which would have profound consequences on global commodity prices if it is borne out:

The Chinese consumer is crowded out. Today, a similar event is happening, but in reverse. 1) China is losing its derived demand as supply chains – exposed as fragile after two years of trade wars and a global pandemic – begin to turn local; 2) China is now focused on reducing environmental costs of production; and 3) not only are Chinese labor costs rising towards the West, labor’s share of costs is declining sharply with a global surge in automation. Moreover, after nearly two decades of high investment and now razor thin margins, as commodity prices rise, the less profitable downstream commodity consumers in China begin to complain of excessive input cost inflation. Just like in the US in the 2000’s, this raises concern among Chinese regulators that speculation is driving commodity price inflation. Rather than undermining the strength of this bull market, we see this downstream demand destruction as validating it, with strong Western demand squeezing China out of the market - just like the Americans were nearly two decades ago.

Goldman then slams the latest episode of blaming speculators, pointing to a long and distinguished history "of attributing paradigm shifts in prices to speculation" and noting that "China’s current crackdown on commodity speculation mirrors similar moves by the US in the mid-2000’s. When commentators are unable to understand what is driving such a paradigm shift in prices, they attribute it to speculators - a common pattern throughout history which has never solved fundamental tightness."

In reality, Goldman argues that speculators merely reflect fundamentals and reduce volatility, with data showing that "net-specs track fundamentals as the specs simply translate fundamental information into price discovery."

Furthermore, history shows that simply banning speculators leads to even more price volatility, while discouraging precautionary inventory building by consumers will leave China even more exposed to crowding out by US firms who are able to pass commodity inflation through to consumers, raising prices dollar for dollar with raw material costs:

Labor’s share of costs are declining. While Chinese labor costs have converged towards the West’s, they are still far lower. What really matters is labor’s share of costs which is declining across the world with increased automation. Not only does this make capital costs more important, which are far lower in the West than in China, but it also increases the relevancy of materials as a share of costs. Moreover, with China remaining far more cost competitive on labor, US manufacturing had to compete by increasing automation and productivity in technology intensive production sectors. This in turn is where the West’s efficiency in the use of energy and materials after the 2000s plays an important role. Combine this with the large fiscal stimulus, our US equity analysts for industrial firms point out that American manufactures are passing commodity price strength into end use consumers dollar for dollar. This higher level of pricing power by US firms enables them to more effectively weather commodity price rises. Moreover, some of the price insensitive Chinese demand in the 2000s was derived-demand from DM to begin with, which has migrated back to the US after a trade war and pandemic. As this focus on domestic production is expected to increase, given this increased focus on automation, the capex needed to replace Chinese production in the West will be even larger than the Chinese capital demand as the new western production will be a more capital-intensive, less labor intensive than what it replaces.

Ultimately, Currie sees weak Chinese demand as validating the bullish thesis:

The immediate reason for the greater US pricing power is the large US fiscal stimulus that is absent in China; however, we believe there are also structural factors that makes this a paradigm shift. China no longer benefits as much from its comparative advantage in low-cost labour, global trade and its previous apparent indifference to the environmental impact of GhG emissions. This ultimately creates a weaker margin setting onshore. With scarcity starting to generate shortages and higher prices, the Chinese are the first consumers to be priced out.

One final point, and one which ties "everything" together - from soaring commodity prices, to Chinese monetary and fiscal policy - is Goldman's argument that CNY strength can provide a tactical tailwind. Although the bank's commodity team sees the Chinese consumer being crowded out of commodities, their ability to retain some pricing power rests on an appreciating CNY: as the FX strength undoes some CNY-denominated commodity price inflation, the Chinese consumer can sustain a greater volume of demand. It is this additional volume that ultimately destocks inventories and drives up commodity prices - exactly as happened in oil in the 2000s.

While Goldman economists see yuan appreciation on the horizon (12m forecast is 6.2), upside is capped by the need for China to retain export competitiveness - a key driver of the Chinese mercantlist economy. Moreover, as the CNY accounts for c.15% of the US Dollars Trade Weighted basket, any appreciation reignites the dollar-commodities reflation cycle.

Tyler Durden Thu, 05/27/2021 - 17:40

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“We Are Headed For Another Train Wreck”: Bill Ackman Blames Janet Yellen For Restarting The Bank Run

"We Are Headed For Another Train Wreck": Bill Ackman Blames Janet Yellen For Restarting The Bank Run

Yesterday morning we joked that every…



"We Are Headed For Another Train Wreck": Bill Ackman Blames Janet Yellen For Restarting The Bank Run

Yesterday morning we joked that every time Janet Yellen opens her mouth, stocks dump.

Well, it wasn't a joke, and as we repeatedly noted today, while Jerome Powell was busting his ass to prevent a violent market reaction - in either direction - to his "most important Fed decision and presser of 2023", the Treasury Secretary, with all the grace of a senile 76-year-old elephant in a China market, uttered the phrase...


... and the rest was silence... or rather selling.

Commenting on our chart, Bloomberg's Mark Cudmore noted it was Yellen who was "to blame for the stock slump", pointing out that "the pessimistic turn in US stocks began within a minute of Janet Yellen starting to speak."

The S&P 500 rose almost 1% in the first 47 minutes after the Fed decision. Powell wasn’t the problem either: the index was 0.6% higher in the first 17 minutes after his press conference started.

Why am I picking that exact timing of 2:47pm NY time? Because that is the minute Yellen started speaking at the Senate panel hearing. The high for the S&P 500 was 2:48pm NY time and it fell more than 2.5% over the subsequent 72 minutes. Good effort.

Picking up on this, Bloomberg's Mark Cranfield writes that banking stocks globally are set to underperform for longer after Janet Yellen pushed back against giving deposit insurance without working with lawmakers. He adds that "to an aggressive trader this sounds like an invitation to keep shorting bank stocks -- at least until the tone changes into broader support and is less focused on specific bank situations." Earlier, we addressed that too:

Looking ahead, Cranfield warns that US financials are likely to be the most vulnerable as they are the epicenter of the debate. Although European or Asian banking names may outperform US peers, that won’t be much consolation for investors as most financial sector indexes may be on a downward path.

The KBW bank index has tumbled from its highs seen in early February, but still has a way to go before it reaches the pandemic-nadir in 2020. Traders smell an opening for a big trade and that will fuel more downside. Probably until Yellen blinks.

And if Bill Ackman is right, she will be doing a whole lot of blinking in days if not hours.

Ackman crying in public

While we generally make fun of Ackman's self-serving hot takes on twitter, today he was right when he accused Yellen of effectively restarting the small bank depositor run which according to JPMorgan has already seen $1.1 trillion in assets withdrawn from "vulnerable" banks. This is what Ackman tweeted:

Yesterday, @SecYellen  made reassuring comments that led the market and depositors to believe that all deposits were now implicitly guaranteed. That coupled with a leak suggesting that @USTreasury, @FDICgov and @SecYellen  were looking for a way to guarantee all deposits reassured the banking sector and depositors.

This afternoon, @SecYellen walked back yesterday’s implicit support for small banks and depositors, while making it explicit that systemwide deposit guarantees were not being considered.

We have gone from implicit support for depositors to @SecYellen explicit statement today that no guarantee is being considered with rates now being raised to 5%. 5% is a threshold that makes bank deposits that much less attractive. I would be surprised if deposit outflows don’t accelerate effective immediately.

Ackman concluded by repeating his ask: a comprehensive deposit guarantee on America's $18 trillion in assets...

A temporary systemwide deposit guarantee is needed to stop the bleeding. The longer the uncertainty continues, the more permanent the damage is to the smaller banks, and the more difficult it will be to bring their customers back.

... but as we noted previously pointing out, you know, the math...

... absent bipartisan Congressional intervention - which is very much unlikely until the bank crisis gets much, much worse - this won't happen and instead the Fed will continue putting out bank fire after bank fire - even as it keeps hiking to overcompensate for its "transitory inflation" idiocy from 2021, until the entire system burns down, something which Ackman's follow-up tweet was also right about:

Consider recent events impact on the long-term cost of equity capital for non-systemically important banks where you can wake up one day as a shareholder or bondholder and your investment instantly goes to zero. When combined with the higher cost of debt and deposits due to rising rates, consider what the impact will be on lending rates and our economy.

The longer this banking crisis is allowed to continue, the greater the damage to smaller banks and their ability to access low-cost capital.

Trust and confidence are earned over many years, but can be wiped out in a few days. I fear we are heading for another a train wreck. Hopefully, our regulators will get this right.

Narrator: no, they won't.

Tyler Durden Wed, 03/22/2023 - 21:20

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China’s Auto Industry Association Urges “Cooling” Of Price War, As Major Manufacturers Slash Prices

China’s Auto Industry Association Urges "Cooling" Of Price War, As Major Manufacturers Slash Prices

Just hours after we wrote about maniacal…



China's Auto Industry Association Urges "Cooling" Of Price War, As Major Manufacturers Slash Prices

Just hours after we wrote about maniacal price cutting in the automotive industry in China, China's auto industry association is urging automakers to "cool" the hype behind price cuts.

The statement was made in order to "ensure the stable development of the industry", Automotive News Europe reported on Tuesday. 

The China Association of Automobile Manufacturers even went so far as to put out a message on its official WeChat account, stating that "A price war is not a long-term solution". Instead "automakers should work harder on technology and branding," it said. 

The consumer disagrees...

Recall we wrote earlier this week that most major automakers were slashing prices in China. The move is coming after lifting pandemic controls failed to spur significant demand in China, the Wall Street Journal reported this week. Ford and GM will be joined by BMW and Volkswagen in offering the discounts and promotions on EVs, the report says. 

Retail auto sales plunged the first two months of the year and automakers are facing additional challenges in trying to transition their business models to prioritize EVs over conventional internal combustion engine vehicles. 

Ford is offering $6,000 off its Mustang Mach-E, putting the standard version of its EV at just $31,000. Last month, only 84 of the vehicles were sold, compared to 1,500 sales in December. There was some pulling forward of demand due to the phasing out of subsidies heading into the new year, and Ford had also cut prices by about 9% in December. 

A spokesperson for Ford called it a "stock clearance". 

Discounts at Volkswagen are ranging from around $2,200 to $7,300 a car. The cuts will affect 20 gas powered and electric models. Its electric ID series is seeing price cuts of almost $6,000. The company called the cuts "temporary promotions due to general reluctance among car buyers, the new emissions rule and discounts offered by competitors."

Even more shocking is Citroën-maker Dongfeng Motor Group, who is offering a 40% discount on its C6 gas-powered sedan, now priced at $18,000. 

Kelvin Lau, an analyst at Daiwa Capital Markets, told the Journal that automakers are also trying to get rid of 500,000 vehicles collectively stored in their inventory, most of which are older vehicles that won't meet new emissions standards.

David Zhang, a Shanghai-based independent automobile analyst, added: “Some car makers have been seeing very few sales. At this rate, the manufacturers’ production and dealership networks will collapse.”

Tyler Durden Wed, 03/22/2023 - 18:00

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COVID origins debate: what to make of new findings linking the virus to raccoon dogs

New reports suggest the pandemic’s origins may be linked to raccoon dogs sold at Wuhan’s Huanan Wholesale Seafood Market. A virologist explains.




The origin of SARS-CoV-2, the virus that causes COVID, has long been a topic of heated debate. While many believe SARS-CoV-2 spread to humans from an animal at Wuhan’s Huanan Wholesale Seafood Market, others have argued the virus was accidentally leaked from a lab at the Wuhan Institute of Virology.

Over the past week there has been intense activity surrounding the emergence of new data relevant to this question. In particular, reports emerged that the pandemic’s origins may be linked to raccoon dogs which were being sold illegally at the market.

The excitement stemmed from a re-analysis of raw data generated as part of official investigations into the role of the Huanan Wholesale Seafood Market in the outbreak.

The team of international scientists working on this re-analysis (from North America, Europe and Australia) alerted the World Health Organization and discussed the topic in an article published in The Atlantic. And the scientists themselves have now released a report on the issue, providing greater detail.

So what can we make of their findings? Will this development shift the course of the ongoing debate? Let’s take a look.

The Huanan market

In January 2020, writing about the emergence of what we now call SARS-CoV-2, I stated the importance of understanding how this pandemic began. It remains important to determine the virus’s origins because this knowledge may help us stop the next pandemic occurring.

Even very early in 2020, it was clear that the central Chinese city of Wuhan (a major metropolis and travel hub) was the epicentre of the outbreak. Within Wuhan, the Huanan seafood market stood out as it was associated with many – but not all – of the earliest cases. Indeed, the market was closed on January 1 2020, animals were culled, and the site was disinfected.

Suspicions arose given the role that animal trade and markets had played in the emergence of the closely related SARS-CoV-1 virus (which caused SARS, a widespread outbreak of viral respiratory disease) nearly two decades earlier. Evidence emerged that the Huanan seafood market also sold live mammals, including a fox-like mammal known as a raccoon dog, that we now know are susceptible to SARS-CoV-2.

Later epidemiological and genetic analyses further focused in on the market, and even specific stalls within it, as being the origin of the pandemic.

Read more: The original Sars virus disappeared – here's why coronavirus won’t do the same

The new data

As part of the official investigations into the market, swabs were collected from various parts of the market in the two months after it shut down at the start of 2020. The scientists who undertook this research, from the Chinese Center for Disease Control and Prevention, posted their analysis as a pre-print (a study yet to be peer-reviewed) in February 2022.

In this, the team concluded that the market likely played a significant role in SARS-CoV-2’s early spread, but that they couldn’t detect the virus in samples taken directly from animals. They reported that all the virus evidence found was associated with humans, and it was therefore likely the virus had been brought into the market by humans, not animals, and so perhaps the pandemic began elsewhere.

An illustration of SARS-CoV-2, the virus that causes COVID.
The origin of SARS-CoV-2 has been a topic of heated debate. Kateryna Kon/Shutterstock

However, prior to any official peer-reviewed publication, the raw data from this work was released on an open scientific database called Gisaid. And the group of scientists who re-analysed this data did actually find an association between SARS-CoV-2 and animals, in particular raccoon dogs in the market.

They found DNA from animals mixed in with SARS-CoV-2 in a number of samples from the market. Some positive samples contained no human DNA and mostly raccoon dog DNA. This mix of virus and animal material is consistent with an infected animal – not a human – shedding virus, which is what you might expect if SARS-CoV-2 originated from animals brought into the market. Unfortunately, samples from a living raccoon dog were either not taken or not reported, and the official investigation makes no mention of raccoon dogs.

Where to from here?

While this latest data is one additional piece of the puzzle that supports an origin of the pandemic linked to Wuhan’s animal trade, it is unlikely to provide irrefutable evidence. It’s important to note it’s also a pre-print.

Ideally, we would like animal samples from early December 2019, and to compare animal virus genomes with human ones. It will also be crucial to follow events backwards through the animal trade and farming systems to work out where the animals got the virus from in the first instance.

Further, we must bear in mind that the virus could have easily been given to a raccoon dog by an infected human, or that the association between raccoon dog DNA and SARS-CoV-2 may be coincidental.

Read more: We want to know where COVID came from. But it’s too soon to expect miracles

However, evidence is accumulating that official investigations have left a gap in their research – particularly around the role that animals like raccoon dogs and the wildlife trade played in the origins of the pandemic.

While it may be unlikely that we will ever get concrete evidence as to how SARS-CoV-2 entered the human population, we can still think pragmatically and seek to alter behaviour and practices to reduce the chance of a new pandemic. One immediate target would be food systems (encompassing farm to fork), and how to make farming and the wildlife trade safer for all, potentially by enhancing virus surveillance in animals.

Connor Bamford receives funding from Wellcome Trust, UKRI, SFI and BMA Foundation.

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