1Q19 preview: Base metals buoyed on positive macro outlook, increasing supply deficit
Comment of the Day

April 26 2019

Commentary by Eoin Treacy

1Q19 preview: Base metals buoyed on positive macro outlook, increasing supply deficit

Thanks to a subscriber for this report from GMP which may be of interest. Here is a section: 

Nickel reversed the downward trend from Q418 after settling at $4.73/lb to finish off 2018 the metal rallied hard in early 2019 and averaged $5.60 for the quarter.  From the early March peak of $6.20/lb, the stainless steel component metal gave back some of its gains going into quarter end.  

We see continued strength in the red metal through the year and expect the prospect of material deficits in 2019 to support our thesis. Cobre Panama which is currently in the commissioning phase is the last of the previous cycle mega projects. Modest demand growth driven by electrification of emerging markets and transportation networks should drive copper and the base metal complex higher.  

Following the strengthening base metal prices during the quarter, the base metal equities performed very well to start the year. Our coverage list was lead by ERO Copper up 69% in the first three months. Markets appear to be aligned with our thinking of strengthening prices in the base metal complex for 2019.  

Eoin Treacy's view

Here is a link to the full report.

The big question is how much damage was done to the global economy by last year’s quantitative tightening. The underperformance of industrials was brought into focus yesterday with UPS and 3M disappointing. South Korea, one of the world’s most trade dependent nations, contracted in the first quarter. It looking likely Japan did too. While central banks seem eager to help, they have so far been rather reticent to splurge in the same manner as years past.

A big part of the reason for their sobriety is the fact the US economy is still performing and even Europe’s periphery is showing signs of life. Meanwhile fiscal stimulus is becoming progressively more fashionable which suggests governments are willing to take up the baton of support. China’s new fiscal stimulus is a clear example of that but will probably take anything up to six months to become apparent in economic statistics.

The LME Metals Index dropped below the trend mean on Thursday and will need to pop back above it soon if the medium-term demand dominated environment is to be reasserted.

The performance of resources and industrials suggests investors appear unconvinced in the potential for a global reflation trade despite the change of tone at the Fed and China’s stimulus. The continued performance of cloud and subscription companies suggest investors are simultaneously positive on the outlook for technology and asset prices generally as the Fed pauses. The relative size of the latter groups suggest asset price inflation will likely triumph.

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