September 2019


        Now the euphoria of a G7 concluded under the admirable Basque sun has passed, it is clear that the world at the end of summer 2019 is facing an accumulation of tensions that are both geopolitical and economic, which make the task of the analyst particularly difficult and that of forecasters, even more so.


        The markets did not disappoint those who made a triumph in gold this summer (over $1,500 per ounce) while the amount of debt at negative rates reached unsuspected levels (15,400 billion dollars!).


        From the geopolitical point of view, there is of course always Iran and Venezuela as well as Brexit in Europe, but we must now add Hong Kong and then in Europe, Italy and Spain along with Germany in the final straightaway with Angela Merkel. From the economic point of view, the trade conflict between China and the United States is still raging, but more so the fears of recession that are rising in both the United States and Europe, with a slow-down in most emerging countries, as in the example of India and China. Finally, the fires from the Amazon to Siberia have brought to the forefront the climatic and environmental emergencies still illustrated by one of the hottest summers in history.


        Iran was the star of the G7 with the impromptu arrival in Biarritz of its foreign minister. After the mutual seizures of an Iranian tanker off Gibraltar and a British tanker offshore of Ormuz, we would like to believe in the slight relaxation on the Brent barrel barometer (already perceptible), which has returned to around $60 (CyclOpe’s forecast of last January…) But to really bring Iran back to the negotiating table, would take a gesture on the part of the United States: for example, allowing Iranian oil buyers exemptions again, as was the case until last April. This would enable Iran to go from 200 to 300,000 bpd, which it exports today at a rate of one million bpd. Is Donald Trump capable of this gesture of goodwill? Perhaps, but John Bolton, his evil genius, is opposed to it as are Israel and Saudi Arabia. For the moment, despite the endless and ongoing crisis in Venezuela and the instability that prevails in Libya, the oil market is in equilibrium, if not surplus, while the prices of natural gas and especially LNG have collapsed under the weight of global overcapacity.


        Xi Jinping was not in Biarritz, but China was unavoidable. The Chinese president is facing three major problems: the confrontation with the United States, the slowdown in growth and Hong Kong. It is likely that Deng Hsiao Ping, who ordered the suppression of Tien An Men, would not be engaged in a standoff with the Hong Kong Democratic forces. While the extradition bill to China has certainly been withdrawn, it is apparent the authorities are playing upon the deterioration of the situation, and with the rise of violence, Xi cannot lose face, but he cannot do in Hong Kong what has been common in Tibet or Si Kiang with the Uyghurs. Hong Kong, in any case, is weakening its hand against the United States while the economy alternates between good and bad figures, though it is still giving some signs of weakness.


        During the summer, the escalation of tariffs has continued and at this little game, the United States are not necessarily winners to the extent that this will be reflected in the prices of many manufactured items that Americans buy en masse for Christmas and “Super-Friday”. Donald Trump has already lightened up a bit with regard to Huawei. The Chinese are paradoxically more comfortable: they can do without US oil and US LNG and their need for soybeans decreases with the spread of African swine fever, while Europe and Brazil can meet their needs for meat. That being said, negotiations are continuing and we continue to believe that by the end of the year a compromise will lead to a kind of peace of the braves.


        The front line could then be in and around Europe. It is true the GAFA and French wine threat was carefully defused in Biarritz. But will these good words be enough? We are waiting of course for the “casting” of the future Commission and then the outcome of Brexit. Donald Trump has promised Boris Johnson a “historic” trade deal, but will he still be there to enjoy it? Nothing is less certain as the British situation is complicated in an institutional framework that even the British struggle to understand: the Queen sends the Parliament home for five weeks at the request of the Prime Minister and Parliament rebels. Elections are being prepared with the prospect of a Labour platform, next to which the collective programme of the French left of 1981 pales. The prospect of a “no deal” seems to be strengthening, but, whatever the outcome of the coming weeks, it is clear that it will weaken Europe at a moment when its main economic engine – Germany – is down and where political uncertainties are hovering over Italy and Spain. Europe will have a hard time this winter escaping economic stagnation, if not worse.


        Will it be the same for the United States? This is one of the major issues of this season. The United States is now in the longest period of economic growth in its history. Admittedly, this growth is no longer very strong (2% or so), but it is enough to maintain a positive balance of job creation. On the other hand, it is clear that deep industrial America, from Indiana to Pennsylvania, continues to suffer. The Fed has listened to Donald Trump – a little – agreeing to lower its rates while the notion of excessive budget deficit is foreign to the Trumpian spirit. Taking into account the fact that the United States will return to an election year (an election that Donald Trump is currently likely to win), that US oil and gas production continues to increase and that the new economy (that of the GAFA and beyond) does not seem to be running out of steam, the ugly word recession still seems excessive and the United States should continue on a growth rate probably a little less than 2% with a lot of dust under the carpet, but for later!


        What is certain, however, is that most emerging countries are no longer so. It is difficult, of course, to measure the reality of the slowdown in Chinese growth. Official figures (6.2%) remain within the party’s range. Imports of raw materials (energy and metals) have not declined, but there is a virtual embargo on secondary materials that has disrupted flows of virgin materials. In July, in any case, the growth of Chinese industrial production fell below 5%. The level of 5% is precisely that at which Indian growth fell while Narendra Modi turned to the most obtuse national-populism by annexing Kashmir. As for Latin America, its main locomotives, Brazil and Argentina, are at the heart of both economic and political crises.


        The general mood does not lend itself to optimism and we understand the disposition of the financial markets with investors who favour security at all costs, even if they accept negative returns. In the past, it was thanks to inflation that real interest rates could be negative and ruin rentiers within a few years. There is hardly any more inflation today, but it is current rates that are negative, including for less prestigious signatures like that of France. In the short term, it is a lifeline for all impecunious states, but in the medium term this mountain of debt can legitimately cause worry. Finally, on the monetary side, the dollar appears more than ever a safe haven and it has steadily appreciated against the pound sterling, the euro and the yuan.


        In this context, the commodities markets have been bleak, including those for which the fundamentals seemed rather favourable. This is the case for non-ferrous metals (with the exception of nickel) whose balance sheets for prices – like copper and tin – have continued to weaken. During the summer, the most dramatic turnaround was iron ore, which virtually eliminated the entire rise in the aftermath of Vale’s accident in Brazil. At the same time, we must also mention the drop in “electric” metals such as cobalt and lithium.


        On the energy side, the most pronounced decline was that of natural gas in Asia (LNG), but also in Europe. Oil could have gone the same way if Saudi Arabia had not reduced production to keep prices above $60 per barrel of Brent, despite a turbulent summer in the Gulf.


        Lastly, gloom also reigns over the agricultural markets following excellent harvests of grains, sugar and coffee. As Europe prepares to negotiate a new, greener CAP than ever before, the United States is opening the floodgates of public aid (“a giant package”, tweeted Donald Trump) and India is subsidizing its sugar exports.


        From this summer of 2019, only gold really stands out (and to a lesser extent silver) and nickel: gold, over $1,500 per ounce, is benefitting from negative rates and the appetite of central banks, while nickel is on the rise as a result of the Indonesian government’s decision to ban export of ore by the end of the year.


        This is a marked return to uncertainty of which, as usual, commodity markets are the best indicator.


Philippe Chalmin


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