- Global bond markets peaking again
- Economic cycle turning up again
- US economy set to boom further
- Commodities bottoming out
- Market leaders look outstanding
- BHP RIO FMG on +5.5% yields and +10% with special dividends
+61 2 9222 9111
The world is an interesting place at present with some important structural changes underway in a number of countries.
The US is of course the key to all these developments and from a market perspective it is coming to the biggest markets of them all: currencies and bonds.
I am unable to make out much from this measure of the US$ as it seems to want to move higher despite a recent sell off. The US$ against the Euro and Japanese Yen does not seem to want to go lower although the British Pound has jumped in anticipation of a successful Brexit.
The bond markets of the world seem to be staging a peaking in price and bottoming of yields in what is described as the Scam of the Century where sovereign borrowers have obtained almost `free money’ from panicking lenders. This game is coming to a close.
The recent increase in yields appears to be signalling the end of this period as it is notable that although new lows in yield were achieved in US 30 Year and in the 10 year for UK and Germany, these new lows were not confirmed by the key 10 year bonds in the US and Japan.
Recent lows in yield are suggesting that the 38 year decline in interest rates is now over.
Why are bond yield declines ending? The economic cycle is turning up again.
The key driver is Trump’s USA.
US Consumer Sentiment is high despite a recent small decline and should support the US economy where the anecdotal evidence of activity is very wide and strong.
Housing is important to watch in the US.
It is only about 4% of US GDP but data indicates that as much as 15% of the economy relates to home building.
US housing starts have been soft for almost three years but the latest numbers gave a strong increase and this needs to be set against the long term requirement of around 1.5m units per year.
This graphic shows that substantial catchup of over 6m units is needed.
Multi-unit structures are taking a larger share of the housing market.
The economy is clearly benefiting from the increase in employment and the low interest rate environment. 30 year mortgage rates are very attractive for home buyers.
The Housing Sector Index for listed companies is also very strong and almost at all time highs.
And it is not just housing.
Dow Jones Trucking Index is close to all time highs.
The rate of change on economic activity is improving despite the superficial chatter.
But this story is far from just this. Raw materials for housing are looking firm.
The lumber price is bottoming and is ready to move higher.
Copper is also showing signs of picking up again.
Copper has its greatest use in buildings construction.
Global mine production is running at about 20.5mtpa with scrap at about 4mtpa and consumption is at about 24.5mtpa. The market will have a deficit of about 0.4mt in 2019.
China accounts for about 50% of all copper consumption.
Crude steel output in China has remained over 1000mtpa and September was a 20 month high in iron ore imports into China.
Keep in mind there is NO INVENTORY of LME metals out there. Copper, lead, zinc and tin are low and aluminium and nickel have has massive inventory reductions over the past few years and are now, too, at critical levels.
Port inventory of China iron ore is rising again but over 40m tonnes has been taken out of the market due to higher demand and the Brazillian shortfalls.
India is the second largest producer of crude steel at 114mtpa and is now an importer. India’s target of 300mtpa of crude steel by 2030 will require another ~300mt of ironore and most will be imported. Note the growth in crude steel production in Vietnam and in MENA so that it is not just a China import market.
The price of oil still needs to reflect declining output from so many oil producers due to peak production from old conventional reservoirs.
Gold and iron ore are leading but copper and oil are ready to move higher and join the leaders.
And all the major commodities are now in uptrend.
And note things aren’t all bad in China despite the Trade War.
China Caixin PMI History This has moved `unexpectedly higher’.
And that is not all.
Freight rates are improving although this is still a mixed market. Tanker rates have risen through withdrawal of some Chinese tankers and the need to anticipate the IMO 2020 restrictions on high sulphur shipping fuels. This will be another positive factor for oil prices as better quality crudes are pushed up against high sulphur crudes which have been widely used as bunker fuels.
The latest Trump China Trade Deal has emphasised a large pick up in China demand for US agricultural products especially soybeans. Trump made a big issue of this suggesting farmers would need to plant more soybeans. Futures prices for soybeans have reached 18 month highs and prices for wheat and corn have also risen.
The Commodity Research Bureau’s CRB Index of futures on COMEX is showing some very constructive action and seems ready to break an 18 month downtrend.
The picture for the longer term looks even better.
This is very positive despite the pervasive pessimism and also for the Australian economy.
So coming back to the US Bond market the 10 year Treasury Note has provided `Goodbye Kiss’ on the lower uptrend line.
The yield on the 10 year is oversold on the downside and now above the downtrend line.
The 30 Year Treasury Bond has also provided a good bye kiss.
The outlook remains clear.
Sentiment is very defensive and has contributed to the reduction in interest rates and the surge in bond prices.
But economic growth is continuing and pressure will soon be really placed on supply of raw materials.
Moves as we have seen in iron ore and gold over this past year are likely to soon apply to copper and oil as well as many other commodities.
The massive volume of funds tied up in bonds will pour out and fuel the uptrends in commodities and commodity stocks.
The ASX S&P ASX 300 Metals and Mines Index has broken its 2008 downtrend, is about to pick up the 2016 uptrend and should be sailing in 2020 and beyond.
BHP might already be there
And RIO not far behind.
Fortescue is looking very good indeed.
These stocks are on 5-6% yields on normal dividends and with the special dividends have rewarded shareholders with +10% dividend income yields.
So much more to come.
Call me to participate.
Barry Dawes BSc F AusIMM(CP) MSAFAA
Martin Place Securities
+61 2 9222 9111
20 October 2019
Dawes Points #92
I own all the stocks mentioned in this report.