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Tuesday, 10 February 2009
Over-Excitement In Shipping And Commodity Cues
Shipping stocks, freight rates and commodity prices are telling us people hope the worst of the economic woes are behind us, but there’s no fundamental reason to jump on what is for now a very speculative bandwagon.
Shipping stocks, freight rates and commodity prices are telling us people hope the worst of the economic woes are behind us, but there’s no fundamental reason to jump on what is for now a very speculative bandwagon.
The risk is not so much that markets are getting things badly wrong. Rather, the risk is they are being too quick to presume things are going all right. Take the Baltic Dry Index, which is a daily average of prices to ship raw materials on 26 key dry bulk routes, and thus a weather eye for overall demand, particularly as it is more forward looking than a lot of economic data.
The index on Thursday hit 1498, racing up from 663 in early December; it’s still way down from record levels above 11,000 reached in June, but it has risen for nearly two weeks in a row - and in the past two days alone has gained 28.4%.
That’s caused all sorts of ripples elsewhere, with shipping stocks surging in South Korea, Taiwan, Japan, Singapore and Hong Kong, and commodity shares riding the wave as well, particularly steel stocks.
Prices of industrial metals have shown some resilience, in part due to the BDI gains and also driven by a shift in perceptions on China.
Only a few months ago the economy there was being thrown out with the bathwater, even as Beijing started chipping in with massive fiscal stimulus, targeting lending and infrastructure, and a series of large interest rate cuts.
Now, even as Beijing warns that 8% growth this year could be a stretch, we’re seeing some tentative stability in data on manufacturing, which is leading a few excited souls to think the economy is at a turning point.
China is working hard to kick-start its economy, particularly by spending on infrastructure and boosting exports, but while it isn’t about to fall in hole, it isn’t exactly going to go through the roof, either.
Rather, expect a steady drip-feed of slightly more positive news in the coming months.
The surge in shipping rates doesn’t mean China is rushing to boost its store of commodities.
UBS’ managing director for China equities, Jing Ulrich, says some raw material suppliers and observers have pointed to a recent pick up in steel production, rising prices and declining iron ore stockpiles as evidence of a recovery in underlying demand.
“This may however be a premature conclusion - temporary restocking and government efforts to support local industry are likely major factors behind the recent buying,” she says.
Exports data from Asia in particular has been woeful of late, including from China, along with imports data showing China is bringing in less in the way of raw materials to process into goods for export.
A fair few large economies around the world are in recession, and the indications from the eurozone are that things will be particularly bad there in the coming months.
Across the sea it’s also too soon to say the U.S. is seeing light at the end of the tunnel: Barack Obama’s stimulus plan - worth nearly $1 trillion - will take some time to wend its way through the Senate and then will take time to start taking effect; in the interim, we are facing another month of large declines in employment with January nonfarm payrolls due later Friday.
Markets have a tendency to get ahead of themselves, and that is what we are seeing now with shipping stocks (where valuations are still not justified), the BDI and commodity prices; there’s an over-reliance on the idea that China can mount a quick recovery and that is being priced in too heavily by investors eager for some good news for a change.
1 comment:
Over-Excitement In Shipping And Commodity Cues
By Rosalind Mathieson
6 February 2009
Shipping stocks, freight rates and commodity prices are telling us people hope the worst of the economic woes are behind us, but there’s no fundamental reason to jump on what is for now a very speculative bandwagon.
The risk is not so much that markets are getting things badly wrong. Rather, the risk is they are being too quick to presume things are going all right. Take the Baltic Dry Index, which is a daily average of prices to ship raw materials on 26 key dry bulk routes, and thus a weather eye for overall demand, particularly as it is more forward looking than a lot of economic data.
The index on Thursday hit 1498, racing up from 663 in early December; it’s still way down from record levels above 11,000 reached in June, but it has risen for nearly two weeks in a row - and in the past two days alone has gained 28.4%.
That’s caused all sorts of ripples elsewhere, with shipping stocks surging in South Korea, Taiwan, Japan, Singapore and Hong Kong, and commodity shares riding the wave as well, particularly steel stocks.
Prices of industrial metals have shown some resilience, in part due to the BDI gains and also driven by a shift in perceptions on China.
Only a few months ago the economy there was being thrown out with the bathwater, even as Beijing started chipping in with massive fiscal stimulus, targeting lending and infrastructure, and a series of large interest rate cuts.
Now, even as Beijing warns that 8% growth this year could be a stretch, we’re seeing some tentative stability in data on manufacturing, which is leading a few excited souls to think the economy is at a turning point.
China is working hard to kick-start its economy, particularly by spending on infrastructure and boosting exports, but while it isn’t about to fall in hole, it isn’t exactly going to go through the roof, either.
Rather, expect a steady drip-feed of slightly more positive news in the coming months.
The surge in shipping rates doesn’t mean China is rushing to boost its store of commodities.
UBS’ managing director for China equities, Jing Ulrich, says some raw material suppliers and observers have pointed to a recent pick up in steel production, rising prices and declining iron ore stockpiles as evidence of a recovery in underlying demand.
“This may however be a premature conclusion - temporary restocking and government efforts to support local industry are likely major factors behind the recent buying,” she says.
Exports data from Asia in particular has been woeful of late, including from China, along with imports data showing China is bringing in less in the way of raw materials to process into goods for export.
A fair few large economies around the world are in recession, and the indications from the eurozone are that things will be particularly bad there in the coming months.
Across the sea it’s also too soon to say the U.S. is seeing light at the end of the tunnel: Barack Obama’s stimulus plan - worth nearly $1 trillion - will take some time to wend its way through the Senate and then will take time to start taking effect; in the interim, we are facing another month of large declines in employment with January nonfarm payrolls due later Friday.
Markets have a tendency to get ahead of themselves, and that is what we are seeing now with shipping stocks (where valuations are still not justified), the BDI and commodity prices; there’s an over-reliance on the idea that China can mount a quick recovery and that is being priced in too heavily by investors eager for some good news for a change.
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