Beat The Top Brass

Trump’s international trade manoeuvres are paying dividends, but as Roger Williams explores, trading commodities can be used to your advantage.

I was was a blue button, a runner of messages, on the London Stock Market. The traders there used to say “Sell in May and go away”. The thought was that you might as well stop trading in markets during the summer months in the Northern hemisphere as people were all on holiday. Globalisation has done away with that and volatility has made ignorance of market movements during a holiday, a risky business. Trading in commodities this year certainly bear witness to this and since early June, copper trading has been a prime example.

Copper, because of its use in computing and telecommunications hardware has become an accepted indicator of world economic activity. Over five years, the price of copper has fallen. In the last two months alone, the price of copper has fallen from approximately $3.30 a pound to $2.70, before a recent ‘dead cat bounce’ brought it back to around $2.80.

The recent comments of Carlos Vegh, World Bank chief economist for Latin America, are worth noting: “If there are fundamentals in the world economy that cause commodity prices to fall in the near future, then it may well be that copper is proving to be the first victim.” He disclosed that estimates for Chile’s economic growth, following the start of the fall of copper prices, have been trimmed by over 20 per cent. Copper constitutes around 45 per cent of Chilean exports by value.

Although I would be careful to attribute cause and effect, this fall happens to coincide with President Trump’s programme of putting “America First” in international trade as he tries to gather support for his campaign against China’s theft of technology and to equalise car tariffs with the EU. Whatever the cause, there is relatively less demand than supply in the last few months. If we look at copper demand, it looks like its falling price can be attributed to China, the number one consumer of copper.

China’s economic activity seems to be slowing. Growth forecasts were reduced by 0.2 percentage points from actual turnout of 6.9 per cent in 2017 to 6.7 per cent for 2018. Looking for evidence to back this up, China’s container port activity might provide some. However, the first quarter showed growth in container volume, despite a 30 per cent decline in US exports to China because of a ban on certain waste exports by the US to China. All five of China’s fastest growing ports showed year-on- year growth in the first quarter.

This is before the precipitous fall in the copper price began on 11 June and aggregate growth at China’s top growing 20 ports in the first quarter was only par with last year’s level of six per cent. A China slowdown would seem to be in evidence although second quarter numbers are not available yet.

In contrast, US growth, albeit only two-thirds of China’s, seems to remain robust. Concern is being expressed that the elements leading to the growth, the new tax regime; subsidies to farmers and huge defence spending, are resulting in a growing US budget deficit. Potential for this to suck up all the available liquidity in world debt markets, is seen as a problem for the US but I think there is another way to look at this.

Certainly, increasing bond sales by the US, at a time of reduced purchases as a result of quantitative easing might give US authorities cause for concern. However, US bond rates at over three per cent compared to almost zero rates in Europe, seem to play into President Trump’s weaponisation of the Dollar.

The US is sucking up liquidity internationally and, together with falling commodity prices and a China slowdown, it is causing pain to resource economies in South America; pain to heavily indebted Southern European economies like Italy and more importantly, pain to China which has huge amounts of poorly performing Dollar- denominated debt in its banks and tertiary lenders.

What does this mean for the UK? I can’t say it’s easy to analyse as Brexit impacts expectations greatly. As I write this, it is the day before the Bank of England is expected to implement another rate rise of a quarter of one per cent. It is coming at a time when UK consumers are borrowing to spend and even a small rise may dampen sales of field sporting goods.

Looking at payments to suppliers, if the rate increase doesn’t happen, there must be a likelihood of some short-term weakness in sterling against the Dollar. In the longer term, there is every potential for this weakness to continue, the US Dollar is considered a safe home and US interest rates are much higher than those in Europe; US growth continues; the US need for borrowing is increasing and it may have to pay even higher interest rates to get lenders on board.

This means if I am a UK resident and I have a UK sporting arms business: I would want a proportion of my savings in Dollars. If I am buying from the US, I would not want to owe the seller Dollars without fixing the rate against Sterling. If I was not importing but buying US made products, I think I would buy them sooner rather later.

If I was buying from China, I would negotiate hard. The Chinese are sure to be seeing less business from the US, from South America and from Southern Europe – that’s a big piece of the world. Also, if the Dollar is strong and the product is priced in Dollars, the seller will benefit. This ‘benefit’ may be limited as the Chinese manage the value of their currency against the Dollar.

When buying from Turkey, remember Dollars and Euros are much more valuable than the Turkish Lira and the supplier (by pricing in Dollars or Euros) has implemented a long term price increase in Lira historically, even if the Dollar or Euro price has remained static. So, it is worth negotiating to get some of this supplier ‘benefit’ back from Turkish suppliers.

There is the potential for increased volatility in Sterling as we approach Brexit. The downside potential for Sterling is higher than the upside, as politicians continue to project fear. Currency traders will not ignore the intransigence of Michel Barnier; and will not miss the campaign to persuade the EU that we are preparing for something that Parliament won’t pass and they may under estimate the damage the EU can do to itself for a political end.

If buying in Euros, fix the exchange rate now or at least a proportion of the bill. If selling, perhaps don’t fix it and leave yourself open to profitable accident.

If you follow my thoughts and broadly agree, just a word of warning: if everyone thinks like this and it turns out better, Sterling will rise against the Euro on Brexit. It may even have an upward blip against the Dollar but a ‘blip’ is all I anticipate. Lastly, my thoughts are just that and don’t constitute investment advice.You’re advised to seek professional help from your financial adviser before making investments or entering into any contracts.

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