Baltic Dry Index surges: Is China back in the metals markets?

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After crashing from 4,209 in May the Baltic Dry Index has surged by 62.1% from a recent low of 1,700.

Source: StockCharts.com.

What does this surge in this ardently watched indicator of global economic activity means?

Well, interestingly enough last week China’s bulk freight rate indices for metal ore and coal rose by 3.4% and 1.0% respectively. A glance at the relationship between the manufacturing PMI for stocks of major inputs and the Baltic Dry Index suggests China’s manufacturers are again rebuilding commodity stocks as the August PMI is likely to edge towards the 50 level and beyond.

Sources: I-Net; Li & Fung; Plexus Asset Management.

The rebuilding of stocks of major inputs is probably as a result of higher export orders.

Sources: Li & Fung; Plexus Asset Management.

The rebuilding of stocks and higher export orders are likely to boost China’s CFLP manufacturing PMI for August to be announced next week. That will be right in line with what we expect from a seasonal point of view.

Sources: I-Net; Li & Fung; Plexus Asset Management.

The Shanghai containerised indices are slowly drifting, though.

Sources: I-Net; Chineseshipping.com.cn; Plexus Asset Management.

After slavishly following the seasonal pattern of the previous two years’ first seven months the jury is out in so far as the CFLP non-manufacturing PMI for August is concerned. A significant drop will mean the non-manufacturing industry is slowing considerably and therefore indicates weakness in the coming months as it did in 2008. As the containerised freight indices are holding up in a normally weak seasonal period with the Northern hemisphere holidays I expect the non-manufacturing PMI to again come in at an elevated level of just below 60.

Sources: CFLP; Plexus Asset Management.

China’s GDP-weighted PMI (manufacturing and non-manufacturing) can therefore be expected to continue to follow 2009’s seasonal trend and not to fall back to the trend set in the second half of 2008.

Sources: CFLP; Li & Fung; Plexus Asset Management.

The outlook for the US GDP-weighted PMI (manufacturing and non-manufacturing) has also improved with the recovery of the Baltic Dry Index. With China’s GDP-weighted PMI for new export orders leading the GDP-weighted PMI for imports by one month the higher Chinese PMI suggests the US’s GDP-weighted import PMIs in August and September are likely to rise after the drop in July.

Sources: CFLP; Li & Fung; ISM; Plexus Asset Management.

Possible investment implications:

  • Metal prices are likely to head higher in the coming weeks.
  • Global equity prices could bottom out.
  • Emerging-market assets are set to outperform.
  • The gold price could fall back.
  • US dollar to weaken against the euro and strengthen against the yen.
  • Government bond yields to bottom.

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