One of the fundamental dynamics of commodities markets has being turned upside down, thanks in part to Donald Trump.
Industrial metals prices and the dollar are
rising in tandem on expectations that U.S. economic growth and inflation
will accelerate during Trump’s presidency. Usually, they move in the
opposite direction as the dollar’s strength makes commodities, which are
mostly denominated in the currency, more expensive for buyers outside
the U.S.
The trend is so rare that it’s only happened a
handful of times in the past decade, and it’s one of the many reasons
that mining companies such as Glencore Plc are rebounding. The
commodities giant is benefiting from lower costs and higher metal prices
at its zinc operations, and is on track to resume paying dividends next
year as part of a broader turnaround plan.
"Post-election, we’ve seen markets
rotate away from defensive investments, seeking growth," Tom Price, a
metals analyst at Morgan Stanley in London, said by phone. "The U.S.
dollar’s lifted, and so has demand for dollar-priced assets like
commodities."
The Federal Reserve said on Wednesday that
inflation expectations have tightened and conditions in the labor market
are strengthening. U.S. President-elect Trump has pledged to enact
growth-fueling tax cuts and infrastructure spending after being sworn
into office.
Another factor: Chinese investors are buying
dollar-priced commodities like copper and zinc as a hedge against yuan
depreciation, strengthening the correlation between metal prices and the
dollar, JPMorgan Chase & Co. analysts said in a Dec. 2 note.
Metals-Dollar Link
The LMEX Index of metals jumped 12 percent in
November, the biggest gain in six years, and prices have fallen slightly
this month. Metals broadly declined on Friday, with copper sliding 1
percent in London to $5,671 a ton.
By comparison, the Bloomberg Dollar Spot Index added 3.9 percent last month, reaching the highest level in more than a decade.
The 30-day correlation coefficient
between the two indexes is 0.29. In July, it was negative 0.6, data
compiled by Bloomberg show.
The dollar’s strength translates to weakness
in currencies such as the Chilean peso and South Africa rand, reducing
the cost of labor and power for miners. At the same time, they earn
dollars for the products they sell.
To see how this affects miners’ bottom line,
look at zinc. Futures on the metal have soared 74 percent this year,
notching the biggest gain in the Bloomberg Commodity Index. At the same
time, mining companies are seeing expenses plummet due to cost-saving
measures and currency weakness in countries such as Kazakhstan and Peru.
Improved profitability would normally
encourage miners to reach for their shovels, but it takes time to begin
operations and several large zinc mines were closed last year. Glencore
has pledged not to restart mothballed mines until it’s confident that
more supply won’t drive down prices.
Zinc’s supply shortage will support prices if
Trump’s economic policies disappoint or Chinese regulators restrict
speculation in metals markets, Molly Shutt, an analyst at BMI Capital in
New York, said by phone.
"Right now, there’s so much frenzied excitement around zinc, and it probably has a bit further to run," Shutt said.
Trump Is Causing a Rare Trend in Commodities
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