Thursday March 17, 2005 - 11:11:49 GMT
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Black Swan Capital - www.blackswantrading.com
The reflation trade question
“Never carry a shotgun or your knowledge at half-cock.”
“By April 2004, the investor community became comfortable again. The consensus was that China would not take serious measures and the Fed would not raise interest rates in an election year. The market was very long commodities and cyclical stocks and was vulnerable to a shock,” wrote Morgan Stanley’s Andy Xie. Hmmm!
Everyone still loves the reflation trade. And why not, despite all its tough talk, there is plenty of punch to keep the party roaring. But, as Mr. Xie tells us, we saw this type of complacency in the market about the same time last year.
Let’s take a look at the damage to key markets last year when the reflation trade came unwound a bit on Chinese growth concerns and Fed tightening:
US 30-year bond futures: Gold futures:
Soybean futures: Euro spot:
Crude oil futures: Aussie spot:
Mr. Xie is not alone in his concern about the reflation trade.
The FX research department of Macquarie Bank penned these comments and presented a very interesting chart today (thanks Geoff):
“There is a growing portion of the currency market that believes commodities are on the cusp of a multi-year cycle, driven by demand from China, India et al , and that this will push the Aud well above 0.80 on a 3-5 year horizon . We can see where this view is developing from – and, to be honest, find it refreshing to see a long term strategy being discussed in a market that has essentially become reactive [since 9/11 particularly] – but are nervous that the near-term will see a clean- out of the speculative element clearly present in many of these markets (as happened this time last year). In light of this, a recent survey of price forecasts in metals markets is instructive, and again we poach words of wisdom from our colleagues.”
Aussie dollar compared to the CRB Index of key commodities:
Macquarie also printed the following interesting forecast of metals prices based on a PriceWaterhouseCoopers survey of metals analysts (Macquarie does caution that a relatively small sample of analysts were queried). But it does give you an idea that sentiment on the metals is not one-way despite the price action:
Metals market sentiment survey results
% Change from current price
Q1 05 Q2 05 Q205-Q106 Long-Run
Aluminium -7.2% -5.0% -7.2% -21.4%
Copper -4.9% -10.1% -14.7% -38.3%
Lead -5.8% -8.0% -16.7% -36.4%
Nickel -11.8% -15.2% -18.6% -49.1%
Zinc -8.9% -10.4% -8.9% -22.8%
Gold ($/oz) -3.6% -1.3% -0.1% -9.2%
Source: PriceWaterhouseCoopers Metals Market Sentiment Q1 05 (printed by Macquarie FX Research 17 Mar ’05)
Bottom line: If Mr. Xie and the FX research team at Macquarie Bank are right, we could see some vicious price action in the markets very soon. So maybe we need to put the current account deficit concerns behind us and focus on something that has a lot more potential to move markets.
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