China macro

The China data remains terrible, mostly due to lockdowns that have now spread to Beijing.

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Commodity bulls will point to the above (noting that China is ~50% of all incremental commodity demand) and suggest something like well if prices are THIS high, given such a large demand shock, than the supply shock MUST be that much worse/larger/higher than we previously thought.

And hence they remain bullish. And indeed, as you can see below, those commodity prices are very elevated.

In our view, commodity prices are high due a mix of factors that will eventually normalise, including lingering pandemic effects.

On the supply side COVID absenteeism (caring for others, or sick themselves, or precautionary distancing) makes keeping production volumes up challenging, and on the demand side, things that can be safely consumed at a distance (which is mostly goods, as opposed to services) are the primary culprits.

The common macroeconomic component, a function of easy monetary and fiscal policy do the rest.

With COVID impacts eventually set to fade, and monetary and fiscal policy stances shifting firmly to contractionary, we think the last pillars of support to higher commodity prices will weaken.

China’s recent set of announcements to stimulate the economy do work against the views outlined above, but we would argue that stimulatory policy if commodity prices were low, would make for an attractive backdrop. But stimulatory policy that occurs because of material widespread weakness, at a time of very high prices simply makes the whole story too risky for our appetites.

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