Reuters Insider - Inside the News: China Move Seen Unlikely To Hit Commodities
13/06/2016 11:10
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Source: Thomson Reuters
Description: China's latest monetary tightening, which put
equity markets and the dollar under pressure, is
unlikely to have a major impact on surging
commodity prices in the long term, says BarCap's
Henk Potts.
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Transcript (May be auto-generated)
1000 GMT. Fears over the Euro zone debt crisis appear to be receding and the ECB
beats the inflation drum. The Euro is up but well off the day's peaks. It
extends gains following the European Central Bank President Trichet's warning on
inflation risk, a message echoed today by Bundesbank President Axel Weber. The
Euro short squeeze yielding its biggest weekly gain since Q1 of '09. This week's
auctions from Spain and Portugal also rejuvenate sentiment towards Euro assets.
2-year gilt yields spiking after UK producer prices surged 3.4% in December. The
2-year yield up at 1.38, up around 30 basis points this month so far. European
equities heading lower for a second day, banks among the losers as rising
concern over inflation and the stronger growth outlook push up market based
rates. We've had some numbers out of the Euro zone. Final inflation numbers up
six-tenths on the month, bang in line. 2.2% on the year, that is also bang in
line. The complicated outlook for commodities also weighing on equity markets
today. Supply disruption in Australia and elsewhere supporting coal and some
metals while copper heads lower on longer term fears over Chinese demand. Some
news just out of China. China has tightened policy again. The Central Bank says
it's raised its reserve requirements by 50 basis points. Let's talk about the
commodities story and the other drivers in the equity markets. Barclays Wealth
Vice President Henk Potts joins me now. Henk, how do you weigh up the impact of
commodity prices given this latest hike as well in China on the stock markets?
Well there's a major concern. Obviously the Chinese are taking steps to try and
cool down the concerns over inflation. That's bound to have a knock-on effect in
terms of economic growth and demand for commodity prices. So I think in the
short term given the significant rally that we've seen in commodity prices, I
suppose there's an element of indigestion there but longer term I think we can
still believe the commodity story is quite supportive. The reality is that
global growth is bouncing back relatively strong. The strongest areas that you
were just talking about are coming through from emerging markets which are still
commodity intensive in terms of the growth expectations coming through. I think
you can also point to rebound in terms of manufacturing data coming through.
Infrastructure projects, the stimulus that's been announced in the last couple
of years will also require significant amounts of commodities. So longer term I
still believe there is a story to play out in terms of being bullish for
commodity markets. Alright. Yesterday's bond auction and of course the day
before lifting sentiment in the Euro zone. But if you're gonna believe equities
are gonna do well, you got to believe this Euro zone's debt story is gonna at
least ease if not go away, right Henk? And what do you believe? I'm not sure
that's entirely correct. I think you can still be positive about equity markets
while still appreciating there is a risk when it comes to European situation. We
believe that the Euro area will play out in three ways over the course of the
next year. Our first scenario, well we'll probably assign a 70% chance, it's
that policy makers will continue to work very hard muddling through in terms of
dealing with the problems. No single country is likely to default on that debt
and maybe they'll need further help in terms of adding to the bailout
mechanisms. Our second scenario is where we'd see a default in terms of a single
country in terms of its debt or struggling to meet its bailout targets and
therefore is ejected from the Euro; or in fact Germany getting very fed up of
having to pay for other European countries and therefore decides to launch its
own currency. In that scenario where we'd assign a 20% chance, we'll obviously
see disintegration of the Euro zone. The third scenario would be that we saw
better economic growth, it would help to alleviate these problems and then we'd
assign a 10% chance. Okay, thanks a lot Henk. Aussie by the way falling sharply
back on the China move, heading back below 99 cents. Euro zone peripheral
spreads continuing to come in today after yesterday's successful Spanish bond
auction. Reuters Fixed Income Analyst Vincenzo Albano though says attention now
turning to Belgium's underperforming debt. Its CDS is now in line with Italy.
While the boundaries of core and peripheral Euro zone are redefined, Belgium may
be subject to further volatility. In fact it's just on the edge. CDS basis is
higher than in Italy and in Spain. And in fact the Belgium CDS are in line with
periphery while yields are at the top end of the core Euro zone. Japan's
government getting a big shake-up. Prime Minister Naoto Kan has reshuffled the
cabinet, bringing in Kaoru Yosano as Finance Minister. The new man is a noted
advocate of raising the country's sales tax potentially easing bond market
concerns over the country's fiscal position. That's it. Stick with Insider for
updates on the hour. 1030 GMT, Breakingviews. I'm Axel Threlfall. This is
Reuters