Daily market movements have been driven by negative news from China, placing markets in the East under pressure while more positive news from the United States has seen markets rise again.
Markets are further wavered by the unstable situation in the Middle-East, driving the oil price higher due to fears regarding oil supply.
The oil price is probably between $15 and $20 higher due to socio-political tension in the Middle-East. At present, the focus is on Egypt but don’t forget about the Syrian civil war still in full swing. Problems in Turkey have also recently surfaced.
In Europe renewed uncertainty exists over Portugal’s bailout package and the continued implementation of the agreed measures to put that economy back on the recovery path.
Growth in the rest of Europe is still limited, but the European PMI data continues to improve. The most recent figure of 48.8 still indicates sluggish growth, but this remains the best figure recorded in almost twelve months.
The Irish and Spanish figures are both above the level of 50. Germany is at 48.6, which is for the second month in a row slightly lower.
The Chinese PMI data came in at 50.1. However, China has since announced that the release of these figures will be suspended until further notice. This, of course, makes the analysis of the actual situation in China even more difficult.
The impact of these contradictions renders asset-allocation decisions very difficult. Commodity stocks are at first glance very cheap, but should the Chinese economic downturn continue or even deepen due to shady banking (leading to a cash crunch and a decrease in credit extension), commodity prices of steel, iron ore, coal and copper will decline.
The price of platinum is to a large extent a function of the European economy and vehicle sales in Europe, while the gold price may be adversely affected by the possibility of economic recovery in the US. As mentioned above, the European economy appears to be slowly recovering even though with only a minor positive growth.
Finally, it seems the gold price is reacting to movement of bond yields in the US. As rates increase, the gold price declines and vice versa.
It is the general belief that during the next two years, rates will normalise and that can put the price of gold under pressure. From a South African point of view, the rand price of gold is important and this plummeted the last few months to almost R400 000 per kilogram.
At the current rand price of gold of R400 000 per kg, about 60% of South African goldmines are not profitable, putting the gold mining companies’ shares under pressure.
Therefore, I think it is safe to say that what we see currently happening in the world is that the economic crisis of five years ago that started in the USA and steamrolled through Europe, has now arrived in China.
The expectation is that lower commodity prices can put countries like South Africa and Australia under pressure. Fortunately for South Africa and Australia, both countries have floating exchange rates that can act as a shock absorber.
Commodity prices of copper, iron ore, coal, tin and, to a lesser degree, aluminium can be under pressure. The price of platinum should at current levels form a basis to rise from, while gold can weaken further.
Source: Dawie Klopper PSG online