Central bank interest rate moves, Japanese equities and Chinese copper inventories

Fracking as a leading indicator

Primary Vision's Frac spread count is now available on Macrobond. This indicator measures the number of crews actively conducting hydraulic fracturing (known as “fracking”) of shale in the US, which serves as a leading indicator of oil production.

This chart analyzes the correlation between Frac spread count and future earnings in the energy sector, which is represented by 12-month forward earnings per share sourced from Macrobond/FactSet Equity Factor Aggregates. Historical data shows a robust correlation between the two indicators, suggesting that Frac spread count can provide investors with valuable insights into the future performance of the US energy sector.

Macrobond users can now create dynamic charts using our standard tools, click here to learn more.

Central bank interest rate moves

It has been a busy week for central banks, with more than 20 gathering for meetings and the Bank of Japan making headlines as the latest one to exit negative interest rates.

Many central banks are holding interest rates steady for now, but in a surprise move, the Swiss National Bank (SNB) reduced its main interest rate by 25 basis points to 1.5 per cent on Thursday – a decision enabled by the country’s effective control of inflation.

Markets largely expect interest rate reductions from the Federal Reserve, European Central Bank, and Bank of England over the coming months.‍

Emerging market equities’ returns and the US dollar index

The Federal Reserve’s fund rate appears to have reached a peak since July 2023 and is expected to decline over the months ahead. This is likely to mitigate the strength of the US dollar against the backdrop of robust economic conditions, a strong labor market and a gradual easing of inflation rates, although these remain above target.

In this context, it is useful to analyze the return correlation between emerging market equity indices and the US dollar index on a country-by-country basis, where countries with a more negative correlation appear more attractive.

According to our calculations, most MSCI emerging market mid and large capitalization indices across countries have had a greater negative correlation to the US dollar index in recent years than long-run norms (in terms of medians and percentile ranges). As the chart shows, MSCI Peru, MSCI Taiwan and MSCI South Africa have the largest negative correlations.‍

A sector approach to Japanese equities

Japan’s stock market rally has been supported by solid earnings growth expectations, a weaker yen and Japanese equities not looking overvalued on a price to earnings ratio basis.  While Japanese-listed firms are multinational and exposed to global factors, the country’s economy faces the challenges of a reduced US-Japan interest rate differential, which would support the yen, and {{nofollow}}the Bank of Japan mostly ending its monetary ultra accommodation.

These challenges come on top of demographic issues including a shrinking workforce and rising social security costs. Against this backdrop, it is worth considering a sector-specifc approach to investing. This chart compares price to book ratios and return on equity, showing valuations together with profitability. Utilities and consumer cyclicals appear more profitable relative to the price to book ratio than other industries.

Record Chinese copper inventories 

This chart examines Chinese copper inventories, which have risen to historic highs since China agreed to {{nofollow}}production cuts in response to raw material shortages and underperforming plants.

This news has lifted copper prices, which have reached heights not seen since April 2023, as treatment and refining charges (TC/RCs) have plummeted due to a constrained supply of copper concentrate.

This drop in TC/RCs, driven by the rapid expansion of smelting capacity in China, India, and Indonesia, poses challenges for smelters, potentially impacting copper prices despite concerns over a global economic downturn. The closure of First Quantum Minerals' Cobre Panama mine has further tightened short-term projections, coinciding with increased demand from sectors such as power generation and electric vehicles due to the energy transition.