Special edition: BCA Research on commodity prices, China's economy, and Eurozone inflation trends

The level of GDP is what matters for commodities

By Roukaya Ibrahim, Strategist, BCA Research

This chart highlights that commodity prices are more sensitive to the level of GDP than the growth rate. 

The shaded regions refer to periods during which the G20 Composite Leading Indicator (CLI) is above 100. This indicator is designed to capture fluctuations in economic activity around its long-term potential level and provide a six-to-nine-month lead on business cycle turning points. A value above (below) 100 corresponds with expectations that the level of GDP will be above (below) its long-term trend. Meanwhile, a rising (falling) CLI implies that GDP growth is anticipated to accelerate above (decelerate below) long-term trend growth.

The chart reveals that energy and industrial metal prices typically rise on a year-over-year basis when the level of GDP is expected to be above its long-term trend, regardless of whether the CLI is rising or declining. This result is intuitive given that, ceteris paribus, an above-trend GDP level likely corresponds with an above-trend level of commodity consumption. 

Moreover, prices of these commodities generally decline during periods when the CLI is below 100, regardless of whether the CLI is rising or declining. This implies that commodity prices typically fall on a year-over-year basis when the level of GDP is expected to be below its long-term trend. Again, this result makes sense given that a below-trend level of GDP implies that the level of commodity consumption is also relatively weak. 

A reality check on China’s corporate profits

By Jing Sima, China Investment Strategist, BCA Research

After a two-and-a-half-month rally, Chinese stock prices are now aligning with the country’s subdued economic fundamentals.

Credit and money supply data remain downbeat despite recent measures to support the property market. The ongoing descend in money growth confirms that business activity remains weak, suggesting that corporate earnings will deteriorate over the next six months.

Without an improvement in corporate profits, Chinese stocks are unlikely to sustain rallies beyond two to three months.

How far is “far right” in Europe?

By Marko Papic, Chief Strategist, BCA Research

French politics has given global investors agita as they scramble to make sense of the trajectory of the country’s fiscal and geopolitical policy. Many still harken back to the Euro Area sovereign debt crisis when Euroskeptic policymakers – including Marine le Pen – roamed the continent, threatening to blow up the monetary union. However, this is a long gone era. The reason that Le Pen’s National Rally (RN) has found success is because her popularity is no longer capped by her Euroskepticism. Since the 2017 presidential election, Le Pen’s popularity has finally broken through the glass ceiling she imposed on herself by sticking to the maximalist anti-EU message. Much as with almost all of the anti-establishment parties on the continent, RN is today only “far” right on the issue of immigration. 

Misconception of Chinese household savings vs. consumption

By Jing Sima, China Investment Strategist, BCA Research

The belief that large bank savings by Chinese households will support consumption is misguided. Historically, changes in household bank deposits in China have shown little correlation with spending.

Unlike US consumers, Chinese households did not receive direct cash transfers from the government during and after the pandemic. The sharp rise in bank deposits since 2018 is due to asset reallocation rather than increased savings from household income. Although the total household bank deposits have more than doubled, most of this increase is in time deposits (savings accounts and CDs). Checking account balances have remained almost unchanged over the past decade.

To sum it up: even though Chinese households have accumulated more bank deposits in recent years, much of this is held in savings accounts by wealthier individuals, who have a low propensity to spend. Therefore, household savings are unlikely to drive significant growth in consumption.

Korea’s export recovery in perspective

By Arthur Budaghyan, Chief EM/China Strategist, BCA Research

Even though Korean exports have rebounded, most of this recovery has been due to semiconductor exports. After collapsing in early 2023, semiconductor overseas shipments have surged. Korea is producing high-value-added memory chips, and demand for these has surged in the past 12 months. 

Excluding semiconductor exports, exports have improved only marginally. This and other global trade data suggest that the global trade recovery has been primarily driven by surging demand for AI chips and improvement in US imports/domestic demand. Outside these, there has been a little recovery in global exports.

Why have EM stocks underperformed?

By Arthur Budaghyan, Chief EM/China Strategist, BCA Research

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There is a reason why global equity investors have been moving out of EM stocks for several years. EM and Emerging Asian EPS in US dollars have been flat for 13 years, with considerable cyclicality. Investors do not pay high multiples for profits that have not grown at all but have experienced considerable cyclical fluctuations.

By contrast, US EPS has been growing rapidly with reasonably low volatility. That is why equity investors have been abandoning EM and flocking to US stocks. Hence, for EM equities to enter a structural bull market, their EPS should grow reasonably fast with low volatility. For now, EM and EM Asia EPS are still contracting.

Underlying inflation is slowing

By Mathieu Savary, Chief European Investment Strategist, BCA Research

Despite recent hiccups in core and services CPI, the Eurozone’s underlying inflation remains consistent with rate cuts by the European Central Bank (ECB). Trimmed-mean CPI now seats below core CPI, while supercore CPI and PCCI are still well behaved. These observations suggest that the ECB will not be stopped in its track and will cut rates more this year.

How much more though? Inflation is not really the constraints on the ECB today. Growth is. The European credit impulse is picking up from depressed levels, real wage growth is above 2%, and global trade has regained some vigor. Consequently, the ECB risks boosting growth too much if it starts easing policy aggressively. This would generate inflationary pressures down the road. As a result, the ECB will move in line with the pricing of the €STR curve and it will cut rates twice more in 2024.