Commodities, base metals, forex, excerpts from our January 2015 Yearly Report

Here follow some excerpts of our year 2015 forecasts as a sample of our services to foreign companies (among which there are some multinational entities).

The complete 2015 Prices Forecasts about Base Metals, Oil, Euro-Dollar, Forex and Precious Metals was sent to our customers in January 2015.

Any interested companies may ask to receive our past analysis for an overview, whilst booking the 2015 yearly/monthly reports. Nevertheles our weekly analysis on all non forrous metals and steel is only available in italian.

Contact: mg@mercatiefuturo.com

January 2015

Negative factors indicating falling markets

– The probability of a significant recovery of the Chinese economy are, in our opinion, very scarce. A complex series of calculations and analysis conducted with our methodologies leads us, on the contrary, to believe that there are high chances that the growth rate predicted by the Government for 2015 will not be honored and that the economic situation of the country is doomed to a prolonged period of weakness, with high risks of going beyond the most pessimistic expectations. As we have been pointing out, for several years, the inevitable need to transform its economic model, adapting it to a radically changed scenario, will embroil, for China, a long period of economic slowdown, compared to the rates of growth we seen in the past decade, especially before the 2008 crisis.

– On the basis of our analysis, conducted on the dynamics of the Chinese real estate market (and its correlation with the economy in general), on the trend of electricity consumption, on the prospects of the freight costs, on a set of other indicators that are part of our method, we consider very unlikely, for the whole year 2015, any serious and solid economic recovery in China. We are not so pessimistic, on the contrary, the Chinese financial system which, though filled with serious risks, should be able to withstand (for a number of valid reasons) impact of the change of the economic model that Beijing will be forced to adopt in the future. The dynamics of domestic consumption, and private investment, in our opinion, can not provide the support needed for a rapid exit from the current stalemate, even for a fairly long time.

– Much more restrictive financial conditions to finance the purchase of metals and commodities in China should prevent a recurrence of the speculations that have contributed, in recent years, to the rise of prices.

– The fragility of the international economic scenario is not conducive to the return of the financial investment and speculation in the commodities sector.

                             Baltic Dry Index

– The continued price fall of the Baltic Dry Index, effective indicator of the cost of international freight rates for the maritime transport of not liquid goods (now back near the lows from 1986, in area 650), does not allow any optimism about future the international situation and, above all, on the performance of raw materials more closely linked to economic cycles.

– A prevailing weakness of the BRICS and Emerging Contries economy should connote the international economic scenario, in a 12 months view, as a result of the combined action of the slowdown of the Chinese economy, the sharp drop of the commodities price on the international markets, the increased geopolitical risk, globally (which favors a return on investments in the US and Europe).

– The US central bank will begin to show signs of tightening of the monetary policy and will manifest the intention to prepare the markets for the first rise in interest rates. We do not think likely, however, that this can happen before the middle of 2015. However, the decline in commodity prices should prevent the resurgence of inflation (both in the US and Europe).

– The price of copper, sharply falling on international markets, significantly restricts the divergence in place for a long time with the prices of other industrial metals, confirming, in perspective, an international economic slowdown. We recall that, for a long time, the price of copper have been an effective barometer of economic cycles.

– The Geopolitical risk should contribute to the return of international investments towards the United States and Europe, with positive implications on the dollar, the US and European economy, but negative effects on the Emerging economies.

– In summary, for the year 2015 we see an improvement of the European situation, stability for the US (where the economic recovery is already in progress for some time), but more difficulties for the other areas of the world, which are those that in the past years have driven global growth. This situation will lead to a rebalancing of the past economic imbalances, as we saw a continued strong growth in emerging Countries against a certain weakness of the major economies of the most advanced West. We want to point out, however, that this situation will be temporary and does not imply, for the future, a radical change of current trends, in the long term. In other words, as this emerging economies stage of transition towards more advanced economic models will end, these same economies will return to expand with a new force, with stronger growth prospects, compared to the US and Europe.

– At the same time it should be noted that the likely improvement in the European economy and the continuation of US growth are not the result of the final solution of the critical structural factors that characterized the last decade (on a financial, monetary, political basis), but simply the consequence of a temporary rebalancing of current trends, due to important economic and geopolitical reasons (crisis in emerging countries, international tensions related to the spheres of influence between the old and new powers).

Positive factors indicating rising markets

– The US economy is still the only source of support in the international economic scenario. The economy is growing, the economic and financial system (unique in the world) has been able to regain stability, after the 2008 crisis. It seems likely that, in the near future, Western Europe will positively affected by this trend, considering the following factors.

– The ECB announced the adoption of extraordinary measures of monetary stimulus, according to our anticipations of recent months. Given the extent of the announced measures, we believe likely that part of the resources put into the financial system can finally reach businesses and households, thus pushing, again, the economy of the Euro Zone. The ECB has decided to follow, at a great distance of time, the route taken (successfully) by the US Federal Reserve, after the 2008 crisis. Since this delay stems, in part, the divergence in place between the US and the European economy. In a situation of widespread pessimism about the future, however, we can not be sure that businesses and families will decide to take advantage of this new opportunity, at least at first. In any case, it seems reasonable that the impact of the measures promised by the ECB will begin to stimulate the economy, in the third and fourth quarter of this year, when unmistakable signs of economic recovery in Europe (and also in Italy) may start to appear.

– The ongoing rebalancing in the currency markets, compared to the trends of the last decade, has led to a significant appreciation of the US dollar (the reserve currency of the exchange rate system). This fact should lead to a major boost for the European economy (particularly in Italy and Germany) and we believe reasonable that, since the second quarter of the year, some positive effect on exports (particularly Italian) is destined to emerge. We tend to think that a relative strength of the US dollar against other currencies can characterize, despite ups and downs, the whole  year 2015.

                Euro-Dollar Exchange Rate

– The strengthening of the dollar against the euro should be, in our view, in its final stage, after which we should see a consolidation of the prices and a subsequent recovery. Our prediction for 2015, at present, is moderately favorable to the euro, which in recent months has suffered over the strength of the US dollar, also for “technical” reasons  (markets always tend to move from one extreme to the other and the “overshooting”, typical in both bullish and bearish phases, is due to factors that are not related to a natural supply-demand relationship, but with technical reasons about which we can not say, here). While we can not exclude a further retreat of change, even up to the 1.0800 area, we tend to think, for 2015, to a range of values between (…). The gradual improvement of the European economy, throughout the year, should contribute to a recovery in prices from the lows already reached, or from a possible new low, as said above.                      

                                Oil

– Oil price has exactly reached the low predicted, with great anticipation, last year and, as we thought, without suffering the repercussions of the of the geopolitical scenario. For the current year, we believe that the price of WTI barrel may fluctuate in an area between 65 and 32 US dollars.

– The oil and other commodities price drop will decisively contribute to the economic improvement in the West economy, freeing resources that families will again allocate to consumption. This effect, however, should begin to be perceived especially in the second half of the year, once the bearish movement in the prices of commodities will be consolidated.

– Production and investment cuts should help to balance, over time, the supply and demand ratio in the non-ferrous, ferrous metals and other raw materials (but not in the oil industry) over time. Possible purchases by the Chinese State must be considered, again, among the factors supporting the price of raw materials. Increased competition among the producing countries, however, should help to control prices.

– The crisis and the falling prices could facilitate the acquisition of dominant positions on the base metals market, with increased risk of price manipulation, as  seen several times, in the recent past. 

                                       Geopolitical Risk

The geopolitical risk and the increased terrorist risk, paradoxically, may have a positive effect (for Europe and USA), helping to reunite the West and, in particular, the countries of Western Europe, as part of the NATO alliance, recreating closing conditions to the East that, in our view, could favor a return of investments in Western Europe itself, given the ongoing economic difficulties in other countries of the world. In such circumstances it is inevitable to regain and maintain greater social stability within the European Union and the Eurozone and, for this reason, we see the possibility of a future easing of the austerity measures imposed, in recent years, to the less virtuous countries, including Italy. More generally, one could also think about a downsizing (perhaps temporary) of the process of globalization and its deleterious consequences for Europe and the United States.

                                           War Economy

– The geopolitical evolution of recent years, the continuing tensions in the Middle East and North Africa, the rekindling of the terrorist risk, are also the result of friction going on between the old and new powers, following the end of the historical balances East-West, in the last decade of the last century. The redefinition of spheres of influence between the big powers is in progress and will be still lasting for several years in which, presumably, the tendency to rearmament should continue to grow, for the increased risk of conflicts. This situation should lead to a further increase in military spending in the emerging powers and to a recovery of the defense investment in the most advanced powers. It is a very important factor for the future development of the world economy.

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                     mg@mercatiefuturo.com