The death knell of the commodities supercycle hasn’t tolled

Your top financial and economic news for Nov. 19


Top of the morning

China has been far and away the largest source of increased demand for commodities over the past decade. As its rate of expansion moderates, and the composition of growth shifts towards domestic spending rather than credit-fuelled and export-led growth, conventional wisdom holds that commodity prices will also deflate. That consensus view is challenged by Erik Swarts of Market Anthropology, who thinks prices of gold and oil still have room to run:

This idea remains supported by our research that implies yields are not headed materially higher anytime soon – despite the anxieties surrounding the Fed raising interest rates over the next few years. Moreover, we expect that real yields (nominal – inflation) will remain suppressed and eventually retrace the rise that began in the back half of 2011. When the real yield cycle finds its zero bound and breaks below, commodities tend to outperform in the market over an extended period of time. All things considered, the death knell spike in real yields that has historically punctuated the end of major commodity booms in the past – has yet to appear for us on the horizon…

While the recent prognostications of $700/ounce gold and $50/barrel oil make for great hyperbole by the bears and in the punditsphere, we view them as the typical overshots that are thrown around during the final throes of capitulation. In as much as markets tend to overshoot significant moves, expectations soon follow – always in the same direction of where a market has been trending…

While the excesses in China have been well described and rigorously debated for the better part of this decade, the just how bad the crash will be expectations by the policy bears have so far been largely unfounded.

On the homefront

The TSX hit a seven-week high on Tuesday, with robust gains driven by the gold miners as bullion eclipsed 1,200 USD/oz for the first time this month. TSX 60 futures are moving higher ahead of the open.
The Canadian dollar continues to drift lower against its U.S. counterpart following yesterday’s decline to hover just above 0.88 USD this morning.


Keystone XL bill doesn’t pass the Senate. So what? A proposal to approve TransCanada’s (TRP) contentious Keystone XL pipeline came up one vote short in the United States Senate. This vote was largely a symbolic one, a political ploy meant to bolster Democratic Senator Mary Landrieu’s chances of retaining her seat in an upcoming election. President Obama indicated that he would veto any approval. Keystone has become emblematic of the power struggle between environmentalists and big business. For the most part, the importance of this project has been overstated – by both sides. It doesn’t make up a massive portion of TransCanada’s order book, and the Alberta oil sands’ access to market has become less of an issue – the narrowing spread between Western Canadian Select and West Texas Intermediate is, in part, a reflection of this. If you’re a TransCanada shareholder, your pressing concern is how any battle between the company and activist investor Sandell Asset Management plays out, not whether Keystone is one of the few issues on Capitol Hill that has some semblance of bipartisan support. Today, TransCanada holds its annual investor day in Toronto.


Slumping oil doesn’t scare Suncor. Canada’s largest vertically-integrated oil firm, Suncor Energy (SU), plans to ramp up production and capital spending next year despite a massive drop-off in oil prices seen since late June. Management’s full-year guidance for 2015 pegs the upper end for production at 585,000 barrels of oil equivalent per day (versus 570,000 in 2014) and between $7.2 to $7.8 billion in capital expenditures (versus $6.8 billion). For the oil sands in particular, capex is expected to increase by about 18 percent.


Another C-Suite shuffle at Barrick Gold. Ammar Al-Joundi, chief financial officer at the world’s largest gold producer, is departing on February 18, 2015. Shaun Usmar, formerly of Xstrata, who will succeed Al-Joundi after this date, is set to join the company next week. Three other executive changes have occurred at Barrick Gold (ABX) in the past three months.


Cliffs looking to exit expensive Quebec mine. The Globe and Mail’s Bertrand Marotte reports that Cliffs Natural Resources hasn’t found any interested buyers or partners for its Bloom Lake iron ore mine in Quebec, and might be looking to close it. The company estimates that would cost between $650 to $700 million (U.S.). During the highly entertaining conference call held in late October, CEO Lourenço Gonçalves said the company wouldn’t embark upon Phase II of the development of this asset alone.

Daily dispatches

The Bank of Japan made no alterations to monetary policy following its latest meeting, as expected, even though the economy posted an unexpected decline in the third quarter. Governor Kuroda warned that inflation could drop below 1 percent, echoing remarks made by Bank of England Governor Mark Carney last week. A separate release showed that all industries activity in Japan advanced by 1 percent month-over-month in September.


Two members of Mark Carney’s Bank of England want to hike rates immediately, as the minutes from the Bank of England’s November meeting revealed. Business Insider’s Mike Bird points out one passage that explains how monetary policymakers across the pond could see inflation materialize faster than their projections currently indicate.


Another source of support for King Dollar, or merely a reflection of its rally: the United States saw a record monthly inflow of foreign cash in September, as Bloomberg’s Joe Weisenthal notes.


There’s a double dose of U.S. housing data out this morning, with building permits and housing starts for October expected to edge higher.


The minutes from the Federal Reserve’s latest meeting, which are always closely parsed by traders in many asset classes, will be published at 2:00pm (EST).

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