Hey guys,

Welcome back to Market Macro Hub.

It’s been a hectic week, I’m building something for you guys which is coming soon, you’ll love it, guaranteed.

As you can tell by the title, China is back, and that’s huge for global markets; in this piece we’ll look at:

  • The role China plays within the global macro mechanism

  • 2nd order effect of China relaxing their zero covid policy

  • Trade ideas from this situation

As always, lend me your attention:

China’s Detrimental Position In Global Macro

People don’t pay China the respect they deserve when looking at the global economy as a whole. By the end of this article, you’ll be more attentive to China than before.

With a GDP of $14.72 trillion, China is one of the worlds largest and most powerful economies. Second in fact, only to the U.S, with a GDP of ($20.89 trillion), but first when it comes to consumption of commodities, producing electrical goods and driving global synchronised growth.

Let’s get into China’s influence on the worlds economy, starting with non other than the U.S.

Figure 1: China ISM vs U.S ISM

As you may or may not be aware of, the ISM indicator is one of the best indicators of where the U.S economy is headed, with a near direct correlation with U.S equities, as shown below. Let’s go back to figure 1, you can see clearly that when Chinese ISM drops, U.S ISM has a lag of 2-4 months before it falls in line with the direction of China’s ISM strength or weakness. 2020 and November 2020 (China) are two examples where China both bottomed and peaked to which U.S followed suit in line with the moves in China.

Figure 2: U.S ISM vs SPX

So, if U.S ISM leads U.S equities markets, and U.S ISM is led by China, it’s pretty clear the effect a China re-opening would have on U.S equities, risk on sentiment. This is known as the 2nd order effect, which refers to the indirect or secondary consequences of changes within one country’s economy and what that means on a global scale. With that being said there’s more to the story than a China reopening, the Western world is currently experiencing a slowdown, or better know as disinflationary periods as interest rates rise across Europe & the U.S, so a clear bet or trade idea to long U.S equities may be premature.

Needless to say, China’s trade presence is renowned worldwide; an economy such as Australia ( the largest exporter of Iron ore globally), stands to benefit the most from a Chinese reopening. Australia’s largest trading partner is China, which accounts for more than 26% of Australian trade.

Investors are looking at Chinese stocks as a good allocation of capital, and as a result the Australian dollar is receiving a lift higher as Australia is set to see a boost in trade activity and demand for its commodities.

China’s top three commodity imports:

  • Crude Oil - China been the world’s largest consumer of crude oil accounting for 10% of total imports

  • Iron ore - Used for steel production and accounts for 6%

  • Copper - It’s main use is for manufacturing and construction, roughly 2% of total imports

Commodity longs?

In short, yes. WTI Crude and Copper are two commodities that are directly linked to periods of global expansion and growth, the more global economic activity, the greater demand for commodities such as oil to transport goods, for copper to be used in the manufacturing and making of goods.

WTI Crude BBG Chart

At the time of writing spot WTI is trading at the $78.00 per barrel handle, and it’s safe to say that oil trading within the high $80’s region isn’t a wishful thought at all, something I’ll be looking at myself as an opportunity.

Copper is another commodity that will see additional uplift due to the reopening of China; although Europe and U.S are both experiencing slowdowns my ideology behind commodity longs are simple. The largest global consumer of commodities have reopened there economy and are set to see an increase in both trade and activity, an example of this scenario would be the reopening of Europe and U.S where Covid restrictions were relaxed in 2021; SPX delivered 28% incl dividend.

Copper BBG Chart

Now, surprisingly Gold is making a comeback amidst the China reopening. You would expect oil to have such a move to the upside but there’s more to the story once again than a China re-opening. Gold is affected by many factors, but mainly, treasury yields, inflation and the dollar.

XAUUSD Spot BBG

The $1900.00 mark has been broken through by the yellow metal, levels not seen since April 2021. Recent U.S CPI came out inline with expectations dropping to 6.5% for the month of December; treasury yields, both front end and long end bonds have been declining as investors reduce expectations of aggressive federal funds rate for the future. Gold and bond yields have an inverse correlation, as bond yields decline, gold rises due to the yield attainable in bonds; but as bond yields decline gold receives some allocation.

UST Yield Curve

If we continue to see treasury yields fall this will add further strength and investor sentiment towards Gold; as investors reposition away from Treasuries the yellow metal is a prime allocation of capital; however as 2023 is still a year of the unknown when it comes to future central bank decisions so it’s worth seeing how the Fed meeting in February goes and what tone will be set out for the future of global central bank activity.

Guys, that’s it for today thanks for reading; I hope you was able to take away some knowledge and trade ideas within the commodity space as China reopens!

Big announcement: I will be moving Market Macro Hub to Substack in the upcoming weeks, as we grow, I want to be able to interact more with you guys and even offer a premium level of service for those who are either wanting to learn at more about the global macro space and or those who want more actionable suggestions such as this piece here. More about that soon…

But for now, I’ll make the transition smooth for you so no need to worry or do anything for now!

As always, I appreciate you sharing these macro breakdowns on your social media, Twitter and other platforms, it allows other people like you to gain an advantage and access clear cut information. No jargon.

I’ll be with you guys next week, until then, have a good one MMH crew!

Joe