Market 05/21: Is China trying to dominate the commodities market?

Fed officials' statements: Waller, Bostic, Barr

1. Waller

• Inflation is trending slower, heading towards 2%

• Need more evidence of inflation cooling to be able to cut rates

• Holding rates at current level for “3-4” months will not affect the economy.

2. Bostic

• No rush to cut rates, need clear evidence to ease policy

• Inflation will decline but "relatively slowly"; no expectation of rate cuts before Q4.

• Fed's top priority is to bring inflation back to 2%.

3. Barr

• Economy is quite strong — still need to complete the inflation-fighting mission.

• Need to stay tight for longer than previously expected.

Warning that high interest rate pressure is clearly impacting consumer and business spending

• US credit delinquency rate rose to 8.9% in Q1/2024, doubled in 3 years and rising at fastest pace since 2008 Financial Crisis

• Household excess savings hit lowest level in past 5 years

• Year-to-date, number of multinational companies defaulting reached total of 55 - highest since 2020 pandemic, (mostly in the US).

• World's largest seafood chain Red Lobster bankrupt after 'endless shrimp' promotion:

  • Restaurant owner emphasizes difficulties in high interest rate environment!

Is China trying to dominate the raw materials market for semiconductor chip, energy, and electric vehicle industries?

While investors worry about copper shortage (pushing copper to record high last week), China still stockpiling large amounts of copper metal…

… even though China alone accounts for more than half of global copper demand…

Not necessarily, this large stockpiling may not be for domestic demand, they might want:

1. Export copper after prices peak.

2. Overhauling national power grid: part of the construction plan National integrated computing system (全国一体化算力体系) — mentioned at the Two Sessions meeting in March.

3. Seize global power in raw material supply chains for key industries: electric vehicles, semiconductors, and clean energy!

And it's highly likely China is aiming for option 3, because not only copper, they are stockpiling a range of rare raw materials for semiconductor, electric vehicle, and energy industries!

Share of key metals used in battery and semiconductor industries controlled by China is very high:

• Cobalt: 75%

• Lithium: 67%

• Nickel: 58%

China is also ramping up stockpiles of silver and aluminum via Futures contracts:

• Silver futures continue to rise over 7% to hit new record at Shanghai exchange.

• Aluminum ore futures up +7% in Guangzhou.

  

China's stockpiling of critical metals, which are raw materials in the semiconductor, electric vehicle, and clean energy sectors, is entirely possible when:

1 - The new US-China trade war is focusing on these sectors — and the US has a technological advantage.

2- The EU is also protecting its domestic clean energy industry with a series of investigations into energy product exporters from China to the EU.

In addition, China is also curbing surging domestic demand for gold and silver to prevent a short squeeze in gold and silver prices:

• Increasing margin ratio for T+D gold contracts from 9% to 10%

• Increasing trading limit from 8% to 9%

Crypto Market: Ether price surges on signs of US approval for Ether Spot ETFs

Over 360 million USD in contracts liquidated from the crypto market as BTC and ETH surge

80% of positions belonged to short traders, equivalent to 290 million USD

The main reason comes from ETH rising over 20% as SEC gives the green light to approving Ether Spot ETFs.

Earnings updates: Paloalto, Zoom, Lowe’s

1. Paloalto

• Orders +3% Y/Y to 2.33 billion USD

• Revenue +15% Y/Y to 1.98 billion USD (10 million USD above expectations)

• Non-GAAP EPS: 1.32 USD (0.07 USD above expectations)

• FY24 Outlook:

  • Orders +11% Y/Y

  • Non-GAAP EPS ~5.57 USD (0.05 USD above expectations)

2. Zoom

• Revenue: 1,141.2 million USD, +3.2% Y/Y

  • Enterprise revenue: 665.7 million USD, +5.3% Y/Y

  • Online revenue: 475.5 million USD, flat Y/Y

• Non-GAAP profit: 426.3 million USD, up from 353.3 million USD last year

• Non-GAAP operating margin: 40%

3. Lowe’s

• Revenue: 21.4 billion USD, -4.4% Y/Y

  • Offline revenue: -4.1% Y/Y

  • Pro and online revenue: positive growth

• Diluted EPS: 3.06 USD, down from 3.77 USD in Q1/2023

• Net profit: 1.8 billion USD, down from 2.26 billion USD in Q1/2023

• Total stores: 1,746 stores

Other news

1. Most investors do not expect the economy to recess in the next 12 months.

   

• Large amounts of money from funds are returning to long-term bonds as the market believes this is the asset class that will benefit from the Fed cutting interest rates

2. ~77% of high-yield bonds issued so far have been used for debt repayment or refinancing:

3. Share buyback announcements by Japanese companies surge this year