Copper Party

Mid-Week Bond Update

Copper Party

Global bond markets welcomed yet another disappointing inflation reading in the US, which pushed global bond yields and inflation expectations lower. European sovereigns were also supported by comments from European Central Bank (ECB) president Mario Draghi, who said that the ECB should be patient and...

persistent with its present accommodative monetary policy. The fall in US Treasury yields lifted corporate bond performance, offsetting flat or falling corporate spreads – a reflection that economic data in the world’s No. 1 economy remains mixed. It was more the world’s No. 2 economy that seemed to lift market sentiment over the past few days: as China opened its twice-a-decade Party Congress, officials signalled the economy may surprise on the upside. Beijing’s optimism was underpinned by strong data: September’s producer prices rose above expectations, and so did imports – both signs of a healthy economy. China’s economic and consumer appetite lifted commodity prices such as copper.

Emerging Markets (EMs) had a quieter week, dented by a rising US dollar. Mexico and its currency also suffered as the country continues trade talks with its northern neighbours, which some investors fear could lead to higher trade barriers. Other Latin American currencies, such as the Chilean peso, did better on the back of rallying commodities - which they export. Oil climbed above the US$ 50 dollars per barrel mark, while in the UK, annualised inflation accelerated to 3%, a five-year high. This is partly due to the rising energy prices, and also to the pound’s 12% drop since the country decided last year to leave the European Union.



Copper – on Chinese wheels: Leading world commodities extended their gains over the past five trading days, including copper and aluminium, both up 26% so far this year. China’s above-expectations producer price and imports data helped lift the price of those commodities, as well as the currencies of the countries that produce them, such as the Chilean peso, the Peruvian sol and the Argentinean peso. Copper rallied almost 4% over the past five trading days, bursting above $7,000 a metric ton on the London Metal Exchange, the highest since 2014. Apart from favourable supply and demand issues, the metal is also boosted by China’s seemingly insatiable appetite for electric cars – which use the metal as a key component. As seen on the chart, the two variables have been moving almost together this year.


China’s electric car production – driving copper 


Source: Bloomberg 18 October 2017. RHS is Right Hand Side. Past performance is no guarantee of future results. Please see disclaimers for definitions.

To learn more about potential opportunities in Emerging Markets, read Brandywine Global’s latest “Around the Curve” blog: Can Emerging Markets hold steady?


European bonds: Viva gloom: European sovereign, corporate Investment Grade and corporate High Yield bonds all outperformed their US counterparts over the past five trading days, lifted by further reassurance from the ECB that monetary policy and the central bank’s bond purchases will remain accommodative for the time being. Also, and despite recent surging momentum in the continent, old issues that could dent growth surfaced again: the political tension between the Spanish government and the Catalan region’s separatists remains unsolved; Germany’s leading ZEW confidence index came in below expectations, and pan-European car sales fell 2% in September, the second drop in 2017. Bond investors cheered the gloom.



US long bonds: An investor calls: Long-maturity US Treasury bonds gained 1.5% over the past five trading days, the best performance among the 33 fixed income asset classes tracked by Mid-Week Bond Update. The optimism over the asset class, however, reversed following a battery of positive US data, with the up/down option ratio over the asset class reaching a one-month low: as seen on the chart, the ratio of investors buying call options, which give the right to buy a 30-year Treasury bond (a sign of faith on the asset), fell as the number of investors buying put options, which give them the right to sell the bond, increased. This recent drop breaks an also recent and more natural relationship, in which the call / put ratio mostly rose as inflation fell. Despite this recent sentiment drop over the asset class, some investors, such as Western Asset, believe that while US growth is picking up, the pace is still moderate, while inflation remains below target. Click here to read the views of Ken Leech, Chief Investment Officer of Western Asset. 


US long-bonds: put down

Source: Bloomberg as of 18 October 2017. RHS is Right Hand Side. The call/put options ratio used is the CBOT 30 Year Bond Call Put Ratio. The inflation index used is the 5year Personal Consumption Expenditures (PCE) Core Price Index. Past performance is no guarantee of future results. Please find definitions in the disclaimer.


Mexico - hot politics: The Mexican currency fell 0.3% against the US dollar over the past five trading days, taking its drop to 3.4% so far this month. Apart from the ongoing tensions over a redrafting of the North American Free Trade Agreement (NAFTA), some investors are also worried about the recent surge of a populist candidate for next year’s general election. Andres Manuel Lopez Obrador, who favours social spending and has opposed an opening of the economy, a relaxation of labour laws and the break-up of the state’s oil monopoly, is now seen as a frontrunner for the July 2018 vote. Investors gave him a thumbs-down, while voters, one up.


Source for all data: Bloomberg and Barclays Capital as of 18 October 2017, unless indicated.


IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.