Note from the MD: All eyes on China’s recovery

China’s re-opening after lifting COVID restrictions has made way for another rush of traders re-positioning themselves into long commodity positions. This of course has further driven the ASX 200 closer to its all time high, sitting just shy of 4% away from it as of today. Copper has performed particularly well, and at time of writing is currently trading 34.7% up from its yearly low. 

China’s re-opening after lifting COVID restrictions has made way for another rush of traders re-positioning themselves into long commodity positions. This of course has further driven the ASX 200 closer to its all time high, sitting just shy of 4% away from it as of today. Copper has performed particularly well, and at time of writing is currently trading 34.7% up from its yearly low

The world’s second largest economy reported 2.9% GDP growth in the fourth quarter of last year. Chinese stocks had already started to rally on Monday 16th January as the government came in with more stimulus to spur on their rebound. The CSI 300 was driven up 2% intraday to a near 5 month high as the People’s Bank of China announced they would inject more liquidity into the banking system. Iron ore prices realised further upside, and are currently 52.86% up from their yearly low.

The macroeconomic landscape is still quite uncertain, so it is interesting that the VIX is around 50% down from its yearly high. As global economies move towards their terminal interest rates, it will be interesting to observe options trading activity amongst investors.

However, there wasn’t any good news in China’s property market. Their new homes prices fell not only again in December for five months in a row, but 2022 was also the eighth straight declining year in a row

There was even more turmoil in the never ending Evergrande saga, who is not only China’s largest property developer but also the world’s most indebted property company with almost  $US18.9 billion of what is turning out to be toxic debt. After Fitch and Moody’s both last year withdrew credit ratings for the embattled behemoth who is currently in default on their bonds, on Monday 16th January PwC it was reported that has quit as their auditor amid the company not being able to provide consolidated financial statements or estimates of the realisable valuable of their property portfolio.

China’s housing market is a key demand driver for iron ore and copper prices, so a smooth recovery is essential to these commodities performing well.

The XJO has had strong momentum and near 8 month highs. Despite signs that inflation may have peaked in the US, investors seem to be worried about aggressive policy tightening by the Federal Reserve and other major central banks tipping the global economy into recession and hurting corporate profits.

Locally, Melbourne Institute’s Monthly Inflation Gauge showed prices eased to a four-month low of 0.2% in December 2022, slowing sharply from a 1.0% rise in the previous month while marking the fourth straight month of increase. The latest result came despite signs that Australia’s inflation figures remained high, both in terms of quarterly and monthly readings. The annual inflation rate in Australia climbed to an over three-decade high of 7.3% in Q3 of 2022.

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