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Bets on Trump boosting metal prices further are tempting fate as US dollar soars

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Rampant speculation and exaggerated hopes of a Trump-led boom have fuelled a blistering rally in industrial metal prices. Oil is perking up and talk of a new commodity supercycle is suddenly on everybody's lips.

It is as if we were returning to the glory days of break-neck industrialisation in China and the rising powers of Asia. But this time, the bulls risk bitter disappointment.

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A hauntingly strong US dollar is watching like Banquo's ghost over the party. Sceptics warn that the market is already starting to fray at the edges, and signs are growing China's latest recovery is about to fade.

"When you have copper going up by $US1000 in barely a week you know there is something wrong. Fundamentals don't change that fast," said Robin Bhar, base metals strategist at Societe Generale.

Copper was already on a tear before the US elections, chiefly driven by the latest housing bubble in China. Prices on the London Metal Exchange have risen by 25 per cent to $US5445 a tonne in a month.

Zinc, nickel and lead have followed to varying degrees. Iron ore has jumped 40 per cent in the same period, doubling since the start of the year.

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Investors have thrown caution to the wind since the election shock, making a collective bet that Mr Trump's fiscal stimulus and bonfire of regulations will lift the world out of its deflationary malaise once and for all.

It is a bet that his spending plan on roads, bridges, telecommunications, harbours and the power grid - either a putative $US550 billion ($743 billion), or $US1 trillion, depending on Mr Trump's mood - will gobble up commodities.

"There isn't really going to be any infrastructure spending until 2018 to 2019," said Mr Bhar. Few "shovel-ready" projects are on offer in the US, even if Congress agrees to fund them.

Bruce Kasman from JP Morgan said the likely outcome is that deficit hawks in Congress will whittle down the infrastructure plan to $US150 billion and little of that will have any impact over the 2017-2018 period. Tax cuts worth $US200 billion will lift the deficit to 4 per cent of GDP - "an unprecedented level for a peace-time economy near full employment" - and will add roughly one percentage point to US growth, but it will not help the world economy.

Beware the double squeeze

JP Morgan warns that the double squeeze from a super-charged Trump dollar and higher global borrowing costs is likely to outweigh the local stimulus in the US itself, leaving aside the costs of protectionism and the damage to global supply chains.

For now, schizophrenic markets are buying the US dollar and commodities at the same time, defying the pattern of the post-War era.

It is as if we were returning to the glory days of break-neck industrialisation in China and the rising powers of Asia. But this time, the bulls risk bitter disappointment.

Can you bet on a higher greenback and commodities at the same time?

Can you bet on a higher greenback and commodities at the same time?

Oil prices will indeed rise, but that is because the Saudis have abandoned their two-year policy of flooding the market.

Zhiwei Zhang from Deutsche Bank said the latest burst of housing stimulus and state-driven industrial spending in China is unsustainable. The authorities have repeated the error made in early 2015 when they inflated an artificial stock market bubble. They are now having to slam on the brakes with lending curbs. House prices are already falling in some "tier I" cities such as Shenzhen

China is pivotal to the commodity story. It accounts for roughly 50 per cent of the world's base metal consumption, compared to 9 per cent in the US, and just 2 per cent in India. As China is forced to scale back credit growth - still growing at almost three times nominal GDP - it threatens to kill the metals rally stone dead.

Mr Bhar said China is compensating for the property slowdown with more spending on the power grid, the railway network, and infrastructure. "There is still enough front-loaded investment to keep demand going for another three to six months," said Mr Bhar.

Chang Liu from Capital Economics estimates that growth hit a three-year high of 6 per cent in October. This is a sharp rise from the slump conditions of around 4 per cent growth in 2015 and early 2016, but the sweet spot this autumn will soon pass. "Credit growth has peaked. We believe this rate will prove unsustainable. Growth will slow next year," he said.

Capital Economics said the worry is that capital outflows reached an estimated $US73 billion last month. This is the highest since the panic at the start of the year, and a rising proportion is coming from fickle "hot money" flows driven by devaluation fears.

Goldman Sachs's bold call

Goldman Sachs is defiant. Jeff Currie, the bank's veteran commodity guru, argues that capital flight from China could actually help metal prices. Steel mills are building stockpiles and locking in supply to beat depreciation.

Mr Currie said the world's "mid-cycle" slowdown earlier this year was a healthy breather that allows another leg of the post-Lehman recovery. This phase comes as economic "output gaps" in the US and China at last turn positive, a perfect set-up for commodities. Meanwhile there is a looming supply crunch. He recommends betting on further rises in the enhanced GSCI commodity index, which tracks the global commodity market .

This is a bold call at a time when the dollar is surging. Mr Currie argues that the global financial system has changed beyond recognition, with the rise in excess savings from $US1 trillion in 2001 to $US9.3 trillion today. The money is recycled almost instantly through asset purchases, and therefore lifts global economic growth.

This opaque argument is unlikely to convince sceptics, and some of the claims seem to conflate cause and correlation. What is clear is that commodities crashed in a near-perfect inverse fit with the soaring dollar from mid-2014 to mid-2016.

Critics says Goldman Sachs is either right to be bullish about the dollar, or right to be bullish about commodities. But trying to reconcile the two conflicting trends is stretch too far.

The Daily Telegraph London

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