Commodity supercycle depends on China

Hi Everyone,

U.S. retail data published this week is projected to jump +5.5% for the month of March, the third highest reading, excluding May 2020 reading of 18.3% due to base effects. Retail spending has been volatile in the last 12 months due to imposed lockdowns but also increased propensity to save as individuals have witnessed unprecedented levels of bankruptcies and redundancies. After a round of direct stimulus cheques distributed in March 2020, spending data remained positive for a few months. However, between the months of October-December 2020 retail spending contracted, only to expand again in January to +7.6%, when the second round of stimulus cheques was distributed. Should the history repeat itself, March data is likely to be bolstered once again by another round of stimulus cheques that were posted to eligible Americans last month.

However, Retail spending might not carry the economy much longer, since the direct stimulus payments are coming to an end and the savings rate has increased from pre-pandemic long-term average of 7% to current 13.6%. With 8 million unemployed individuals in the States and U6 unemployment rate of 10%, it seems nearly impossible to instigate organic recovery in retail spending, highlighting the importance of getting the infrastructure plan approved, at least partially, by the Senate in the first half of 2021. Consumer spending constitutes 70% of U.S. GDP, and retail spending covers 40% of consumer spending, making it one of the most important high frequency economic data point.

China reports its Q1 Gross Domestic Product this week and the consensus expects an expansion of 1.5%, compared to the previous quarter. The world’s second largest economy is on track to expand 6.5% this year, despite weak base effects when compared to 2020. China was the only major economy to grow in 2020 and is now on the path to overtake the U.S. as the largest economy by 2028 – two years earlier than predicted, according to estimates from the Brookings Institute. According to the 14th 5-year plan published last year, the focus for the next years will be on building out domestic markets, autonomous technology infrastructure, while ensuring the economy is protected from external shocks. The latter is achieved by securing supply chains for resources, including food and raw materials. Additionally, similar to Joe Biden, Xi Jinping has emphasized the importance of technological dominance through domestic semiconductor industry, high-tech manufacturing and investment in R&D. The leadership has put forward an ambitious plan of doubling the size of the economy by 2035.

China has proved time and time again its ability to recover from crisis through a centrally planned economy. Post-2008 economic crisis China orchestrated a large-scale domestic infrastructure spending, maintaining 9 to 10% GDP growth throughout 2008-2011. The construction of roads, bridges and cities bolstered a boom in commodities and exporting countries, such as Australia, Brazil, Peru and South Korea. In fact, China consumed more concrete, around 6.6 gigatons, in three years from 2011-2013 than the U.S. during the entire 20th century (around 4.5 gigatons). China’s growth in recent years has stabilized near 6% but the planned spending is likely to support commodities prices. According to Reuters, China has already bought record volumes of crude oil, copper, iron ore and coal in 2020. Trade data for December, shows the massive buying spree appears to be ending, which is evident also from commodities prices. There has been little price action since March in oil futures, copper futures, as well as in the CRB index. Longer-term effect on main commodities is still bullish with 2 major economies, China and the U.S., focusing on large-scale infrastructure spending.

S&P 500 rose 2.71% to another all-time high of 4,218.81, while Nasdaq-100 was up +3.87%. Russell 2000, representing U.S. small and medium companies, shed -0.46%. The dollar index DXY lost -0.91%, supporting gold to gain +0.80%. Oil futures dropped -2.75%.

Have a great trading week ahead!

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In The Spotlight

DateCurrencyEventPrevious Consensus 
MondayEURRetail Sales (YoY) – Feb-6.4%-5.7%
TuesdayUSDCore CPI (YoY) – Mar1.3%1.6%
WednesdayNZDRBNZ Monetary Policy and Interest Rate Decision0.25%0.25%
ThursdayEURHarmonized CPI (YoY) – Mar2.0%2.0%
ThursdayUSDRetail Sales (MoM) – Mar-3.0%5.5%
FridayCNYGDP (QoQ) – Q12.6%1.5%

*In USD thousands

• U.S. Retail Sales
US economy, being very consumer driven, is heavily impacted by retail sales. Up to 70% of the GDP is related to consumer spending, while 40% of consumer spending consists of retail spending, therefore all data points related to retail are heavily scrutinized and have the potential to move markets. Increased retail sales are considered bullish for USD, whereas lower or below expectations read is generally considered bearish.

• Chinese Gross Domestic Product
GDP data shows the monetary value of all the goods and services produced in China. A negative number indicates a contraction of economic activity while a positive number shows an expansion. A better than expected GDP growth is generally positive for CNY, whilst a print below expectations tends to be negative.

Market Sentiment

EURUSD pair is once again attempting to recover and is currently testing 200-day simple moving average (SMA) near 1.18890. Short-term sentiment is still bearish with momentum indicators currently below the price, but long-term momentum has the potential to turn bullish with 200-day SMA rising and 50-day SMA decreasing, crossing potentially in the coming weeks. Price is at this point finding resistance near 34-day exponential moving average (EMA) near 1.19000, while 21-day EMA is offering support near 1.18660. RSI and Stochastic are both neutral, although the latter is pointing higher, flirting with overbought levels. ADX and DMI-s do not give a quality signal. Resistance has formed near 1.19000 and 1.19130, while support is near 1.18750 and 1.18660.

Resistance: 1.19000
Support: 1.18750

GBPUSD is currently testing 100-day SMA support near 1.36790, while trending lower. Short-term momentum indicators are bearish, while the price is flirting with oversold territory based on Stochastic. A descending triangle pattern seems to have formed on the chart, signaling a potential break in the coming days and weeks. Short-term momentum is pointing lower but 200-day SMA is still below the price near 1.33250. ADX and DMI-s do not offer a quality signal. Weekly chart is still bullish with moderate energy in the trend. Resistance levels are near 1.37030 and 1.37180, while support is near 1.36685 and 1.36370.

Resistance: 1.37030
Support: 1.36685

NZDUSD is in a bearish trend with 8- and 21-day EMA offering resistance, and momentum indicators being stacked in a bearish fashion. Long-term trend is bullish with 200-day SMA currently below the price near 0.68940. Momentum seems weak as ADX and DMI-s do not give a clear signal. Also, RSI and Stochastics are both neutral on the daily chart. Price is likely to move lower or sideways for the upcoming days, although weekly chart signals slightly oversold levels. Resistance levels are near 0.70400 and 0.70505, while support is near 0.70070 and 0.69940.

Resistance: 0.70400
Support: 0.70070

XAUUSD is inching higher and finding support near 8-day and 21-day EMA near 1,735.00, while 34-day EMA is offering resistance near 1,744.67. Price briefly pierced resistance that had prevailed since early March, only to be forced back to the same range earlier today. Short-term momentum is still bearish, but price is currently overbought based on Stochastics. Long-term momentum is bearish as 200-day SMA is above the price near 1,857.76. Weekly chart confirms the bearish sentiment. Resistance levels are near 1,744.67 and 1,755.67. Support is near 1,734.98 and 1,728.60.

Resistance: 1,744.67
Support: 1,734.98

Kaia Parv, CFA, is an experienced Portfolio and Investment Manager with exposure to both public and private markets. Before joining FXPRIMUS, Kaia was a Senior Investment Associate at EFA Group and a Vice President in Bank of America Merrill Lynch.

Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

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