12 May 2016
World share markets mostly edged higher in April, with the recession fears of February seemingly a receding memory. Most indices edged higher over the month, on the back of economic news from China that indicated stabilising growth and the continuing surge in crude oil prices.
Commodities take centre stage
So far in 2016 oil has become a barometer of economic health and investor sentiment, correlating closely with share markets. And that correlation virtually guaranteed a strong April for equities markets, with West Texas Intermediate (WTI) oil up 20 per cent in April and Brent crude even stronger, up 21 per cent. Oil was helped by a contraction in US shale oil production and disruptions to Kuwaiti and Venezuelan supply. At April’s end, oil prices had surged almost 70 per cent since February’s lows.
The other big commodity rebound in April was iron ore, which also rose by about 20 per cent, topping $US70 a tonne (62 per cent iron ore, delivered to northeast China) for the first time since January 2015. The iron ore surge represented a gain of more than 60 per cent since December 2015.
Jaded Australian investors (not to mention the nation’s Treasury) would have welcomed the iron ore price rise if it were clear evidence of renewed strength in the Chinese economy. Indeed, there was some evidence for this view; while official figures showed that the Middle Kingdom’s economy grew at an annual rate of 6.7 per cent in the March quarter – down from a 6.8 per cent gain in the previous quarter – figures on Chinese industrial production, retail sales and home sales were more positive.
However, there was another possible explanation for iron ore’s blazing month. The late-2015 clampdown on speculation in China’s share markets, which was meant to lessen the huge volatility on the Shanghai and Shenzhen bourses, resulted in speculative demand being diverted into commodity futures – in particular, steel rebar (reinforcement bar) and iron ore futures. On the Shanghai Futures Exchange and the Dalian Commodities Exchange respectively, these have become the world’s first and third most actively traded commodity futures contracts.
Iron ore, steel take off in China
In April, speculative mania pushed activity in these contracts to phenomenal levels. On 21 April, steel rebar futures turnover equated to 225 million tonnes – greater than China’s entire 2014 output of steel rebar, of 215 million tonnes – and at 606 billion yuan (US$93.5 billion) in value, topped the combined transaction value of the entire Chinese stock market.
The rise in steel futures prices flowed into Chinese steel prices, which in April were showing a 50 per cent uptick after six years of losses. Steel mills began to restart (or boost) production to cash in on the boom. But the unexpected price rise was not due to rising underlying demand, and the Chinese iron ore market is over-supplied. Reality appeared to make itself felt in early May, with a crackdown on commodity speculation popping the Chinese steel and iron ore futures bubble, and prices slumping.
However, the April action was enough to lift commodities – nickel surged 11 per cent in April, while copper was up 4 per cent – and the share prices of major producers. For instance, BHP Billiton shares surged 23 per cent in April, the largest monthly gain since 1999, while Rio Tinto shares jumped 21 per cent,and Brazilian producer Vale was up 32 per cent in New York. Australian iron ore pure-play Fortescue Metals saw its stock rise by 34 per cent.
Central banks still influential
Elsewhere, central bank actions remained major influences on market activity – for good and bad. On the debit side, the strength of the Japanese yen and lack of any significant inflationary pressures in Japan led markets to expect that the Bank of Japan (BOJ) would add to its existing stimulus package at its April meeting – but the BOJ stayed put. The European Central Bank (ECB) also left policy unchanged at its April meeting, but bank president Mario Draghi did confirm the improvement in the Eurozone since policy loosening began in 2014, adding that the latest stimulus package (March) had extended that recovery.
As for the Fed, it acknowledged in April there were risks to the US economy, and that it wanted to monitor the economic data for the time being. US economic data for the month was mixed, with strong employment growth (215,000 jobs created in March) and a record jobless claims streak; unemployment claims have now been below 300,000, a threshold associated with healthy job market conditions, for 57 weeks, the longest stretch since 1973.
But first-quarter GDP figures released at the end of the month showed that the US economy grew at an annualised rate of 0.5 per cent over the quarter, weaker than consensus expectations for 0.7 per cent growth, as weak consumer spending and business investment and a struggling manufacturing sector weighed it down. It was the weakest quarterly GDP growth figure for the US in two years.
On the markets, the Dow Jones Industrial Average (+0.5 per cent) and the broad S&P 500 Index (+0.3 per cent) had a good month, while the technology-heavy Nasdaq Composite (–1.9 per cent) slipped. In Europe, the Euro STOXX 600 index gained 1.2 per cent, led by the German DAX (+0.7 per cent), the CAC 40 (+1 per cent) in Paris and the FT-SE 100 in London (+1.1 per cent).
In Asia the Japanese market took off in the first half of April, climbing 9 per cent, but gave it all back (and more) once the BOJ disappointed by failing at its April meeting to roll out more stimulus. In China the Shanghai Composite lost 2.2 per cent for the month, while the Hang Seng Index in Hong Kong gained 1.4 per cent. With the big miners doing well, the Australian S&P/ASX 200 Index added 3.3 per cent for the month.
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