Julius Baer has published this week their latest market insights with the performance of the commodities and Chinese normalisation, as well as an analysis of the Fixed income and their forecasts of growth in Thailand and Philippines as main topics. Norbert Rücker, Head Economics and Next Generation Research and Sok Yin Yong, Fixed Income Analyst Asia, give us all the main takes of the week from both markets.
Commodities – Pandemic Hiccups and Chinese normalisation
Norbert Rücker, Head Economics and Next Generation Research, Julius Baer
The pandemic hiccups, economic concerns, and a souring market mood pulled commodity prices sharply lower over the past weeks. Yet there is more to the turbulence than just the virus. The growth normalisation in China became a headwind in particular for metal prices. While the pandemic hiccups are a temporary element, we see more lasting headwinds for commodities overall. Supplies, or at least supply fears, in metals and agricultural commodities should continue to ease. Oil prices could see a recovery in the near term as strong Western world demand depletes storage, but also longer term the shale and petro-nation production return will eventually bring headwinds.
Concerns about the latest pandemic hiccups struck financial markets and caused turbulence, particularly on commodity markets, in recent weeks. Yet there seems to be more interferences on the economy than just the spreading of the delta variant and tightened health measures. The broader concerns primarily originate out of Asia. China has moved beyond the post-pandemic growth recovery and seemingly reached cruising speed earlier than some expected. This economic normalisation put pressure on metals markets given their high dependence on China.
The government’s environmental policy and scrutiny of steel production levels added to the sharp sell-off of iron ore prices. The tightened health measures meanwhile become visible in somewhat lower mobility levels. The consequent dent in oil demand trend in part explains the past weeks’ wobbling of oil prices. Unlike other market observers, we see still softening fundamentals across the board for commodity markets and stick to our Cautious view. China’s normalisation likely brings further headwinds for metals. The harvest and supply fears should eventually ease, deflating agricultural commodity prices. Only for oil prices, the near term looks more stable. Despite return shale and petro-nation production, elevated Western world demand levels should continue to tighten supplies over the coming months, not least as the pandemic-related demand dent in China seems temporary.
Fixed Income – Thailand and the Philippines: Growth forecasts slashed on delta
Sok Yin Yong, Fixed Income Analyst Asia, Julius Baer
Both Thailand and the Philippines have cut growth forecasts for 2021, as the delta variant spread and related mobility curbs weigh heavily on their growth outlook. Despite better-than-expected Q2 GDP in Thailand, the third Covid-19 wave and slow vaccine roll-out have led to a prolonged tourism slump, delaying its recovery. The Philippines is also struggling to contain the virus even as lockdowns persist, hampering the country’s recovery. Acceleration in vaccinations is crucial in both countries. Both BoT and BSP will likely stay accommodative.
Thailand’s National Economic and Social Development Council (NESDC) cut its economic growth forecast for 2021 to 0.7%-1.2% last Monday (1.5%-2.5% previously), citing expectations that the much larger third Covid-19 wave would have a significant impact on economic activity over the rest of the year. The revision follows the Bank of Thailand (BoT) and Finance Ministry’s recent cuts to 2021 GDP forecast. Thailand posted better-than-expected growth in Q2 2021, as GDP rebounded to 7.5% y/y from a low base last year (+0.4% q/q), driven by stronger exports of goods.
The BoT governor has urged the government to borrow THB1trn (USD30bn) to provide further fiscal stimulus amid the surge in Covid-19 cases. He argued that additional borrowing now to spur an economic recovery would help to bring down public debt in the longer term, as compared to a stalled economic recovery, which would hamper growth even after the outbreak ends. On Wednesday, the Philippines government also cut its 2021 growth forecast to 4%-5% (6%- 7% previously), owing to the impact of the virus outbreak and related mobility restrictions. Its GDP grew 11.8% y/y in Q2 2021 but contracted 1.3% q/q, as lockdowns dragged on growth and, in particular, private consumption.
The Bangko Sentral ng Pilipinas (BSP) raised its inflation forecasts for 2021 to 4.1% (4.0% previously) at the monetary policy meeting last week, citing higher commodity prices and recent PHP weakness, but sees inflation expectations as stable, with broadly balanced risks to the outlook. Downward pressure on the PHP is likely to persist in view of the widening current account deficit and investment outflows. Meanwhile, the Philippines is easing Covid-19 curbs in the capital region from 21-31 August (to second strictest level, allowing higher operating capacity in some businesses, but indoor and al fresco dining and religious gatherings are still prohibited), even after recording its second highest daily new Covid-19 cases on Thursday.