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Commodities Strike Back

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Metals, oil finally showing signs of recovery.

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Commodity prices have started to recover since the massive commodity-fund liquidations and inventory reductions at mine, refinery and final-consumption levels - which in some instances, gave rise to record stock levels of industrial metals on the London Metals Exchange.

The recovery in metal and oil prices should be seen in context, though. The sharp drop in prices rendered a significant quantity of global production uneconomical, resulting in substantial cutbacks in production already seen and planned for the next 2 to 3 months.

China (FXI) continues to be the main driver in the metals market. An update on the Chinese situation -- and specifically, the PMI data released last week -- makes for interesting reading.

The Li & Fung Research Centre reports that the Chinese PMI rebounded to 52.4% in March 2009, up from 49.0% in the previous month. The index was back to the expansionary zone of higher than 50% for the first time since October last year. The Output Index, New Orders Index and Purchases of Inputs Index were also higher than the critical level of 50% in March. Except for stocks of finished goods, all sub-indices were higher than their respective levels in the previous month.

China's improving PMI seems to indicate that the country might have seen the worst of the GDP growth statistics. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.) The first quarter's growth rate may surprise on the upside and could come in at higher than 8% year on year.



The chart below shows that New Orders and New Export Orders lead metal prices by approximately 1 month, providing upward momentum to the rally in metal prices.



And finally, China's PMI for stocks of major inputs shows the deterioration has probably bottomed, and based on the close relationship with the Metals Index, should put a floor under commodity prices.
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No positions in stocks mentioned.
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