Before the stroke of midnight, a NAFTA deal with Canada was announced. The new tri-lateral trade deal will be known as U.S. Mexico Canada Agreement (USMCA). The agreement aims at freer markets, fairer trade and robust economic growth.
Among other things, it will include new provisions on unfair trade practices, new market access for farmers, a deal on car tariffs and stronger labour provisions, which will incentivize more automobile production in the U.S. No agreement in Canada steel or aluminium was made so far.
Just in the past couple of weeks, we have seen the U.S. announce trade deals with South Korea, Mexico, Canada -- and talks moving ahead with Japan. EU is on the list as well, then perhaps China? The news of this announcement helped the Canadian dollar jump to its strongest level since May -- to C$1.286.
The elephant, or rather the dragon, in the room remains China. As we are closer to approaching the U.S. mid-term elections in November, could Trump just be going through his check list to gain nominations? Of course, if he succeeds, he can then call it a "significant victory," one "no U.S. administration has managed to pull so far," and see U.S. markets reach new highs (thank you Apple (AAPL) , Google (GOOGL) and Microsoft (MSFT) ). What is left out to the public is that most U.S. administrations have not used the dollar as a weapon and the treasury as a personal war chest to coerce and collapse Emerging Markets, just to make a point.
The latest PMI surveys in China were released on Sunday, showing sentiment dropped further. The Caixin Manufacturing index declined in September, showing the slowdown from the trade wars with the U.S. China's NBS Manufacturing PMI fell to 50.8 in September from 51.3 in August (below consensus of 51.2).
Looking across components, all major sub-indices showed weaker growth momentum. Trade indicators softened, and employment index fell, as well. All this was to be expected, given the rapid rise in the yuan, closer to 6.88 vs. the dollar, over the summer. Markets and risk assets, especially Chinese-oriented names, have more than priced this slowdown.
However, the non-manufacturing PMI picked up to 54.9, showing that domestic demand for consumer services remained strong. What is even more interesting is that the construction PMI spiked to 63.4, 4.4 percentage points higher than August! Could this could be the fiscal boost to infrastructure that China has been pushing through over the past few months?
This all bodes well for copper, which is linked to the infrastructure boost in China. The government support policy measures will start to show up in the data properly over the fourth quarter. With all-time record shorts on copper, traders trying to play the broader macroeconomic slowdown should be wary, as the devil is in the detail.
The central bank has promised fiscal stimulus in the form of tax cuts and infrastructure spending to buffer the domestic economy from any impact from the trade wars. As seen recently, the PBOC has also been injecting liquidity in the markets via reverse market operations. History has shown that it never pays to bet against the red dragon.
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Last November, as the economy was growing way above the 6.5% GDP level, we saw the central bank take their foot off the pedal to continue with its de-leveraging process. Given the softer prints seen over the summer, and the chance that the economy is growing closer to 6% than 6.5%, there is a chance the central bank will continue to provide a boost into Q4.
Going back to specific commodity markets, such as copper, where there is a deficit seen for this year and next, any boost from China will blind side the shorts playing the top-down recession theme, while ignoring pure physical market trends. Physical premiums in China have been shooting higher, and Codelco recently signed contracts early to source supply -- indicating tight demand.
If supply stays the same and demand moves up from here, prices have no choice but to grind higher. They need to be at a level that incentivizes producers to excavate and produce copper. It is not easy to mine copper -- as with oil, where some taps can be turned on and more oil released.
Copper miners are a bargain here, especially with the higher risk-reward in copper. Kaz Minerals and Antofagasta are some of the cleanest, purest ways to play this theme -- showing upside of at least 20%-40%. With EV/EBITDA for 2019 less than 4x, these stocks seem unreasonably cheap, especially when considering the growth in copper that is needed -- and that these companies are already positioned for.
