The Outlook for Base Metals in a Volatile Week Ahead
Key Dates in the Week Ahead
• 5th November: The US Presidential Election
• 7th November: Statement from the US Federal Reserve October Monetary Policy Meeting
• 4-8th November: China's National People Congress Meeting
5th November: The US Presidential Election
Potential outcomes and the impact on base metals:
• Contested victory; President may not be known for days, at least; uncertainty extends, likely negative for base metal prices.
• Republican Sweep of the White House and Congress; Base metals to move lower in the medium term due to potential inflationary policies (corporation tax cuts, tariffs), heightened geopolitical tensions.
• Democrats Sweep; Base metals likely weaker on fears of inflationary forces (tax and spend), but probably more pragmatism on foreign policy.
• Either incumbent, divided Congress (this is probably the most likely outcome), status quo likely to be maintained – would Congress pass a repeal of the Inflation Reduction Act, for example?
• Important question: would inflation become enough of a factor for the Fed to perform a U-Turn? Given the weakening in the US labour market, probably not, but don’t rule it out.
What Impact Might We See on China?
In our view, we expect a win by either candidate to result in a tougher working relationship with China.
A Harris Win
While she hasn’t outlined a specific policy on China, markets are assuming continuity with Biden’s polices which focus on national security and export controls on high-tech areas.
Impact:
• China’s green exports only make up 5% of total exports and 0.1% of GDP; however, curtailing high-tech areas could hurt China as they move to replace growth from the property market. BBG forecasts that Chinese GDP from high-tech areas will rise to 23% by 2026, from 12% in 2018.
A Trump Win
• Implement 10-20% tariffs across the board on all imports into the US.
• Implement a 60% tariff on Chinese goods imports.
• Under the scenario that China invades Taiwan, Trump stated in a WSJ interview
“I would say: if you go into Taiwan, I’m sorry to do this, I’m going to tax you at 150% to 200%”.
Impact:
• A follow through of these tariffs (which do not require approval by Congress), would be a shock to the market, resulting in (based on economic theory from 2018 tariff increases), a stronger US dollar, slowing growth and labour productivity. Furthermore, in the scenario of retaliation by US trade partners, the outlook may become more unfavourable for industrial metals.
• StoneX Ivy Li reports: “an additional 30-60% tariffs on Chinese exports goods to the US could slash China’s foreign trade growth ratio by 4-8%”. The US share of China’s foreign trade could fall to close to zero (it currently stands at 15%, down from 20% pre-2019 trade war).
• The PBoC may have less room to adjust interest rates if the US faces inflationary forces from tariffs. Note, Vice President Kamala Harris has stated that Trump’s tariff plan could result in an additional increase of $3,900 sales tax on Americans, driving up prices and inflation.
6-7th November: US Federal Reserve October Monetary Policy Meeting
“A quarter percentage interest rate cut by the Fed this Thursday is a near-certainty, with guidance by Fed Chairman Jerome Powell pointing toward another quarter point cut at the Fed’s December meeting. Fed officials pencilled in two more quarter-point cuts by year-end at their September meeting. They started with a half-point move in September because they wanted to get the fed funds rate down by a full percentage point in 2024 and they only had three meetings to do it. Better to start with the big move and then dial the process back to a modest rate pace, was the thinking” - StoneX Strategy Team.
8th November Chinese stimulus (close of NPC meeting)
The Standing Committee of the National People's Congress (NPCSC) meeting will be held
4-8th November. These meetings are usually held every two months (the second half of even numbered months); however, with the upcoming US election, the meeting was moved to give China greater flexibility to adjust their fiscal package.
Further details on fiscal stimulus are forecast to be released, with markets previously expecting an average of ~2tr yuan. However, Reuters reported that that as much as 10tr yuan ($1.4tr) in extra debt could be released in the years ahead, with additional stimulus to follow if we see a Trump win on 5th November. Note, this would account for 8% of the output of the world’s second-largest economy, which falls short of the bazooka stimulus in 2008, which accounted for 13% of GDP.
Market Forecast on Chinese Stimulus
Source: Bloomberg, StoneX
Our View for Base Metals in the Short-Term
The US Election
Even if a contested election is avoided, higher inflationary pressures, periods of uncertainty in policy and growing frictions with key trading partners (i.e. China), will result in downward pressure on the base metals in the near-term.
The October FOMC Meeting
Will support the longer-term outlook for recovery in cyclical demand for the industrial metals, although much of this impact has already been priced in.
China’s National People’s Congress
Increased fiscal spending in the country will be highly welcomed; however, details on the size and areas of implementation are still uncertain and have historically disappointed the market so far this year.
Base Metals YTD Price Performance
Source: Bloomberg
Copper:Gold Ratio
Source: Bloomberg
