Market Views: Multi-Asset
Metals, bitcoin bubbles, consumers: eight market charts from October
We round-up eight charts that caught our eye in October, including soaring palladium and bitcoin prices, consumer spending, changing China and sentiment.
Unstructured Learning Time
Change in China
In some circles, China’s economy is regularly characterised as being addicted to credit and investment. But as the chart below shows, the economy is gradually growing accustomed to a slower pace of growth in both areas.
Growth in China’s total social financing (TSF), a broad measure of lending by both the official and shadow banking sectors, has steadily been falling along with that of investment over the past few years. It is no coincidence that along with this slowdown has come a moderating pace of GDP growth too – which had previously been over-reliant on credit and investment
It is a welcome development for the country. The key question for the world’s second-largest economy has now moved on from whether a "hard landing" for growth is likely, to how to effectively deal with its still-sizeable debt pile.
Following the global financial crisis in 2008, and in an attempt to mitigate the fallout, China’s government embarked on a massive RMB 4 trillion stimulus which saw credit growth and investment spike in the years after. This red-hot expansion has slowly cooled over the years and, although leverage (borrowing) is still building, it is doing so at a much slower pace. This can only be good news for both the Chinese and global economies.
Bitcoin and bubbles
Bitcoin is a topic we’ve looked at before in our charts of the month series. But it regained my attention over the weekend when I was surprised to find out how knee-deep in Bitcoin three close friends of mine are with their personal savings.
I couldn’t resist showing them the chart below which was produced recently by our colleagues on the Schroders Value Investment team in an article titled “If bitcoin isn’t a bubble, it’s a spookily good impression”.
The chart was not meant to attack Bitcoin (nor the wisdom of my companions). Rather, it highlights “the behaviour of the wider market towards something whose intrinsic value cannot be assessed – for the simple reason it does not have any”.
But while we debate its fundamentals, or lack of them, investors are watching their profits grow. At the time the chart was produced on 19 October, one Bitcoin was worth $5800. At the time of publishing today (2 November) it is worth $7066.
Whether it’s bubble time, or time to pop open the bubbly, remains to be seen.
Tables have turned on confidence
While the mood in the UK looks increasingly gloomy, consumers in the eurozone have been growing ever more cheerful since the start of 2017.
In the chart below, you’ll notice a pretty pronounced dip in UK’s blue line immediately after the Brexit vote, but no discernible effect in the eurozone’s green line. This year, the gap has widened.
In October, eurozone consumer confidence actually hit a 16-year high. No great surprise. Economic growth in Europe looks good but inflation remains below target. This means that although the European Central Bank has confirmed it will slow quantitative easing - gradually turning off the liquidity taps – it has not increased its main interest rates.
On the other hand, the probability of a November rate increase from the UK’s Monetary Policy Committee has surged. UK GDP growth was better than expected in Q3, but inflation has also hit 3%.
Sensing the consensus
For trying to ascertain the consensus towards UK equities, this is a potentially illuminating chart.
Based on a survey of UK small cap investors by Peel Hunt, it reveals where respondents stand as a whole – net bullish or bearish – on a number of macroeconomic factors seen as impacting the market. Domestic concerns dominate, with respondents most bearish about UK politics and Brexit, the UK economy and the Bank of England (BoE).
The picture was more varied at the time of the previous survey in May, when China was seen as a significant bearish factor and the BoE the single most bullish one.
What’s driving palladium?
Palladium spot prices have rallied sharply this year. The chart below shows the extent to which it has outperformed other precious metals.
In particular, there has been a major divergence in performance between palladium and platinum. The two are mined together, have similar physical and chemical properties and their supply is not expected to change materially in the next few years. So their divergence is best explained by demand factors, particularly in relation to cars.
Around 80% of gross palladium demand comes from the car industry, where it is used in petrol (gasoline) catalytic converters. For platinum, demand is more diversified but the largest source is also the car industry, where it is used in diesel catalytic converters.
Palladium’s rally in relation to platinum can at least in part be put down to the demise of demand for diesel cars.
Overall global demand for cars has continued to be strong, suported by growth in China. However, headline growth masks an acceleration in the sale of petrol cars, at the expense of diesel powered car sales, which are slowing.
The emissions scandal and reversal of government support for diesel have been factors in the demise of diesel sales. This has boosted demand for petrol catalytic converters and, in turn, palladium.
As countries seek to lower emissions levels, higher palladium content will likely be required in each converter, to further cut the release of noxious gases.
In the long-term the electric vehicle (EV) revolution could mean that cars no longer require either palladium or platinum. However, the timing and pace of this change is uncertain. Indeed it may be that hybrid EVs, which still use autocatalysts, are adopted in a transition period, in which case demand for palladium should remain intact.
Past performance is not a guide to future performance and may not be repeated.
Consumers slam the brakes on new car demand
Staying with the auto theme, the UK new car market saw a 9.3% year-on-year decline in September 2017, according to data from the Society of Motor Manufacturers and Traders (SMMT). The decline is thought to be due to economic and political uncertainty, as well as confusion over plans to improve air quality. New registrations of diesel cars fell by 21.7% while there was a 41% surge in demand for alternatively fuelled vehicles (AFVs).
This is the first time in six years that there has been a year-on-year fall in September and the decline prompted concerns over waning demand. March and September are traditionally important months for car sales because the number on the registration plate changes and drivers rush to buy a vehicle with the new number. However, despite the September decline, the SMMT data shows the UK new car market remains at a historically high levels with over two million vehicles hitting UK roads so far this year.
US consumer picks up hurricane tab
Staying with consumers, the next chart shows a jump up in US personal spending in September.
Both US personal income and spending reports were strong in September due to a combination of temporal and more secular factors. A 0.4% monthly increase in personal income, following an increase of 0.2% in August, was the largest in seven months.
Personal spending rose 1.0% on the month, slightly exceeding expectations, for the biggest gain since August 2009, driven by spending on autos and gasoline. The savings rate declined from 3.6% to 3.1%, the lowest since December 2007.
Both the swing in personal spending and savings likely reflected spending on repairs and restocking following the hurricanes in recent months. As such, this outsized increase will likely prove temporary.
The solid gain in personal income, as well as robust hiring and rising consumer confidence, augur well for US household consumption in the fourth quarter.
Happy (?) Halloween
Finally, as it was Halloween this week, a chart you might find scary.
It seems that dissatisfaction with politics in the West has grown to such an extent that if you were born in the 80s and think democracy is essential, then you are in the minority.