PBOC doubts weigh on commodities

<p>The deepening selloff in commodities has been blamed on a host of factors, ranging from disinflation risk in Europe to persistently sub-par growth in the […]</p>

The deepening selloff in commodities has been blamed on a host of factors, ranging from disinflation risk in Europe to persistently sub-par growth in the G8. But uncertainty about the future of leadership at the People’s Bank of China (PBOC) is raising serious questions about the growth in the world’s biggest buyer of global commodities.

PBOC overhaul

Two weeks ago the PBOC said it didn’t want to act to stimulate the economy in order to squeeze out bubbling financial excesses. Just days later, the PBOC pumped CNY 500bn in liquidity into five of the nation’s largest banks. The reaction was a brief bounce in commodities and their currencies, namely, CAD, AUD and NZD.

PBOC governor, Zhou Xiaochuan, refrained from cutting interest rates, in fear of provoking a new asset bubble in China. The PBOC launched a new lending facility — Pledged Supplemental Lending–but failed to generate much enthusiasm by banks.

Reports emerge from the Wall Street Journal that the PBOC chief will be replaced after 12 years at the helm by someone more receptive to stimulating the economy and rather than in favor of reform. Among the top candidates is Guo Shuqing, governor of the Shandong eastern province, who has experience in banking and securities regulation. Speculation about his appointment arose when he surprisingly showed up at the secretariat of the PBoC’s monetary policy committee.

A change at the top of the PBOC will enable Chinese president Xi Jinping to further bolster his power consolidation among top political appointees, including governor Zhou, who has led financial market reform and currency liberalisation over the past ten years.

Commodities underwhelm

Commodities have not been helped by uncertainty from the PBOC.

The CRB Thomson Reuters commodities index – a 19-component commodity index— has fallen 11% in a matter of three months, hitting the lowest level in January. The weighting of the index is dominated by energy commodities, with oil occupying as much as 15% of the index. Yet, the selloff in metals and agricultural commodities cannot be ignored.

The contrasting picture with equities is highlighted by the climb in the S&P500/CRB ratio, hitting 12-year highs, up 101% from August 2011, and 158% from the lows of June 2008. At a time when geopolitical uncertainties converge in Eastern Europe and the Middle East, and the ECB combats the threats of disinflation, commodities are in no need of roadblocks in China’s monetary policy-making. A decline in WTI oil below $90 remains a possibility, while $1175 gold is increasingly considered as certainty. As commodities resume their downfall, the moment of catch-down from equities is inevitable.

SPX CRB Sep 25

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