Data on the Data
Episode 1: A real economy warning for reflation
In this first episode of our new series, Data on the Data, Refinitiv’s Oliver Hetherington talks to Bruce Alway, Director of Metals Research about whether the dollar reflation trade can transition into true reflation, based on a pick-up in global growth. Does the data usage across a broad range of commodities highlight a slowdown in the real economy that is obscured by the impact of the weaker dollar?
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Hi, I'm Oliver, and welcome to Data On The Data.
Copper prices have been marching steadily higher since the pandemic lows of 2020. They have been following the move lower in the dollar and this has generated a lot of momentum from fast money accounts chasing the trend. The CFTC net non-commercial position in copper futures is close to an all-time high.
The price momentum in copper has been repeated across many other key commodities. Investors are now waiting to see if this dollar-based reflation trade can transition into true reflation based on a pick-up in global growth.
But when we looked at the actual post-holiday rebound in data usage across a broad range of commodities, there was one where usage had started to drop significantly. This is a commodity where demand is more about the real economy rather than financial instruments such as futures and ETFs.
Bruce Alway of Refinitiv outlines the data usage and why this could be a warning.
When most people think about one commodity that strikes at the very heart of economic growth patterns, they world normally think of either crude oil or Dr Copper, known as a doctor because it has a PhD in macroeconomics as its price so closely mirrors the real economy.
These are huge commodity markets, but they are also ones that can be distorted by non-commercial actors, such as hedge funds or asset managers, who can express views on the global economy through these liquid futures markets.
The financial market for iron ore is far less developed. Demand and supply generally originates with corporate entities within the real economy. The data usage for iron ore had built momentum in the second third of 2020, peaking just before the holiday season. Like many other commodities, data usage rebounded in early 2021. But in Asia, where data usage on iron ore has been the highest, this post-holiday rebound has quickly lost momentum and the number of users is now starting to fall.
If we then look at the data usage by organization type, the corporate sector is by far the largest sector in iron ore. Once again, like with the important Asia region, this user group has started to see a rapid decline in the use of iron ore data after this year’s initial rebound.
Why should we care? Well, the other major commodities, which are also plays on the weaker US dollar, may have found support outside of the real economy from financial institutions playing the weakness in the dollar since the US November election, whereas iron ore is dominated by the real economy. If real economy interest is starting to lose momentum, this could be a warning for other commodities. Although vaccines are on the way, the global economy still has a tricky few weeks ahead.
And as noted at the beginning, speculative positioning in copper is close to the all-time highs. While demand for copper from the world's largest consumer has been bolstered by Beijing's latest stimulus package, the real risk is that the dollar now starts to rebound, moving the currency support just when there are signs in the iron ore market, that underlying demand in the real economy could also be starting to falter.
Some really interesting insights from Bruce there. Iron ore is a key industrial commodity, and it will be at the heart of any major boom that results in fiscal stimulus and rebound in growth from the lows of 2020. That doesn’t, however, mean that demand will exceed 2020 levels.
The post vaccine euphoria may have got a little bit ahead of itself. Many commodity markets are distorted by non-corporate players.
It’s therefore worth keeping an eye on real demand from the real economy to see whether the broad-based price action reflects broad based growth. The drop in data usage of iron ore could be a lead indicator for some of the other commodities which have been riding high on the reflation narrative.
And there's one last thing.
Take a look at this chart here we are showing the data usage of alternative energy funds vs. traditional energy funds on our EIKON platform. We've seen a huge increase in demand for alternative energy fund data with a 476 percent increase year on year. Back this up with the inflow of 5.2 billion dollars into alternative energy funds since the start of 2021, and it looks like investors could be preparing to ride Biden's 'green wave'. Certainly something we're going to be keeping a really close eye on. Thank you for watching Data On The Data. Don't forget to subscribe and I'll see you next time.