Since then the imposition of another round of tariffs on China’s exports has been deferred while US and Chinese officials try to negotiate the terms of a deal in Beijing and the Fed ‘s chairman, Jerome Powell, has made some more dovish comments about the Fed’s approach to monetary policy this year.
The two particular issues that ignited the rout in markets have been therefore, if not defused, then at least deferred.
Nevertheless, the 20 per cent jump in iron ore prices since their nadir in November, the 3.5 per cent rise in the copper price since the start of the year, the 5.9 per cent rise in the nickel price this year and 14 per cent spike in the oil price are puzzling given the wider context.
It is likely that there will be at least one more rate rise in the US this year, perhaps two, and that the Fed will continue to shrink its balance sheet and withdraw liquidity from the US economy and global financial system. The European Central Bank has also ended its bond and mortgage buying, although it isn’t yet raising rates or running down its balance sheet.
It is also improbable that China will satisfy the ambitions of the more hawkish of Donald Trump’s trade advisors and begin dismantling its state-driven economic model or surrender its economic and geopolitical ambitions.
The US also has some trade issues, or at least asserts that it has, with Europe. Trade tensions aren’t suddenly going to disappear.
The impact of Trump’s tax cuts are waning and US corporate profit growth is slowing as the rate rises flow through and the impact of the tariffs that are in place raise costs and lower demand.
China’s economy is slowing through the combination of the impact of the tariffs on its factories and the pre-existing efforts of its authorities to reduce the financial leverage in its economy. That reduced growth is spilling over into the wider Asian region.
Europe is also experiencing declining growth, so the prospects for global growth aren’t positive.
There are some specific elements to the rebound in iron ore, given there is a seasonal aspect to steel production in China that has been exaggerated in recent years as mills – closed in winter to improve air quality – reopen.
Iron ore does, however – along with copper and nickel – appear to be responding to the cautious and targeted stimulus program China has been expanding as its economy has slowed.
Earlier this month, the reserve requirements for its banks were reduced for the fifth time in a year while an infrastructure investment program focused on transport infrastructure has been implemented in recent months.
It isn’t yet the large-scale stimulus that China injected into its economy in response to the financial crisis and probably won’t morph into a program of that magnitude, given the concerns the authorities have about the overly-indebted condition of their local governments and state-owned enterprises.
Nevertheless, it has provided a tonic for the depressed commodity prices. The iron ore benchmark price, at just over $US74 a tonne, has recovered almost all of the ground it lost in the final months of 2018.
Oil is responding to a different set of influences.
Brent crude was trading above $US86 a barrel before it cracked in early October. While the wider market turbulence might have played some part in the precipitous fall to just over $US50 a barrel late in December, the larger impact came from an OPEC misjudgement.
Under pressure from Trump, the Saudi-led cartel and its affiliates, particularly Russia, had ramped up production in anticipation of the forced withdrawal of much of Iran’s production as the Trump administration re-imposed sanctions.
Unhappily for OPEC they didn’t anticipate, and weren’t informed, that the administration would grant waivers from the sanctions to some of Iran’s biggest customers. The market was flooded with oil and the price tanked.
The cartel and other non-member producers agreed late last year to reintroduce production cuts and it appears that the Saudis are prepared to do the heavy lifting by cutting up to a million barrels a day from their output. The Saudis have demonstrated in the past that they will trade volume for price gains to optimise the revenue generated by their oil reserves.
The rebound in commodities might, given the gloomy and volatile global economic outlook, be short-lived. For the moment, however, it is providing some respite for the big commodity producers and a fillip for their share prices.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.