Monday, July 1, 2013

Europe recovering & commodities making their move?

The economic news out of Europe today, while still weak, beat expectations.  Manufacturing PMI numbers out of Italy and France were better than expected though still in contraction territory.  Spanish PMI actually beat expectations at 50.0 and jumped into expansion territory!   German PMI just missed by one tenth and Euro zone unemployment also dropped two tenths at 12.3%. 

I've stated a few times in recent commentaries, in addressing my deflation thesis, that it was imperative that the Euro zone start coming out of their malaise in short order if the global financial system were not to slip into a deflationary spiral.  China was dependent upon this happening and with our economy facing rather strong disinflationary forces we could ill afford any continuation of the recessionary situation in Europe.

I was puzzled by the move in gold and the gold miners (GDX) late last week but look at what also popped today:

(click on chart for larger image)
 
"Dr. Copper sported a nice long healthy candlestick today.  And the "Doctor" was not the only industrial commodity that made a big move.
 
 
Here's the S&P GSCI Industrial Metals Index which is comprised of futures contracts on aluminum, lead, copper, nickel and zinc:
 
(click on chart for larger image)
 
Normally, one could explain the pop in commodities by pointing to a weakening US Dollar.   But the Dollar, as of this writing, is down only fractionally on the day.  Proportionally, for the amount the Dollar is down, the move in commodities is historically disproportionate.
 
I think the market is signaling to us that the deflationary juggernaut is abating.  What happened with gold and the miners late last week (http://equitymaven.blogspot.com/2013/06/gold-interest-rates-market-direction.html) was predictive of what we saw today in industrial metals. I know some would say this is a premature call but I've been watching commodities closely since their top in early 2012 and I'm going to stick my neck out and say we're witnessing an important turn in the markets and the global economy.  Time will tell if I'm right ...