Daily Commentary

MarketMinder’s View: China’s May exports skyrocketed 19.4% y/y thanks to the global AI investment boom (semiconductor exports surged 110% y/y). External demand rose across the board, as Chinese shipments rose to America (35% y/y), the Association of Southeast Asian Nations (24%) and the European Union (7.6%). Alongside strong imports (27% y/y), the headline numbers are indeed robust. That said, this coverage points out a couple caveats worth considering, namely, the disconnect between trade values and volumes. “Almost none of May’s increase came from higher volumes of shipments, but rather from higher prices for semiconductors amid a continuing shortage of memory chips. In volume terms, semiconductor exports rose by just 6% in May from the year-earlier period, said Abhijit Surya, an economist at Capital Economics. China’s rare-earth exports more than tripled in dollar terms, soaring 237% in May from a year earlier, according to data from the customs bureau. That reflected skyrocketing prices for the valued inputs into high-tech products, since rare-earth exports actually fell in volume terms from a year earlier, the data showed.” As the article also notes, though Chinese imports of crude oil rose on a value basis (due to higher prices), they fell -29% y/y in volume terms. Volumes better represent how much “stuff” is moving between partners whereas values reflect prices (which other variables may affect, including inflation). Now, demand out of the world’s second-largest economy still looks solid, and the country stocked up on oil in the months before the Iran war, so a slowdown in volumes should be expected. But trade likely isn’t as gangbusters as May’s headline results indicate—worth keeping in mind when forming expectations.

MarketMinder’s View: Always take politicians’ words with many grains of salt, but the pre-scheduled review of the US-Mexico-Canada Agreement (USMCA) opens on July 1, and Canadian officials are turning on the charm. “Canada is signalling it wants stronger collaboration with the US, its largest trading partner, and is willing to accept tougher conditions to trade in North America. Ottawa’s previous mantra has been to double non-US trade with new partners in Europe, Asia or Mercosur countries. … On Wednesday, Ottawa announced a reversal of policy that saw an additional 15 per cent tax on US streaming services to produce local content for Canadian audiences.” That is a far cry from Canada’s more antagonistic approach when Prime Minister Mark Carney won election in April last year because of his “tough” stance toward US trade and President Donald Trump. This doesn’t mean America and Canada will start singing kumbaya and come to terms by Canada Day. But it is a useful reminder that harsh rhetoric shared at press conferences or on social media won’t necessarily prevent talks from commencing (or agreements from being reached). And, even if the talks don’t conclude with a broad agreement to extend or deepen USMCA, it isn’t relegated to the scrap heap. The deal simply states the countries would move to annual reviews through the expiration in 2036. Maybe that isn’t great for long-term investment, but it is no huge calamity, especially since politicians could always extend or deepen it later.

MarketMinder’s View: Those titular unknowns: How long will global inventories last and what is the state of demand (especially in China, which has reduced its seaborne crude oil imports)? This analysis worries the Iran war and closure of the Strait of Hormuz have disrupted global oil supply and demand to such a degree that the market is flying blind. “While the industry has developed increasingly sophisticated tools to track crude production, refining activity and tanker movements – often in near real time – consumption remains fragmented across billions of users and is often only reported with significant delays. In some cases, such as China, it is not reported at all.” The chief concern: Many outfits believe global oil demand has contracted sharply, and “… the longer the Hormuz disruption persists, the greater the drag on economic activity and fuel demand”—which markets are supposedly glossing over, as indicated by recent Brent crude price levels. While we agree measuring supply and demand can be difficult, that doesn’t mean markets are missing anything. Take supply concerns. Yes, countries have drawn down oil inventories—but what goes overlooked is how producers (especially those in the US) are ramping up production and exports thanks to the price incentive. Besides, isn’t that the point of reserves in the first place? To hedge against disruptions? On the demand side, as this article acknowledges, China may have reduced crude imports for now—but it can also jump into the market whenever it sees a price it likes. And it is widely known to have stockpiled pre-war. We don’t dismiss future price volatility, but over the longer term, don’t underestimate markets’ ability to efficiently discount widely known information. They move much quicker than any one group of investors, strategists or observers.