China's credit impulse worsens

Tighter credit conditions may explain several recent market moves

Chart of the Day

China’s August money supply data was out late last week and confirms that the credit impulse remains negative on both a six-month and 12-month basis. With concerns about real estate company Evergrande’s debts coming to the boil last week, there is some pressure on the authorities to loosen credit conditions and help those types of firm out. That means we could see the six-month credit impulse start to turn up, although there are few that expect China to engage in any large-scale monetary easing any time soon, given those aforementioned debt concerns. That is one reason why some doubt there is much more upside for commodities left.

Macro

At the global level, the 12-month credit impulse turned down sharply in Q2. That’s because the massive increase in borrowing in the US in Q2 2020 fell out of the calculation. Since then, corporates and consumers have been deleveraging.

Canada added 90,000 jobs in August, and on a proportional basis is still ahead of the US in terms of the jobs recovery.

UK GDP was unchanged in July and is still some way lower than before Covid hit.

In Russia, the central bank hiked again on Friday. Several EMs have been hiking recently in response to higher inflationary pressures and reduced capital inflows in some cases.

Markets

A negative China credit impulse is not normally good news for commodities, implying they could fall in price - this is a generalization though, it’s a global market and sometimes the credit impulse provides the wrong signal.

Weak credit conditions in China may explain some of the recent weakness of global yields.

Traders remain short longer-term bonds, implying they expect yields to rise.

Traders have been reducing their net longs in platinum, which has fallen back sharply lately and hit a new 2021 low last week.

Platinum is now back below its level at the start of 2020 - could palladium head there too? That would go far against the narrative at the start of the year, when everyone expected palladium to do well due to increased EV demand.

Despite some negative moves for commodities, a selection of risk-on type assets has done well this past week.

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