China

CCP officials are discussing policy options for breaking out of a deepening liquidity trap. Anything policymakers come up with will be additive to existing spending and to the multi-trillion-dollar fiscal-stimulus packages being rolled out by the EU and US. Inflationary pressures in the real economy will become embedded as increasing demand for industrial commodities meets constrained supply. Stagflation likely follows.

Chinese onshore stocks are attractive on a risk-reward basis relative to their global counterparts. If the global equity bear market continues, our bias is that Chinese onshore stock prices will also drop, but they will likely fall by less than their global peers.

China is launching a diplomatic charm offensive to improve relations with the world excluding the United States. But China’s proposals in Ukraine and the Middle East are overrated in their ability to restore global stability and reduce geopolitical risk.

Both iron ore and steel will have oversupplied markets in 2023. The path of least resistance for iron ore and steel prices will be down in the coming months. We expect both iron ore and steel prices to drop by 15%-20% from their current levels. We recommend that investors short stocks for global steelmakers and global mining companies.

China’s victory in getting KSA and Iran to restore diplomatic relations is of far greater consequence to commodity markets than the past weeks’ bank failures in the US. For China, further success in sorting long-standing security issues in the Middle East could incentivize oil and gas capex and affect oil flows. With short- to medium-term fundamentals largely unchanged, we are keeping our 2023 and 2024 Brent forecasts similar to last month, at $95/bbl and $110/bbl, respectively.