Morning Brief – Friday 31st

China: The Dead Spread

When I worked on the floor of the Chicago Futures Market, traders watched and traded the price differential between spot prices of pork meat and the futures price of live hogs. It was less than charmingly named the Dead Spread. Pork as we all know is a fundamental of the Chinese diet and global pork prices are about to receive a major jolt. Six months ago African swine fever was imported into Guangdong province and was slow to spread. It has now grown rapidly and farmers have slaughtered herds of pigs to prevent the spread of the disease. At first we thought this was a local or maybe a regional story, but research has demonstrated that it takes approximately 6 months for such an outbreak to feed through to prices. Spot pork meat prices in China have risen by a relatively minor 10%. But estimates of the 400 million Chinese pig stock being reduced by a third have rattled futures markets on the other side of the world. In Chicago the Sep and Dec 2019 lean hog futures contract have increased by 50%. While readers may think that Chinese will replace this part of their diet with soya or buy overseas pork, the fact is that for the 1.4 billion Chinese there is simply not enough pork in the world to replace the loss of a third of their pigs. For the rest of the world: expect pork prices to rise sharply in the next months, so stock up your freezers now, the Dead Spread is about to narrow big time as spot pork rises towards the futures price.

Italy

The Euro elections have had a number of consequences and nowhere more than in Italy where the right wing League Party led by Deputy PM Salvini captured 34.3% of the vote. This has worried markets as emboldened by the result, Salvini has pledged to concentrate on the real economy and wants to ignore the “old parameters” of the EU budget rules. Salvini has for good measure called for a fiscal shock which means tax cuts and will cost EUR 30-50 billion. The government bond market has been selling off with yields climbing to 2.72% in the 10yr which is a historic high against the German Bund which is trading at minus 0.15%. For such a large and such an indebted economy such as Italy demonstrably to be threatening to ignore EU budgetary rules goes far far beyond the borders of Bella Italia with its implications. Basta!

China v USA Trade

A potential Trump trump by the Chinese lies in the production of Rare Earths. 70%+ of Rare Earths are mined and exported by China and are vital in an array of sectors including the glass industry, renewable energy technology, oil refineries and electronics. The US Geological Survey designated Rare Earths critical to the US economy and to national defence. The Chinese are it is reported contemplating withholding exports to focus the mind of POTUS on the trade negotiations. Bullshit may baffle brains but commercial considerations trump……er…… Trump?!

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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