(Bloomberg Opinion) -- Copper has touched $7,000 per metric ton on the London Metal Exchange, having climbed roughly 60% from a late-March nadir. The industrial metal is trading at levels unseen since 2018 despite a surge in coronavirus infections in Europe and beyond, stockpiles rising off recent lows, and expectations of a surplus in 2021. The reason is China, which is dominating the 24-million-ton per year market like never before thanks to a recovery that is outpacing other economies.The metal’s rebound from four-year lows in March mirrors the rally in that other gravity-defying asset class, the FANG-powered U.S. stock market. Copper’s rally has exceeded expectations, given that the most pessimistic forecasts for pandemic-related supply disruptions haven’t been borne out. Peru’s production fell in August from a month earlier, hit by worker shortages, but output in Chile, the world’s top exporter, increased. BHP Group-operated Escondida, the Chilean copper mine that’s the world’s largest, avoided a strike last week, even if workers at Lundin Mining Corp.’s far smaller Candelaria downed tools in the country.China’s industrial production gained momentum to rise a forecast-beating 6.9% in September from a year earlier; excavator demand has jumped, along with car sales. Fiscal stimulus, an imminent five-year plan that will boost clean energy investments, and an expansionary monetary policy are all supporting the recovery. Meanwhile, an appreciating yuan has increased consumers’ purchasing power.China’s influence is hardly new — or surprising, given it’s the only major economy the International Monetary Fund expects to see expand in 2020. In industrial metals, though, this year has marked a significant increase in its clout. The country now accounts for more than 50% of demand in nickel, steel, copper and aluminum, analysts at BMO Capital Markets say — a level that only Japan has ever come near, and China’s North Asian neighbor peaked at less than 15% of global volumes.Indeed, China’s dynamics have been enough to put copper back on a rising path after a short-lived drop earlier this month, when U.S. President Donald Trump was diagnosed with coronavirus. That’s partly because inventories are still close to historic lows, making the price more likely to swing on supply hiccups, like Lundin’s disruption. But it also hints at a market watching the macroeconomic signals rather than output specifics, and expecting China, which has already imported more copper than it did in 2019, to keep on spending its way through post-pandemic convalescence.The five-year plan is set to include ample sums for electrification, clean energy and electric cars, which use four times as much of the metal as a standard vehicle. They are already forecast to make up the bulk of copper growth over the next decade or so, along with charging infrastructure. Then there are the aggressive decarbonization ambitions. All of that, and hopes of a spending spike in the fourth quarter from the likes of State Grid Corp. of China, explains the persistent net long positions among money managers in CME copper, up again, according to the latest Commitments of Traders Report. There are fewer bears out there, too, compared to much of early 2020 and 2019.The bigger question is whether that is enough to hold the metal at or close to current levels, especially if China’s rush begins to fade before the rest of the world recovers, or before Beijing’s five-year plan and its green ambitions rev up. A price consistently above $6,000 is also more likely to encourage companies to approve new projects, as they did after 2017, analysts at CRU Group pointed out in a September study. Cashed-up diversified miners and even iron ore-focused diggers may pile into copper acquisitions with greater enthusiasm, too.Still, supply is unlikely to be the immediate cause if the rally does stumble. The reality is that even at lower prices, miners have been eyeing up deals for some time, given the metal’s gleaming green-economy prospects. Unfortunately, theory is easier than practice. Anyone needing a reminder could do worse than consider BHP’s Olympic Dam copper operation in Australia, where ambitions and scale have shrunk again this week. It’s a far cry from a vision that once included the world’s largest open pit. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- International Business Machines Corp. shares fell the most in four months after the company failed to provide an earnings outlook and reported its ninth consecutive quarter of declining or flat sales.While IBM’s third-quarter revenue beat analysts’ forecasts, investors are looking for signs that the planned spinoff of its legacy infrastructure unit will resuscitate growth. Shares dipped as much as 6.7% in New York on Tuesday, the most since June.The company, which had pulled its full-year forecast in April citing uncertainty from the coronavirus pandemic, declined to provide any updated guidance on Monday’s earnings call. Earlier this month IBM announced plans to shed its division that manages corporate computer systems and go all-in on internet-based services and artificial intelligence to help revive fortunes at the 109-year-old company.While the spinoff is the right step for improving its future growth prospects, BMO Capital Markets analyst Keith Bachman said “underlying business trends remain weak such that patience will be required.”IBM is hiving off the unit that handles day-to-day infrastructure service operations and accounts for about a quarter of the company’s total sales. But that business has shrunk in recent years as customers have moved more of their operations to the cloud, where IBM competes with rivals such as Microsoft Corp. and Amazon.com Inc. Meanwhile, demand for cloud computing services has boomed as companies have shifted to remote work.Chief Executive Officer Arvind Krishna took over from Ginni Rometty in April and has moved quickly to cut thousands of jobs as many of IBM’s customers have pared investments and held off on big software deals during the pandemic. The splitting off of the services unit, which won’t be completed until next year, will let the company target hybrid-cloud software and services. In 2018, IBM spent $34 billion to buy Red Hat to further those efforts. Hybrid cloud refers to companies using a combination of their own servers and renting storage and computing power from large providers such as Amazon and Microsoft.“As we look forward, the case for hybrid cloud is clear,” Krishna said on a conference call with analysts. “It’s a tremendous opportunity valued at $1 trillion with most of the enterprise opportunity ahead of us.”Sales fell 2.6% to $17.6 billion for the three months ending Sept. 30, the Armonk, New York-based company said Monday in a statement. That was slightly better than the $17.5 billion analysts had forecast, on average. The revenue decline was driven by tech support units Global Business Services and Global Technology Services, where the business that will be spun off is housed, which reported decreases of 4.7% and 3.6%, respectively. Meanwhile total cloud revenue increased 19% to $6.0 billion, led by Red Hat, which saw a 17% bump in sales. IBM released preliminary results earlier this month when it announced the spinoff.Chief Financial Officer Jim Kavanaugh said the pandemic’s affects on the economy continue to damp demand. “The rate and pace of recovery remains uncertain and as a consequence, we have not seen a fundamental shift in overall demand levels,” he said on the call, adding that IBM has “healthy pipelines in cloud and data platforms” in the current quarter.Third-quarter earnings excluding some costs were $2.58 a share, beating the average analyst estimate of $2.55. Shares closed little changed at $125.52 Monday in New York and have declined 11% this year, compared with a 6% gain in the S&P 500 Index.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- If everyone across global financial markets is prepared for a “big bang,” will it truly be a big bang?That, in a nutshell, is what banks and other institutions exposed to interest-rate swaps on more than $80 trillion in notional debt are about to find out starting this weekend. The secured overnight financing rate, or SOFR, will suddenly replace the effective federal funds rate in valuing these derivatives in what’s seen as a big step forward to leading the financial system away from the London interbank offered rate benchmark that has dominated the lending world for about five decades.I’m not sure when Wall Street as a whole agreed to dub this transition the “big bang.” I found research from as far back as February from ANZ Research flagging the adoption of SOFR discounting this month as a “big bang for the benchmark rate reform process,” with further commentary from BMO Capital Markets in June and Barclays Plc in July. Regardless, the nickname makes the switch sound rather ominous. Just before Europe made the shift to its own new benchmark in July, a Bloomberg News headline said “Banks Scramble to Cut Derivatives Losses on Eve of Market Reset.” In hindsight, that switch had little market impact. There are many reasons to expect the same will happen this time around, starting with preparations made by clearinghouses that stand between the two sides of a swap. Bloomberg’s William Shaw, Liz Capo McCormick and Tasos Vossos reported that LCH Ltd. and CME Group Inc. aim to effectively neutralize changes in swap values by shifting any compensation from clients whose position values go up to those whose values decline.“For about six months our members and clients have been able to look on their screens and see a forecast for the compensating cash payments and compensating swaps they will receive, so they are familiar with what’s about to happen,” David Horner, head of risk at SwapClear, which is part of LCH, told Bloomberg. “It’s important for the market that it runs smoothly.”Bloomberg Intelligence analysts Ira Jersey and Angelo Manolatos attempted to put some hard numbers on exactly what might happen. They estimated in late August that for a $10 million notional 10-year swap with a coupon of 0.52%, the net present value would decline by about $400 simply because of the switch to SOFR discounting. In theory, that should be manageable for clearinghouses to adjust.If there’s one element that could cause chaos, it’s that clearinghouses are not just settling these losses with cash but are also distributing fed funds/SOFR basis swaps to compensate for swings in value — something that didn’t happen during Europe’s transition. Both CME and LCH are then holding auctions to allow clients to close those out.Again, as Horner said, banks have seen forecasts for both the cash and swaps they’ll be getting for months now. There shouldn’t be any major surprises. But if there are, here’s Shaw, McCormick and Vossos on what that might look like:Clients have agreed to a maximum loss, said Sunil Cutinho, president of CME Clearing, and “if their positions cannot be auctioned off then they are fully protected and they can use their own private means to dispose of their positions.”However, there are concerns about price swings in the market amid a surge in supply as some banks ditch basis swaps they received as compensation.The big question is how well the auctions go. Clearinghouses are not guaranteeing the minimum prices for the basis swaps, which could fall below the maximum that firms are prepared to tolerate, said Joshua Younger, a strategist at JPMorgan Chase & Co.“Many would then likely unwind them in the open market and the price action could get very disorderly,” he said.Maybe I have too much faith in markets and in arbitrage, but I have a hard time seeing how an event so telegraphed could lead to any serious long-lasting disaster. It stands to reason that there are hedge funds or other sophisticated investors out there who have calculated at what price they’d step in and purchase basis swaps if there truly is a glut and a need for some firms to get them off their books.In any event, even if there’s short-term volatility from the big bang, it will almost certainly be worth it, simply because of how much it moves the ball forward on the global shift from Libor, which is scheduled to happen at the end of 2021. When I wrote about SOFR soon after its introduction in 2018, it was a big deal that the World Bank issued $1 billion of two-year floating-rate notes tied to the new rate. Fast-forward to today, and more than $100 billion in notional volume of SOFR-linked swaps traded in September. Analysts fully credit the impending shift for this development, which they say will create a more liquid swap curve and make SOFR a more formidable alternative to Libor.In this context, the “big bang” isn’t so much a scary market-moving event as it is a necessary one-time jolt to get global markets ready for the reality of a post-Libor world, with a benchmark based on actual transactions rather than banks’ guesswork. SOFR has long been called the future for U.S. rate markets without nearly enough to show for it — a truly frightening proposition. In just a few days, the new benchmark may finally live up to the hype.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.