Having held on to hope that the reflationary impulse would sustain the adverse series of events and geopolitical shocks over the past two weeks, RBC’s head of cross-asset strategy Charlie McElligott is ready to throw in the towel, driven by what we have been pounding the table on for the past three months, namely the fading inflationary impulse out of China, manifesting itself most vividly in the recent crash in various commodities, and iron ore in particular, which has tumbled 30% from recent highs.

In a note released on Tuesday morning, McElligott cautions that the market is “losing the [reflationary] impulse” and adds that while attention is focused on events out of the UK where Theresa May unexpectedly announced snap elections, “the “real” macro story in my eyes overnight is the ongoing commodities fade originating out of China.Iron Ore continued its outright collapse (Qingdao 62% Iron Ore is -17.6% MTD and -30.2% from late February highs), while Aluminum, Copper, Zinc, Lead, Rubber, Gold, Silver, Rebar, Brent / WTI Crude, Gasoline and Nat Gas are all markedly lower.”

The larger implications here both with lower commodities as well as the potential for contraction in Chinese credit creation comes back to a weakening in “inflation expectations.”Already over the past few weeks I’ve noted the fading of the ‘energy’ component in recent CPI prints in both Germany and US, as the base-effect in crude thins further.Market indicators such as US breakevens, 5y5y inflation swaps, ‘cyclicals vs defensive’ equities and the aforementioned iron ore are all continuing their collective slide as well. 

As a reminder, we showed last week that the Chinese credit impulse has rolled over sharply, and is now the lowest it has been in 7 years.

And some further details this morning from UBS:

Looking at the QI model, either “Inflation Expectations,” “Metals & Agri” or “WTI & Brent” are “top 3” macro factor price-drivers of the following cavalcade of bell-weather securities: UST 10Y, 6th ED$, USD fwd 2Y2Y, Bund 10Y, EUR fwd 2Y2Y, BTP 10Y, Nasdaq, S&P 500, STOXX Europe 600, Nikkei, MSCI Emerging Markets, EURUSD, USDJPY, EURJPY, Gold and JNK (US HY credit).  Net / net, “inflation” remains the most critical driver of cross-asset pricing—so if ‘price is news’ and inflation is preparing to fade further (without any seeming ‘US fiscal policy’ booster shot coming near- to medium- term), be ready for negative impact on risk-assets.