Against the Grain

It seems the Greeks are going back to polls after the parities failed to agree on how to form a unity government. We have note the EU has a tactic that if a country votes no in a referendum they are made to revote till they say yes, we suspect the EU will be more nervous about this Greek choice between pro and anti bailout parties. This on the same day the new French President got a soaking on his way to be sworn in and then headed off to meet the German Chancellor for Summit #1 we suspect of many. The markets had a typical Mon, dealers on their own over the weekend to try and figure out what the news meant stampeded out of the markets on arrival for a week of trading. The pack effect seems to have steadied things up in Europe this morning. We have noted before traders seem to have bullishness in numbers. Then a heavy day of data left the markets poised to recover as the week progresses.

The metals struggled in morning trading as markets absorbed the political and economic news. Third Wed stock action saw al top the increases followed by pb and zn while cu registered a fall. The bank analysts have turned their sirens onto pb. Earlier in the year the cry went up that zn demand would outstrip supply in 2013 / 14 and that would boost the price. Now pb is in the limelight as Bloomberg ran an article trying to boost price. With the LME stocks down 8% from last Oct record high analysts are predicting a deficit next year of 150 kt. We have always been cautious of calls on pb because of the dominance of China and the growing recycling industry.

There was a deluge of data, in Europe it was Q1 GDP, Germany 0.5% (Q4 -0.2%); France flat (0.1%) and Euroland flat (-0.3%) so escaping double dip recession for now. The May German ZEW economic sentiment survey slipped to 10.8 (Apr 23.4) while the Euroland declined to -2.4 (13.1). The Apr US retail sales rose 0.1% (Mch 0.7%) with ex auto flat (0.8%); this poor set was offset by CPI was flat (Mch 0.3%) and the May NY Fed Empire State manufacturing index rising to 17.09 (6.56) and a strong NAHB housing market index 29 (24).

Greece looks set for new elections as the carpets in the Presidential Palace are worn thin but no unity government of pro and anti bail out parties can be cobbled together. In the meantime public opinion polls have shown a sharp rise in support for the anti socialist party Syriza who came third in the poll. Maybe indecisive elections like this are good for democracy, it makes parties that hid behind bland non committal policies in the election campaign lay on the table what they will really do and then the electorate votes again knowing what they will really do. Things were rough for the German Chancellor, Merkle as the election in the state of North Rhine Westpalia saw her CDU party lose to an SDP – Green alliance. The heartland of austerity rejects its chief proponent. So again Europe faces a crisis, watch the leaders try to paper over the cracks, what amazes us is the markets will take off again when the fudge is announced. They just want to believe the worst is over.

These two events saw investors head for the exits as the € fell below 1.29 sending global equities low and rocking metals back of their supports with cu breaking US$ 8000 and 7900. The LME stock falls dominated by zn as it saw warrants cancelled in Malaysia. On the mining front the Peruvian miners called off the two day strike set to start today, but expect discontent to rumble on, it does there.

Very little data around the Mch Euroland industrial production fell 0.3% (Feb 0.8%) yoy -2.2% b(-1.5%).

Over the past few weeks we have noted that the Mch / Apr US data we track has shown a slowing of the momentum that built up in Q4 and early 2012 and this has been noted by wiser sages. Overnight Bloomberg reported Bill Gross the ace bond fund manager at PIMCO hinting at the need for the Fed to look at a QE3 measure. While the chief economist at Goldman’s described the US economy as “dreary”. This is not what Obama wants to hear but could support the base metals, not from any fundamental perspective rather the financial Houdini route. More liquidity, lower rates so investors can fund the hording of hard assets.

The metals suffered from the political drama unfolding in Greece like all the markets did though the € continues to hold in pretty well under the circumstances. Asia played catch up overnight leaving the metals hovering around y/days London closes; selling then resumed through the morning and into the early afternoon with copper breaching the $8000 level and the € slipping to 1.291.  There were continuing decreases in stocks; Al -21k, Cu -7.5k, Pb -2.7k and a further  increase in Zn. We would expect these lower levels to encourage some physical buying interest

The data remains scarce the Mch Japanese leading economic index was 96.6 (Feb 96.0). The German Mch trade balance improved to a €17.4 billion surplus (Feb € 14.96 bill) as exports rose 0.9% (1.5%) and imports slowed 1.2% (3.6%).

The political favourites came in over the weekend; Boris Johnson retained the Mayor of London post; Sarkozy was flicked by the electorate in France while the pro bail out parties in Greece were hammered and Putin glided back into the Presidency of Russia in a staged ceremony that might have made a Tsar blush. The market reaction to these political shakes was a slight tremor suggested the results were as expected and despite the changes little will change in the management of Europe. Perhaps more worrying was the US employment data and in particular the Participation Rate that edged lower to 63.6% (Mch 63.8%), this occurred at the unemployment rate improved to 8.1% (8.2%). The red flag on all this is that fewer workers are supporting an already overburdened political system that has shown no sign of being able to self regulate itself. This is a global issue take a look at Kenya where this weekend politicians voted themselves a redundancy payment increase making them some of the best paid in the world as the country struggles with development.

Having reacted adversely to the US data Fri the metals simply shrugged at the weekends political news, expected; will make no difference; so what and ho hum seem to be the views we have encountered. The € hardly missed a beat sticking around the US$ 1.30 mark. The LME stocks saw cu and al lower while pb and zn rose the latter the biggest as the total stock has consolidated above 900 kt and looks set for the million tonne mark. In Peru the mine workers unions have  called a two day national strike for May 14, these things have a habit of escalating. It is boring but we are in a “dollar rut” at the moment with it the dominant driver. This afternoon as the US$ breached € 1.30 cu led the metals lower in what some many see as a delayed reaction to events but perhaps the expectation today of another imminent Greek election got people wondering.

As is usual after the start of month glut the data has dried up, Mch German industrial production rose 2.8% (Feb revised to -0.3% from -1.3%) yoy 1.6% (flat from -1%).

The manufacturing euphoria of China and the US on Mon has ended in a mire at the close of the week as US non farm payroll data fails to live up to expectations for the second consecutive month. Employment rose 115 k (Mch 154 k) although the unemployment rate dipped to 8.1% (8.2%). Mid week the Apr service sector PMI slipped China official 56.1 (Mch 58.0); China HSBC 54.1 (53.3); while Australia dumped 39.6 (47.0) and others struggled, France 45.2 (46.4); Germany 52.2 (52.6); Euroland 46.9 (47.9) the composite index 46.7 (47.4); UK 53.3 (55.3) and US 53.5 (56.0).

The change in mood took the wind out of the metals sails as again a sharp move at the start of the week was reversed. Now brace yourselves for Mon with the LME closed. The cash to 3’s back in cu has eased to US$ 50 from US$ 150 on Mon. The LME stocks have seen al slip under 5 million tonnes for the first time in a while at the same time cancelled cu and al warrants stand at 32% of total tonnage and pb 24%.

Over the weekend we found out who is hurting in the cu market as the cash to 3’s backwardation touches US$ 150 (a back is when the cash price of cu is higher than the three months price), Chinese smelters led by Jiangxi Copper have agreed to deliver LME warranted cu to LME warehouses over the next two months in an effort to boost the availability of metal on the world market. No tonnage was cited but it appears they are being affected in two fronts. The annual contracts for refined cu imports are agreed on a formula that includes the LME cash price plus a premium, so in a normal market the cash price is at a discount to the three month benchmark roughly calculated by tallying up the cost of financing, storing and insuring material for three months. So in normal times if the cash to 3’s contango was US$ 35 and the three month price at US$ 8435, the producer would be selling cu to a Chinese customer at US$ 8235 minus the contango plus the agreed annual premium US$ 110 resulting in a delivered price of US$ 8510 per tonne cif Shanghai. With today’s back the calculation becomes the cash price (3 months US$ 8400 plus the back US$ 150) = US$ 8550 plus the premium equalling US$ 8660, a 1.7% higher price. On top of that customers who are storing metal and hedged are finding the hedge costs are moving against them. In normal market conditions those who have sold forward see the price of the metal fall as the contract approaches cash. This enables them to sell the material and recoup (some perhaps not all) storage costs or buy back your hedge and roll it forward again recouping some of your costs. In the present conditions those who have hedged their material are having to pay a higher price to buy it back hence increasing their costs and financing requirements. The LME has set ruling for controlling the nature of a backwardation and these help to relieve the adverse effect on the market, so far those controlling the tightness have complied with these guidelines forcing entities on the wrong side to take evasive action.

The broader markets were steady as we head into a battery of Apr numbers starting tomorrow with manufacturing PMI that will provide some most up to date assessment of the global economy, Japan’s Apr manufacturing PMI slowed to 50.7 (51.1). The metals opened in London little changed with a close eye on the US$. The LME stocks saw good falls in cu and al while pb registered a 8 kt cancellation of warrants in Italy and Vlissingen taking cancelled over 20% of total stock. We suspect the trader / bank takeover of LME warehouse firms over the past eighteen months is just starting to change the playing field of the market. At best the metal markets meandered buffeted by the US$ and lacking any ideas of its own.

On the numbers front after the horrendous unemployment figure Spanish Q1 GDP declined 0.3 (Q4 -0.3%) yoy -0.4% (+0.3%). The Mch US personal income rose 0.4% (Feb 0.3%); personal spending up 0.3% (0.8%) and savings was 3.8% (3.7%). Ahead of national data the Apr Chicago manufacturing PMI down top 56.2 (Mch 63.3) the slowest pace in over two years. The Feb Canadian GDP declined 0.2% (Jan 0.1%) yoy 1.6% (1.7%).