Against the Grain

The recent market upsurge has been accredited to a realisation as Bloomberg headlined last week “US Avoids Recession as Data Can’t Get Much Worse”, roughly translated, the economy is not going into double dip. But who said the economy was entering that condition, the majority of analysts see the chance of such an eventuality as 25%. Putting the probability of positive growth at 75%. The question then becomes what speed? If the expectation is optimal US GDP of 3%+  and world growth over 4%, then the recent rally is understand however, if over the next two years growth is sub optimal then prices have overshot. This raises a disconnect, economies has many speeds while the market machine has two, risk on / risk off.

The Asian markets added the premium for the late DJI surge then looked around for direction. Into London markets were still looking, LME stocks routine with fall dominated by al and sn the only riser. Looking at the Select volume seems London took time out as well. Normal business resume again tomorrow. On the equity front FTSE rose 11 points.

The Spt Euroland Sentix investor confidence index slipped to 7.6 against and expect rise (Aug 8.2).

There was a tidal wave of economic data but the only one that counted was Aug US employment, the nonfarm payrolls down 54 k (Jul revised to -54 k from -131 k), unemployment 9.6% (9.5%), average weekly hours unchanged 34.2 and average weekly earnings up 0.2% (0.2%). Private payroll rose 67 k better than expected (107 k) as manufacturing payroll fell 27 k (34 k), service providers off 54 k and retail 5 k and construction rose 19 k. In its present mood the market saw this as very satisfactory.

Trailing behind came Aug service industry PMI data Australia 47.5 (46.6) below 50 means the sector is contracting, Italy 51.4 (49.6); France 60.4 (61.1); Germany 57.2 (56.5); Euroland 55.9 (55.8) the regions composite index 56.2 (56.7); UK 51.3 (53.1) and US non manufacturing PMI 51.5 (54).

Asian trading was quiet as the week’s economic numbers reached their crescendo when the US opens. The weekly Shanghai warehouse stocks had cu down 4665 tonnes at 105,917; al off 176 tonnes at 490,589 tonnes and zn rose 4472 tonnes at 236,040. The LME stocks all declined again led by al except sn. On the week cu fell 2.5 k, al off 19 k, zn fell 1 k, pb rose 350 tonnes, ni up 1494 tonnes and sn dipped 25 tonnes. Overnight the mining M&A juggernaut rolled on as Goldcorp agreed to buy Andean Resources in a US$ 3.4 billion deal, Bloomberg reports 290 gold deals this year worth US$ 38.4 billion. The employment data saw the metals jump and gold dive (1239), though the last figure of week dampened things down.

The Jul Euroland retail sales rose 0.1%, less than expected (0.2%) yoy 1.1% (1.2%). The jaw, jaw on the US economy will continue next week as President Obama is scheduled to propose new measures to boost growth. There is a new banking crisis but it is not shaking the world, in Afghanistan Kabul Bank an institution owned by relations and friends of the President is suffering a run on it, as a report says most Afghans do not keep their money in the banking system. While the President blames the West.

US is on holiday Mon be offer the usual cautionary note.

The Bloomberg headline today sums up the market mood “US Avoids Recession as Data Can’t Get Much Worse”. But as the FT points out the first day of Spt was very similar to the first day of Aug, with markets higher led by the DJI advancing over 200 points, only for it to end up down 4% on the month. So surplus cash is rushing into the month on what we said y/day was a millions reasons to by and only two to sell. What are the two, a general slowing in the world economy with stubbornly high unemployment and poor finances in both the private and public sector. The market bias is founded on a belief that the Fed has drawn a line in the sand that it will not allow the economy to falter below, the question is do the governments, central banks and supra national bodies have the resources and ability to deliver for investors. Then there is what PIMCO calls “addition by the elimination of subtraction”, the recent poor data means the speed of GDP to the downside is slowing.

Metals marked time in Asia after joining the headlong rush higher y/day. In China Aug car sales rose 15.4% to 977 k units up 59% yoy as incentives cancelled out a sales tax increase. This compares with Japanese Aug sales up 47% yoy to 291 k units as government subsidies ended and US sales down 21% yoy and twelve months on from the end of “cash for clunkers”. This makes annual auto sales of 11.47 million units (14 million units in Aug ’09). A integrated Chinese al complex has been waiting approval from the National Development and Reform Commission since ’08, the Shanxi Tongde project would produce 2.3 million tonnes of bauxite per year, 1.2 million tonnes of alumina, 400 ktpa of al and extrude 200 ktpa al. An LME stock change, all rose except al. The afternoon was hamstrung by steady US equities although metals again outperformed other areas.

The Aug UK Nationwide house prices fell 0.9% mom (-0.5%) yoy 3.9% (6.6%) and construction PMI 52.1 (54.1). The Jul Euroland PPI rose 0.2% (0.3%) yoy 4.0% (3.0%). The Q2 Euroland GDP was unchanged 1%, yoy 4% (3%). The ECB left rates unchanged at 1%. In the US weekly jobless claims 472 k (478 k). Revised Q2 nonfarm productivity fell 1.8% (-0.9%) and unit labour costs rose 1.1% (0.2%). It is a worry productivity is falling at the same time unemployment is rising. At 15:00 Jul factory orders rose 0.1% (-1.2%) and pending home sales rose 5.2% (-2.8%) yoy 20.1% (-20.3%).

The markets came in on the front foot after President Obama in his address to the nation emphasised a focus on domestic economic recovery. On the whole the August manufacturing PMI data was supportive revealing steady sector growth – Australia 51.7 (Jul 54.4); the official Chinese figure representing the SOE sector 51.7 (51.2) and HSBC SME sector 51.9 (49.4); Russia 52.9 (52.7); Indian 57.2 (57.6); Italy 52.8 (54.4); France 55.1 (53.9); Germany unchanged 58.2; Euroland 55.1 (56.7); UK 54.3 (56.9) and finally the US 56.3 above anticipation (Jul 55.5).

The metals outperformed in Asian time, with cu up US$ 100, there seems to be a million reasons to buy but very few to sell. Late last week the FT Lex had a very bullish article on cu that has pinned its colours to gold, helped by the currency markets and ignoring the equities. In Aug cu rose 0.5%, gold up 5.3% with oil down 8.5% and al off 6%, so fundamentals rule. The Japanese second largest cu smelter Sumitomo Metal Mining predicts concentrate feed will be in tight supply for the next 5 years and already producing at a reduced rate (404 kt in ’10 from 450 kt in ’09). The large mines are not producing to capacity or have had ongoing technical and mechanical problems. The LME inventories fell dominated by al the exception ni, it is becoming clear the LME warrant premiums are above those offered by producers and traders especially in al with reports of primary offers from China and zn. No surprise you make more in financing / storage than moving. The US Department of Commerce has determined Chinese al extrusion imports are being subsidised at a significant rate and proposed countervailing duties. The morning session saw metals remain firm as all the tea leaves were favourable, stronger equities, weaker US$, fund buying et al. The market ignored the poor ADP employment data below before taking onboard the good PMI, DJI jumped 200 points.

As Australia struggles to form a government like other nations after the recent election (UK, Belgium, Iraq) its Q2 GDP rose 1.2% (Q10.7%) yoy 3.3% (2.6%). In Japan Aug vehicle sales rose 46.7% yoy (15%). In Germany, while the economy grows domestic demand remains sluggish Jul retail sales fell 0.3%, against expectations (Jne -0.3%) yoy +0.8% (4.7%).

Overnight the US weekly ABC consumer sentiment index was -45 from -44. The weekly MBA mortgage applications rose 2.7% (4.9%). Ahead of Fri nonfarm payrolls the Aug Challenger job cuts fell 54.5% yoy (Jul -57.2%) and the ADP private employment survey fell 10 k against the anticipated positive number (37.0 k). Jul construction spending -1% (0.1%). Ahead of full Aug car sales data General Motors reported a 25% decline in sales yoy to 185,176 units.

In the 80’s as the coal mining industry was taking off in Queensland, the Premier Joh Bjelke Peterson used to call press conferences “feeding the chooks (hens)”. He knew they would eat out of the palm of his hand and take any slightly positive news way beyond the bounds of reason. This tactic seems to have been picked up by Fed Chairman Bernanke as his Fri speech to the Jackson Hole symposium, to a select group of central bankers and economist, was seen as a kin to a Sermon on the Mount. In hind sight he stated the obvious, the US economy is slowing and the Fed will do all in their power to reverse that slowing. The question is what power do they have? On Fri the investors lapped it up driving markets in “recovery direction”. This week their resolve is likely to be tested further as we head into Aug employment data and other numbers. Already in the US y/day the doubts were back as the equities fell and bond yields declined. Worse on the currency markets the BoJ failed to intervene and the yen headed for new highs against the US$. Seems the Fed’s chook feed is not that tasty.

The commodity sector having been strong late last week has that fading feeling as prices eased back after the Aug Japanese manufacturing PMI was 50.1 (52.8). From the DRC it is reported that the government has seized another First Quantum mine this time three year old 100 ktpa Frontier cu operation. Seems part of a rather murky politico–corporate play, exciting but not good for investor confidence. The LME stocks all declined without any real impact. After the euphoria of Fri markets are very sceptical this morning in London. The US data was better or on track steadying the ship. Gold put in another strong performance again the big move on the US open, it seems whatever the economic scenario going forward investors think it will keep glittering. While oil eased as the latest Atlantic hurricane veered away from the Gulf of Mexico.

On the final demand front, things are looking up in Asia with two good sets of Jul data, Japanese retail sales rose 3.9% yoy (Jne 3.3%) and Australia up 0.7% mom (0.4%). The Aug UK GfK consumer confidence survey was -18 (-22). The Aug German unemployment rates was unchanged at 7.6% as Euroland Jul unemployment was unchanged at 10%. However it is the US where the focus is, first some old data, the Jne Case Shiller home index 147.97 (May 146.43) and composite 20 city index 0.28% (0.53%) yoy 4.23% (4.61%). More pertinent, Aug Conference Board consumer confidence were good 53.5 (50.4) and Chicago PMI as expected 56.7 (62.3). Finally the Milwaukee NAPM 59.0 (66.0). In Canada Jne GDP rose 0.2% mom (0.1%) yoy 2% (6.1%).

We have been impressed by the resilience of the metals in the light of the deteriorating economic outlook and yesterday’s action supported this (the last time the DJI was below 10,000 in early Jul cu was 6600). As the US equity came under pressure after a strong start the metals quickly switched horses to the currency where the US$ weakened as foreign exchange strategists began to opine that the departure of the Japanese central bank governor to the Kansas Fed Jackson Hole economic symposium could him seek agree for intervention in the markets against the strength of the yen that recently hit a multi year high against the US$. The threat of the unknown is a powerful driver in an arena where greed and fear rule. This was combined with consensus that today’s revision to US Q2 GDP will be significantly lower and it was, 1.6% (2.4%) though better than feared. However then the markets settled back to see what Bernanke would say at Jackson Hole. The Chairman uttered the words the Fed “will do all it can” not a ringing endorsement but confirm the kitchen sink will be thrown at the economy if necessary and comforted the buyers ahead of next weeks Aug data.

Metals held their gains in Asia in quiet conditions that are likely to continue in London as the big news will be in the US as Fed Chairman Bernanke speaks at the Fed gathering. The LME stocks were all down except sn, on the week cu off 1.6 kt; al fell 19 kt; zn up 4 kt; pb dipped 375 tonnes; rose 2.5 kt and sn slipped 185 tonnes. The weekly Shanghai stocks saw cu rise 211 tonnes to 110,582; al off 723 tonnes at 490,765 and zn fell 4404 tonnes to 231,589. The turnaround in oil came right on the key as weather forecasters predicted a tropical storm building in the Atlantic, it never ceases to amaze that the driving fundamental of the oil market is the rise and fall of storms in the Gulf of Mexico (rather like cu is ruled by earthquakes in Chile). The US data and Bernanke saw the buyers on top into the close.

In Japan the July National CPI declined 0.9% yoy (Jne -0.7%),Tokyo Aug CPI was off 1% yoy (Jul -1.2%). The Jul unemployment rate was 5.2% (5.3%) and household spending rose 1.1% (0.5%). The UK revised Q2 GDP was revised to 1.2% (1.1%) surprising is the collapse in total business investment to -1.6% (7.8%). The Aug final Uni of Michigan consumer confidence 68.9 (Jul 67.8), current 78.3 (76.5) and expectations 62.9 (62.3).

The LME is closed Mon (US closed next Mon) and be warned when one or other market is closed, mice like to play and Bernanke might have laid out the cheese..

The metals surfed the equity wave higher in Asian time and in the present market conditions it seems the economic data induced selling has run its course and technical indicators are overstretched. So it was no surprise London saw metals open with good gains.

The LME stock figures were mixed with cu, al and sn down the others up. After that prices were stuck in the mud with a weaker US$ the major support. The IAI reported Jul unwrought al stocks at 1.192 mill tonnes (Jne 1.189 mill tonnes). As al stocks grow it will be interesting to see if the weather in China has effects its output. Bloomberg reports the Chinese state research group Antaike saying pb demand was up 6.8% in H1 at 1.78 million tonnes compared to 16.5% growth in ’09. Total ’10 usage will be up 8.3% at 3.61 million tonnes however vehicle sales are expected to grow at 17% this year to 16 million units compared to 49% growth in ’09.Cu moved higher into the US open as buyers like a wound spring rushed back in after the jobless data showed improvement. The US$ weakness is attributed to worries that Japan might move to act against the strengthening yen. If traders equity surfed today they came badly unstuck as the US$ grabbed the limelight. On the day metals and oil outperformed the pack, led by tin.

In Europe the Spt German GfK consumer sentiment improved to 4.1 (Aug 3.9) while Italian Aug consumer confidence slipped to 104.1 (105.5). The Aug UK CBI reported sales was a strong 35 (33). In the US weekly jobless claims 473 k (504 k).

The FT reported a day of breaking records y/day in the world 10 year bond area, UK 10 year gilts registered it lowest yield since it was introduced in 1962 and last seen in 1947, record lows in US bonds and German gilts of that maturity and Japan the yields are back to 2003 levels. What the writer points out that such levels are being blamed on a growing view the renewed slowdown will result in recession. However, in the past this has been signalled by a structural change in the yield curve in that 10 year yields fall below 2 year yields, but this is not occurring in fact the curve is very positive. The only country where a recession has occurred and the curve has remained positive is Japan. What are the prospects the world is following Japan into a protracted period of slow deflationary growth? Well not so in Germany where the Aug IFO business climate index rose against expectations to 106.7 (Jul 106.2), current assessment 108.2 (106.8) but expectations slipped 105.2 (105.5).

The metals were steady in Asia then London attempted an early rally after the recent sell off and helped by the German data. It stuttered after the LME stocks saw cu and al down the others up or unchanged. The weaker US$ helped support the metals and have we have seen on recent pullbacks there is a good defence of al just above US$ 2000, if this gives way expect an increase in physical EFT chatter. The ICSG estimated the world refined cu market was in a deficit of 190 kt in the first five months of this year. While the ILZSG saw the zn market in a 176 kt surplus in H1 and pb a 50 kt surplus. By mid morning the mood had swung 180 degrees and metals were under pressure. The US durable goods kicked the longs hard then the housing data did not help but after that quickly into DJI surfing and the longs caught the best wave. At the close cu had tested and held the 100 dma support at US$ 7050.

In Japan the Jul trade surplus rose as imports slowed faster than exports. Overnight the US weekly ABC consumer sentiment recovered to -44 from previous -45, then the weekly MBA mortgage applications 4.9% mostly remortgaging (13%). Jul durable goods rose 0.3% well below estimates (Jne -1%) and ex transportation a very poor -3.8% (-0.6%). Then at 15:00 Jul new home sales fell 12.4% to 276 k units per annum (Jne revised to 12.1% from 23.6% at 315 k units per annum). In an interesting commentary an analyst at PIMCO opined that “the addition by the elimination of subtractions” meant that the downside to GDP was falling as the recent poor run of US data meant the worst could be over even if recovery does not appear. They see the chances of a double dip at 25-30%. This was before the volatile weekly DoE crude oil and other stocks. In the US the Kansas City Fed is hosting its annual Jackson Hole symposium on the economy for central bankers and the economic glitter arty so what out for breaking news from the papers being given.

Last week the Japanese Cabinet Office conceded China has overtaken Japan as the world’s second largest economy yet the roar of that growth is creating growing pains. Recently there has been a plethora of reports on growing labour unrest then last night the BBC World Service carried a news report about a 100 kilometer traffic jam on the Beijing to Inner Mongolia expressway about 200 km out of the capital caused by road works, accidents and coal trucks. So what you say, well it has been there for 9 days! For now Western markets are obsessed with M&A, with potash the in commodity.

The metals were on the defensive overnight as the Nikkei closed under 9000 for the first time since May ’09 and the yen hit a15 year high against the US$. Perhaps it is the lack of equity turnover but the VIX index remains comfortable in the mid 20’s  In China, Chalco the al producer reported a Q2 loss after increased power rates which accounts for a third of output costs and lower prices. The Group is responding by expanding into coal, iron ore, cu and rare earths. This links into urbanisation, in Spectator magazine article Doug Saunders promoting his book “Arrival City: How the Largest Migration in History is Reshaping Our World” argues that by 2025 60% of the world’s population will live in cities rising to 70% by 2050. This development will boost power demands in many areas where al smelters have congregated for cheap energy- China, ME and Southern Africa. In India Vedanta has had plans to develop a bauxite mine in Orissa rejected on environmental grounds. Midsession the financial markets were on the ropes- cu off 125, FTSE down 81, oil 72.3 and US$ / € below 1.260. The losses gathered pace into and then steadied after the 15:00 US data below, when the well established DJI surfing took over. The DJI was off 150 points after the figures then clawed its way back, as analysts predicted further Fed easing measures, gold vaulted higher. At the close cu is resting on near term support.

The German Q2 GDP was confirmed at 2.2% and yoy 4.1%, with a rise in exports offsetting a decline in domestic demand. The Jne Euroland industrial new orders rose 2.5% (May 3.8%), yoy 22.6% (23.0%). Over the Pond, Jne Canadian retail sales rose 0.1% (May revised to -0.4% from -0.2%), ex autos -0.5% (-0.3%). Then at 15:00 US Jul existing new home sales plummeted 27.2% to 3.83 million units double expectations (Jne revised to -7.1% from -5.1% at 5.26 mill units) and the Aug Richmond Fed manufacturing index declined to 11 better than anticipated (Jul 16).

Well away for a week and very little seems to have changed. Are we in an eye of the rolling financial storm that we battle each year. The economic evidence continues to mount that the world economy is slowing (next week sees Aug data). Yet record Aug M&A activity suggests corporations flush with strong earnings have become predators for cheap added on or new business streams. Rather than employ capital in new investment that would expand the economy they prefer to acquire existing operations in the hoping to make them sweat harder. The one sector that will do well out of this is the financial sector the governments bail out, the BHP deal is set to generate fees of US$ 190 million in fees and traders rushed to benefit.

The metals have been particularly steady but first impressions are investors would like to rally these things on the slightest excuse rather than sell them off. The VIX index remains comfortably in the mid 20’s indicating little stress in the markets. This would tend to go against the economic evidence but interest rates are set to remain low and “cheap money” lusts excitement. Since the last report the LME stocks have been dominated by a third Wed rise in al up around 80 kt, today al led the falls and cu the rises. The Chinese Jul refined cu imports rose 6% however are off 23% yoy and 14% yea to date. The IAI said Jul daily average primary al production was 66.3 kt (Jne 66.6 kt) as monthly production was 2.054 million tonnes (1.999 mill tonnes). It is not clear how much of Chinese output has been affected by the recent weather. Meanwhile the World Steel Association said crude steel output rose 25% in the first seven months to 820 million tonnes. Chinese production was up 18.2% at 375 million tonnes – that is 45% of world supply. In Australia the weekends Federal election has resulted in the much anticipated hung parliament as the horse trading begins. The prospect is the first minority government since 1940 and resource shares rose as the threat of a mining tax receded. The DJI opened higher prompting some light metal buying as traders settle into equity surf mode, then it gave back an 80 point gain so the metals followed. At 17:00 it was all square.

On the data front today saw the Aug preliminary PMI data German manufacturing 58.2 (Jul 61.2), services 58.5 (56.5); France 54.7 (53.9) and 59.9 (61.1) respectively and Euroland manufacturing 55.0 (56.7), services 55.6 (55.8) and composite 56.1 (56.7) in line with our expectation that the region’s economic recovery has peaked. The preliminary Aug Euroland consumer confidence recovered to -12 (-14). In the US the Jul Chicago Fed National activity index improved to 0 (Jne -0.7).