Against the Grain

The metals were quiet overnight quickly resuming their upward trajectory in London with al moving above 1800. More evidence that the economic cogs are starting to grind. In Asia Q2 South Korean GDP rose 2.3% (Q1 +0.1%) with strong consumer spending and benefit from domestic and worldwide stimulus packages. Their stock index the Kopsi is up 34% ytd following last years 41% fall. Singapore was not so lucky Jne industrial production declined 9.3% yoy (May +2.1%) as a weak electronics sector offset pharmaceutical gains. The May Japanese all industry activity index was up 0.7% (Apr +2.6%).

In Europe the good news Jul German Ifo business climate index was 87.3 (Jne 85.9) current reading 84.3 (82.4) and expectations  90.4 ( 89.5), and the Euroland flash Jul composite PMI rose to 46.8 (45.3). Not so good was France Jne consumer confidence declined to -39 (-37) and Q2 UK GDP shrank 0.8% (Q1 -2.4%) more than anticipated and down 5.6% yoy the most since records began in 1955. The UK Jne car production fell 30.2% yoy against May -43% and for the year to Jne -50% against ‘08. Then the real bad news Spanish Q2 unemployment hit 17.9%. We suspect that amongst consumer, housing, unemployment and GDP data lies the “gray swan” we spoke of yesterday.

The Shanghai weekly stocks saw cu down 3935 tonnes to 49,348; al up 210 tonnes 178,133 and zn off 1126 tonnes at 100,978. The LME saw roles reversed cu up and al down, on the week mixed, cu increased 10 kt; al up 40 kt; zn down 350 tonnes; pb up 850 tonnes, ni off 1722 tonnes and sn 380 tonnes but in the present environment who cares. An analyst in London said 75% of LME al stock was unavailable for immediate delivery to consumer (ingots the tightest held product) being tied up in warrant financing deals and we suspect yielding returns north of 10%. There is talk that such deals are reaching saturation as bank risk parameters are reached. The IAI reported provisional Chinese Jul primary al production was 1.029 million tonnes (Jne 984 kt, Jne ’08 1.172 kt full year ’08 13.105 million tonnes). The Japanese reported cu wire and cable shipments rose 20% to 53 kt in Jne however yoy the were down 25%.

The Fed seem to be singing from the same hymn sheet the Dallas Fed President said “we probably have the beginnings of a faint recovery, how robust and sustainable is the stuff of concern”. See three attached that highlight how correlated the markets are; € / DJI, oil / DJI and cu / DJI. As the US began cu clung to its “comfort blanket” oil like a limpet ahead of the equity opening bell. The only US data was at 15:00 the final Jul Uni of Michigan consumer sentiment index 66.0 (Jun 70.8), current 70.5 (73.2) and expectations 63.0 (69.2), no drama in line with mid month preliminary data. Until then the pack had been circling each other then the DJI moved lower and they all went with it. Later in the afternoon metals in two minds as to stay with DJI in negative territory or follow oil higher. Apart from being on the overbought side technically the metals had another strong close.

On the week everything beamed higher; cu 215, al 95, zn 75, pb 80, ni 650, sn 1400, gold US$ 14.5 / oz, oil US$ 4.2 / bbl, DJI 331 points at time of writing and US 10 year bond yields up 0.05%.

Sit back and enjoy the ride, risk aversion is set aside and investors can now chase asset prices higher, that seems to be the general tone of the markets. This mood is likely to be reinforced in the coming weeks as the executive branches of government head off on holiday leaving behind the worries of regulating the financial system. Already like the aftermath of past crises the mood has changed from we must do something to congratulating ourselves on weathering the storm. There will be no “tell tail” sign as the market breaks at the top it will be caused by, call it a “grey swan” event. The markets are so synchronised it will bring them all back - a string of unexpected poor data; bankruptcy; general bad news - suddenly a jolt that makes it a stampede to be more risk averse. For the time being a lot of money manager are nervous about missing out so too much money is chasing too few goods into the jungle. See attached FT article “Insight: Long road back to normality” (www.ft.com).

The equities are a case in point as the MSCI World Index registers its longest stretch of gains since ’03, you could call it the Goldman phenomena.  There is evidence from Japan that the cogs of world trade are starting to turn their Jne international shipments improved falling 35% yoy (May -40.8%) the improvement propped up by manufacturing sales to China. In France their Jul business sentiment index was 78.0 (76.0). In the UK Jne retail sales jumped 1.2% well above expectations (-0.6%) and +2.9% yoy boosted by discounts and good weather!

Heavy Select turnover in cu and zn during Asian trading resulting in cu opening lower in London. The Chinese al producer Chinalco Chairman said inventories are delaying the recovery in its price and as yet demand revival in building and auto industries had not had an obvious impact. The LME stocks dominated by a rise in cu. Evidence of the move of financial investors into commodities comes from Soc Gen asset management group that reported net inflows into their commodity ETF’s rose 57% in Jne to US$ 176 million (this is one bank amongst many so you get the overall influence).

The US weekly jobless claims rose 30 k the first week in three to 554 k. The DJI quickly pushed higher up 100 points turning on better Q2 earnings by Ford, EBay and AT&T, (these earning should significantly lift Q2 GDP estimates as the share of corporate earnings leaps). All the markets higher metals (quickly off their low), oil and € in unison. The Jun existing home sales rose 3.6% to 4.89 million units above expectations (May +2.4% at 4.7 million units), the month’s supply available 9.4 (9.8) median house price was up to US$ 181,800 (174,700). An interesting divide Bloomberg reports Obama gets an 87% favourable rating amongst investors outside the US and 49% at home. Last week we said the mantra was never be short on a Fri afternoon that has changed to never be short any afternoon!

Since as far back as Dec ’08 we have argued that the general economy was not is as poor position as the sorry state of the financial institutions. Since then governments have revitalised the financial sector however at the expense of the general economy. The enormous public subsidy to bank balance sheets and general mantra that they were “too big to fall” has seen speculative money re enter the commodity markets distorting the supply demand equation at the expense of general economic growth. This is most evident in two markets al and oil. Take the latter as a newsletter explained assuming “your cost is a $1 a barrel, then you could have purchased August WTI and the contango afforded you the ability to carry that inventory until next March. The market is paying you to build supplies by virtue of the discount on nearby material. If the recent run-up in price was based on real demand then this discount would disappear, i.e. the market would be moving from contango toward backwardation. That is not the case at this time. Thus, the ongoing drawdown in U.S. crude oil supplies is not demand driven, but rather a function of lower domestic production and fewer imports. In other words, refiners, as any good grocer would tell you, are aggressively emptying the shelves, as it were, of surplus material”. That goes for al refiners as well. Commodities with terminal markets are great speculative vehicles, lender banks know if they hold title to the warrants if things go wrong they get their money back in 48 hours.

Following Bernanke’s first day before Congress markets were subdued in Asian trading as his comments were taken as nothing more than supportive, equities improved, oil rose and metals steady. It is reported from China that refined cu imports rose 12.4% to a record 379 kt (May 337 kt); ni imports rose 63% to a record 41 kt (May 25 kt) and al imports rose 3% to 268 kt (259 kt). Elsewhere a Chinese Ministry of Industry spokesman said the steel industry should curtail “reckless investments” quoting capacity running at 660 million tonnes against demand of 500 million. In Japan cu smelters are reported to have agreed mid year TC / RC contracts with BHP Billiton around 35% below annual ’09 contracts at US$ 50 / US$ 0.05. The LME stocks saw a rise cu and fall in ni as the features. In its year ended Jne production report BHP Billiton had a couple of interesting broad comments “The 2009 financial year proved to be very challenging with significant demand contraction exacerbated by dramatic movements in inventory levels” and “In the short we believe underlying demand trends are still being masked by de stocking and stocking activities across the value chain. China inventory build is essentially complete, while we are now seeing evidence that restocking has commenced in North America, Europe and Japan. However, commodity prices will be influenced by supply responses due to latent capacity currently existing in the industry”. Traders in the US pushed cu higher on the Chinese import data and news of a partial power issue at the Collahuasi mine in Chile (415 kt), the first time in ages news like this has influenced the price and further proof we are back in a bull stampede.

The economic data remains very thin, the May Euroland industrial new orders fell 0.2% against an expected rise (Apr revised to 0-0.7% from -1%) and yoy -30.1% (-35.5%). In the UK the CBI index of factory orders fell to -59, its lowest level since ’92 (-51). The weekly US ABC / Washington Post consumer sentiment index rose to -50 (-51). Poor results from Wells Fargo and Morgan Stanley had the DJI futures under pressure but oil seems the driver with the metals carried along like rag dolls in its wake. The May FHFA house price index rose 0.9% (Apr -0.1%) and yoy -5.6% (-6.8%). Before a Senate panel Bernanke said he saw doubted the need for more government stimulus giving commodities another leg up. In last two hours cu outperforms all to close at a new ’09 high.

The Fed Chairman Ben Bernanke testifies before the House Financial Services panel on monetary policy this afternoon (Senate tomorrow). Before he does someone sent us a note that we feel sums up the present mood in financial markets “It is the month of August, on the shores of the Black Sea. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit. Suddenly, a rich tourist comes to town. He enters the only hotel, lays a €100 note on the reception counter, and goes to inspect the rooms upstairs in order to choose one. The hotel proprietor takes the €100 note and runs to pay his debt to the butcher. The butcher takes the €100 note, and runs to pay his debt to the pig grower. The pig grower takes the €100 note, and runs to pay his debt to the supplier of his feed and fuel. The supplier of feed and fuel takes the €100 note and runs to pay his debt to the town’s prostitute that in these hard times, gave her “services” on credit. The hooker runs to the hotel, and pays off her debt with the €100 note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there. The hotel proprietor then lays the €100 note back on the counter so that the rich tourist will not suspect anything. At that moment, the tourist comes down after inspecting the rooms, and takes his €100 note, after saying that he did not like any of the rooms, and leaves town. No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism…..                                                                                                                                    And that, ladies and gentlemen, is how the United States is doing business today.”

The metals were steady in Asia with the biggest Select volume in zn as the LME / Shanghai arb window opened. In London activity was very nervous as traders looked for a direction keeping a weather eye on the €, oil and equities, by premarket close they had hardly moved. The LME stocks dominated by another 35 kt al dump but who cares most of it is going straight onto financing deals keeping the physical sector tight. At around 12:30 cu hit a low of 5330 then € & oil pick up sending it back above 8400 in 30 minutes. It seems in these very volatile times the 30 minute technical chart is dominating the proceedings with traders following its meanderings. The zn / pb spread continues to contract as zn mounts a strong move higher. In cu the recent backwardation has turned back into a contango. Not sure how it will be policed but US legislators putting together the cap and trade scheme in carbon dioxide permits say the dark market or OTC activity will be sharply curtailed.

The Jne Chicago Fed National Activity Index -1.80 (-2.3). In equities Caterpillar’s Q2 profits exceed estimates helped by the boost from the stimulus package and improved credit markets. The BoC left rates unchanged at 0.25%. Then at 15:00 Bernanke’s testimony was released and the general tone was of an economy stabilising but with many challenges ahead and inflation subdued for the next two years. This seemed to stem the bull tide but by no means bow it, suspect we need a trend change event to do that, very poor data; bankruptcy or news and suspect if it come it will be from the economy rather than financial arena.

Cu powered to its highest price this year above 5400 Asian time with Japan on holiday and the LME price feed systems in some disarray. Good US housing data and a strong recovery in oil were the catalyst for the action, with cu standing at a new high oil remains some 10% below its own ’09 high the difference in price profile between the two commodities being the near term tightness in cu. The metals fundamentals stack up well with unprecedented Chinese demand and a disciplined supply reaction to the ‘08 price fall.

Australian reported its Q2 PPI fell 0.8% to +2.1% annual growth as import prices fell on a strengthening currency. The Jne German PPI fell 4.6% yoy (May -3.6%) as falling energy prices fell 8.4% the index fell the most since ’68.

Third Wed trading began in London with LME pricing systems still down and no stocks but this did nothing to dampen the stampede in the metals and all things commodities – risk aversion as quickly and as much as possible is the investors requirement. The LME stocks came out late and dominated by rises in al and cu. The ni market price improvement has been attributed by Macquarie Bank to rising Q2 stainless steel output with estimates of China up 20% and Europe 14% but total ’09 production is still anticipated to fall 10% to around 23.7 million tonnes. In the US the American Iron and Steel Institute (AISI), reported weekly steel production has been trending higher since May. Recently production topped 1.2 million tons for this first time this year. This must be seen in context the AISI said in May, U.S. steel mills shipped 4.282 million tons, a 52.5% decrease from the 9.008 million tons in May 08. The Fed reported utilisation rates for manufacturers of primary metals, which includes both ferrous and nonferrous was just 45.6% in Jne as opposed to 80.7% in Jne 08.

It is a very light week for US data today at 15:00 we got June Conference Board leading indicators index rose 0.7% to 100.9; coincident index fell 0.3% to 100.3 and lagging reading declined 0.7% to 110.8. The markets that advanced so solidly last week saw some stock taking this afternoon.

In China Bloomberg reported that for a third time in two weeks the government failed to sell the full allocation of six month treasury bills as investors worry the PBoC will soon push up rates to cool stock and property prices. In a study by Oxford Economics warns that the present flu pandemic could slow the economic recovery.

The mixed weekly Shanghai metals stocks saw cu decline 884 tonnes to 53,283; al rose 4777 tonnes to 177,932 and zn fell 4919 tonnes to 102,104. The LME stocks saw cu gain (into NO & Asia) and on the week cu rose 6.5 kt; al jumped 120 kt; zn up 1.5 kt; pb increased 25 tonnes; ni down 102 tonnes and sn up 175 tonnes. The Chinese Bureau of Statistics reported Jne base metal production as refined cu at 335 kt yoy up 1.1% and output of 1.955 million tonnes in year to the end of Jne; al 1.054 mill tonnes +0.9% and 5.678 mill tonne -11.7%; zn 366 kt +0.9% and 1.890 mill tonnes -1.2%; pb 349 kt +19.4% and 1.71 mill tonnes +20% and ni 17,419 tonnes -10% and 99 kt +8%. The metals ground out activity in very narrow ranges through the morning highlighted by al making a break above 1700. There was little economic news or metal fundamentals to enliven the proceedings.

The focus in the US data today was housing, overnight the Jul NAHB housing market index improved to 17 (Jne 15). The Q2 corporate results of Citi, Bank of America and GE were all acceptable. Then Jne housing starts came in up 3.6% at 582 k (May +17% 562 k) and building permits +8.7% at 563 k (+4% at 518 k). Cu having traded near its London session lows jumped US$ 100 to its weeks high in under 30 minutes – an rule you can almost caste in stone is “never be short on a Fri afternoon”. The metals are moving on the back of oil with €, gold and DJI steady on the day at 14:45. With all the stock as baggage al touched a high for ’09.

A powerful up week cu 9% or 450, al 9% or 138 , zn 8% or 122, pb 84, ni 1600, sn 1250, gold US$ 3.8 / oz, oil US$ 1.7 / bbl, DJI 550 point at time of writing and US 10 year bond yields 0.34%.

A flow of Chinese data in Asian time the Q2 GDP grew at 7.9% yoy (Q1 6.1%), we pay little attention to this the Chinese said at the start of the year ’09 growth would be 8% that is good enough for us it will be 8%+ just accept it. For Jne retail sales grew 15% yoy (May 15.3%); industrial production expanded at 10.7% yoy (+8.9%); urban fixed asset investment rose 35.3% rising 33.6% in the first half; CPI down declined 1.3% yoy (-1.4%) and PPI fell 7.4% (-7.2%) in other countries inflation falling at such rates would be worrying financial markets. The other nice thing about Chinese data is you do not get revisions of previous data. In Japan the May tertiary index declined 0.1% (Apr +2.2%).

The aversion to risk that crept in to early Jul has been swept away on a tide of financial reengagement led by the 6% recovery in the DJI so far this week and 7% jump in cu heading the commodities, now if only the real world would back that up. The US$ index has broken out of a technical triangle signalling another bout of weakness which should be a significant  support for commodities and US equities, see attached chart. On the shipping front Bloomberg reports China Cosco the worlds’ largest operator of dry bulk ships has cancelled orders for 8 vessels citing the global recession and overcapacity. Since Oct the group cancelled 13 ships and delayed 29. In the eight months to May Chinese shipyards ( the second largest ship builder in the world) have had 152 orders cancelled. A routine set of LME stock data, in al cancelled warrants are 3% of total stocks with 86% of the 138 kt in the US. The Western Australian government has given Invernia the all clear to recommence pb mining at their Magellan mine. Over the past couple of days oil has lagged the others but when it moves high cu ploughs on to new highs. A strong day for al was helped by news of a wage dispute between South African electricity generator Eskom (95% of country’s power) and the unions.

Reuters today published their semi annual analyst price forecasts summarised below.

The US weekly jobless claims registered another good fall down 47 k to 522 k from previous week’s revised -48k from -52k. The US Treasury said foreign purchases of their long dated securities in the open market nearly doubled in May to US$ 19.8 billion lifting pressure on the US$. The DJI started on a steady note. At 15:00 the Jul Philadelphia Fed manufacturing activity index was -7.5 (Jne -2.2). The € & oil came off and so clattered the metals in unison. Bloomberg reports Philip Verleger a US academic and former government advisor predicts oil will fall to US$ 20 / bbl by year end as recession destroys demand.