Against the Grain

A wonderful quote from a recent magazine article ‘I’m a natural scientist. I’m out there every day, buried up to my neck in ****, collecting raw data. And that’s why I’m so sceptical of these models, which have nothing to do with science or empiricism but are about torturing the data till it finally confesses”. For a very good summary of where the world economy is at see the FT article by Martin Wolf “After the storm comes a hard climb” (www.ft.com).

The renewed investor confidence saw markets push higher overnight with the weekly ABC / Washington Post consumer sentiment index improving to -51 from -52. The BoJ left rates unchanged at 0.1%. In China Jne foreign direct investment declined 6.8% to US$ 8.96 billion (May -17.9%), the Commerce Ministry says foreign invested businesses account for 30% of industrial output, 55% of trade and 11% urban jobs. The Rio Tinto issue rumbles on and could frighten potential investors. In Europe the Jne UK unemployment rate rose to 7.6% (7.2%). The Euroland Jne CPI rose 0.2% (+0.1%) and yoy -0.1% (0)%).

Cu remains the outstanding performer supported by some strengthening fundamentals, the appearance of a cash to 3’s back, continued overall decline in LME stocks although reports of Shanghai material headed for Asian warehouses eventuated today (reports persist that up cu stocks could rise by 100 kt near term up to 30 kt in Asia, 25 kt in Europe from a producer tender and around 50 kt in US LME & Comex) and there are growing reports of concentrate shortages stretching into next year. The LME stock report dominated by a 63 kt rise in al taking total stocks over 4.5 million tonnes, the auto capital of the US received 56 kt, Sing 5650 and Hull 4875 and cu up 4200 tonnes Korea 3700 and NO 1650 as ni declined from Rott. The bulls did not blink at the stocks keeping the forward momentum going as technical sellers are stopped out. The metals have independent strength outstripping oil, € and gold although equities are pretty perky. The ILZSG saw the zn market in a 178 kt surplus up to May this year with the stock to consumption ratio at 7.4 weeks. The pb surplus for the period was 26 kt with a 3.6 week stock to consumption ratio.

Cu remained extremely strong outperforming everything else and up 8% on the week and 70% this year as the US opened (see open / closes below). The Jun CPI rose 0.7% (May +0.1%) boosted by energy that was up 7.4% (+0.2%) and -1.4% yoy, core CPI +0.2% as real average weekly earnings fell 1.2%. This is the sting in the tail gasoline prices are eating into disposable income and this seems to be denting consumer confidence. Furthermore the NYT ran an article saying the US unemployment (9.5%) excludes all those who have given up looking for a job and those part time workers who want to work full time. Include them as the Labor Department broadest measure of the job market then California and a handful of other states have 20% of the workforce who would like to be working full time but are not. The Jul NY Fed Empire State manufacturing index rose to -0.55 (Jne -9.41). Cu kept ploughing higher 5284. At 14:15 Jne industrial production fell 0.4% (May -1.2%) yoy -13.6% with capacity utilisation at 68% (68.2%) auto capacity utilisation is 37%. The DJI was quickly 100 points higher. The NYT ran an article saying the US unemployment  excludes all those who have given up looking for a job and those part time workers who want to work full time. Include them as the Labor Department broadest measure of the job market then California and a handful of other states have 20% of the workforce who would like to be working full time but are not. Cu flagged mid session as oil retreated but came back strongly as oil then recovered and equities remained strong. Asia tomorrow see a large flow of Jne Chinese economic data.

Overnight US Treasury reported its monthly budget deficit in Jne which was a record and sent the nine month fiscal deficit to US$ 94 billion the US$ sold off. While the DJI moved up 2% ahead of expects good quarterly bank results. However you are unlikely to fail if the government gives you a sign to put on your forehead “too big to fail”; cuts short rates to 0% and you borrow short lend long; agree to buy back your poor assets to boost your balance sheet and leave you to concentrate on trading not lending. We have always seen the present situation as two distinct parts Wall Street and Main Street. Apart from auto industry we do not think the broader US economy was so bad late ’08 or as lucky now.

In Asia Q2 Singapore GDP jumped 20.4% leaving yoy growth down 3.7% (manufacturing -1.5%; service -5.1% and construction +18.3%). In Australia Jne business sentiment improved to 4 (May -2) first positive number since Dec ’07. In Europe, the UK Jne CPI rose 0.3% (+0.5%) and yoy +1.8% (+2.2%) while the RPI rose 0.3% (+0.6%) falling yoy by -1.6% (-1.1%). The more up to date Jul ZEW economic expectations index was 39.5 (Jne 44.9) significantly below 47.4 forecasts, the current conditions were -89.3 (-89.7).

In the metals buyers remain in control as equities and US$ supports them. For a second day al dominated LME stocks with material into the US, zn saw a rise also heading into US (Detroit) on the downside ni out of Rott. In Canada Vale workers have gone on strike at their Sudbury ni operations after rejecting a wage offer. The May Euroland industrial production rose 0.5% (Apr +1.9%) less than anticipated and yoy -17% (-21.6%).

The Goldman Sachs Q2 results were well above expectations. On the data front Jne PPI rose 1.8% (+0.2%) reflecting an 18.5% rise in gasoline while ex auto was up 0.3% and retail sales rose 0.6% (+0.4%) reflecting a 2.3% move in car sales, ex autos +0.3% (+0.3%). The US$ strengthened and oil retreated which took the heat out of the recent rallies. At 15:00 May business inventories fell 1% (-1.1%) taking the inventory to sales ratio to 1.42 (1.43). After that the metals showed a desire to follow the strongest market in the pack equities as oil and the € were more cautious.

Extremely quiet Asian session in Japan Jne consumer sentiment was 37.6 (Apr 35.7) the highest level since Dec ’07.

The metals had little traction as they hugged Fri closes and looked for direction. All the metals showed a small decline in LME stocks with the exception of al that began shipping in its regular mid month quota of unwanted production to store away, Antwerp 19 kt, Rott 14 kt and Sing 7 kt. The cu cash to 3’s swung into a back Fri and has held it. The ILZSG expects cu mine output to grow at 3.8% pa out to 2013 reaching 22.7 million tonnes, down from 5% pa estimated in Mch. They forecast concentrate capacity to increase 3.4% to 17.4 million tonnes, annual smelting capacity to rise 2.2% to 19.6million tonnes and refined capacity to reach 25.7 million tonnes a 13.7% rise  by ’13. The risk to the cu going forward in our view remains slanted to the supply side, over the weekend we have seen reports of a earthquake in southern Peru - no damage reported and trouble at the giant Grasberg mine in New Guinea. In The Times newspaper today was a warning that the El Nino weather pattern is forming in the Pacific that could have significant weather problems on both sides of that pond.

With regards al it is a case to keeping too much production out of sight, see Reuters article “Squeeze on aluminium? Alcoa explains how” by Andy Home, it further bears out what we have been pointing out for some time but now the CEO of Alcoa sees it as bullish point to the market.

No US data though oil pushing higher too the other pursuit riders high with cu to a new high after selling off after the official ring close. It appear that buyers are about as the week starts not sure if CTA momentum players (unlikely) or long index fund types (more likely). Then oil lost over US$ 1 / bbl and cu was quickly back to the 4866 a stronger DJI opening caused as flurry in cu back to 90. Seems buyers want to grab hold of any bullish support, the oil, € and DJI coming off cu testing 4850. The DJI turned up as buy recommendations came in for the banks and off everything went cu again. The markets are all very volatile which we suspect reflects nervousness ahead of Q2 US corporate reports, cu traded tick for tick with the DJI hence is afternoon recovery.

The herd that stampeded out of markets across the board y/day afternoon trampled straggling sellers as they rushed back in overnight driving cu up US$ 150 / tonnes in massive Select volume of over 3000 lots. The focus was on cu, with other metals, gold and oil trailing along behind. It reveals a market gripped in fear as short term financial roulette players endeavour not to be caught out and left behind on the gyrations. As we enter H2 ’09 and we question the sustainability of the government stimulus driven recovery so we have attached a chart of the recent cu & crude action (with the caveat past performance is no assurance of the future). If as we suspect financial investors have driven commodity prices out of sync with the underlying economic fundamentals any setback could see them exit positions. All views welcome!

In Asia, Chinese Jun car sales rose 48% to 873 k units, total auto sales were up 36% to 1.14 million units and that takes 1H sales up 18% to 6.1million units compared to the US -35% at 4.8 million units and Russian 1H sales off 49%. In Indonesia President Yudhoyono was re elected with 61% of the vote setting off a barrage of bullish calls for the country. The Australian unemployment rate was 5.8% in June (5.7%). While Malaysian May industrial production was down 11.1% (Apr -11.7%). In a report today OPEC said crude demand had fallen so sharply during the recession that it will take maybe four years to see it back at ’08 levels. T

The metals very like y/day, things hardly moving and rather like those pursuit cycle races where everyone watches to see who is going to break first (metals, €, gold, equities, oil) except here the direction could be either way! The LME stocks were routine at best. Little fundamental news in official cu sold off the € pressed high and everything followed in unison.

Economically the G8 could only agree that recovery was too weak to withdraw stimulus. The BoE left rates unchanged at 0.5% and continue its programme of quantitative easing. The US weekly jobless claims dropped 52 k to 565 k from previous 614 k sparking a short and sharp rally to new daily highs. This was quickly snuffed out by a renewed fall in oil prices. At 15:00 May wholesale inventories fell 0.8% (Apr -1.8%) yoy -7.6% with wholesale sales up 0.2% (0%) yoy 19.9%. Then we had correlation breakdown - a stronger €, weaker oil and steady equities which confused the metals.

The G8 meeting begins in Italy with 39 countries attending for periphery meetings until the Chinese Premier (and main attraction) flew home to solve a little local difficulty (or avoid foreign press questions). This will significantly devalue the importance of the event as it lacks the input of the fastest growing economy, biggest government stimulus provider, a main protagonist for a new world reserve currency argument and one of the largest emitters of CO2 as the climate issue moves to the top of the pack ahead of the Dec World Climate Conference in Copenhagen.

In the US the ABC / Washington Post consumer confidence index dipped to -52 (-51) with the record low in Feb at -54 the American consumers mood is not improving like other countries citizens. In China the PBoC reported preliminary Jne new bank lending rose fivefold yoy to 1.53 trillion yuan and in H1 up three fold to 7.37 trillion yuan. The Jul Australian Westpac consumer confidence index rose 109.4 (Jne 99.6) and the UK Jun Nationwide consumer confidence survey was 58.0 (53.0). In Japan May machine tool orders fell 3% against an expected rise (Apr -5.4%) yoy -38.3% (-32.8%); Jne bankruptcies rose 7.4% (May -6.7%) and the Jne Japan economy watchers survey was 42.2 (36.7) and outlook 45.6 (43.3). The UK Jne Halifax house price survey fell 0.5% down 15% yoy (most UK survey names bear the names of defunct financial institutions). May German industrial production rose 3.7% much better than expected (Apr -1.9%) yoy – 17.8% (-21.6%).

After tight ranges in Asia the metals started London near their lows then “hair trigger” traders ran cu up US$ 75 in half an hour as they followed a US$ 0.40 / bbl rise in oil – an extremely nervous market to contend with. The pb / zn spread that has been around US$ 140 pb over for the past three weeks has in the past two days shrunk to below US$ 100. The LME stocks were routine with al posting the largest fall but some moves in the cancelled warrant area of cu up 3100 tonnes to 6% of free stock (L/pool 1500, US 625, Sing 600, Bilbao 500) and ni 1374 tonnes cancelled in Rott. Intrigue entered the iron ore market after Rio Tinto reported four of its staff in China had been arrested including the head of their China iron ore operation. This comes on top of the failed Chinalco bid for Rio and protracted iron ore contract negotiations, the story is still unfolding. There are reports the Chinese Business News said mills have accepted a 33% iron-ore price cut in a frame contract over six not twelve months. A story that continues to gather momentum is that large quantities of cu are destined for LME warehouse locations as China stops buying last week it was 20 / 30 kt and now risen to 100 kt.

The recent drop in US bond yields saw the MBA mortgage index rise 10.9% with the volatile refinance index up 15.2% and purchase sub set rising 6.7%. The IMF revised its ’09 global growth projection to -1.4% (Apr -1.3%) while they expect ’10 to grow at 2.5% (+1.9%) The US had a blank canvas this afternoon except for the weekly US Dept. of Energy oil inventories these were up or down depending what you looked at but didn’t really kick things off. Into last hour and cu cracked daily low set in Asia and a rout ensued as metals, DJI, oil, currencies saw the herd exit.

A quiet Asian session with the Reserve Bank of Australia leaving rates unchanged at 3%. It appears the last three weeks has seen the market reach an equilibrium point and settled into a consolidation phase. In the US there is a growing body of opinion that a second stimulus package will be needed to shore up the recovery. While EU finance ministers y/day said it was too soon for governments to exit or reverse stimulus packages. Do investors take this as a sign things have not recovered a much as expected or evidence governments will provide a “put option” going forward.

The base metals have shown good resilience to weaker €, oil and equities, suggesting the momentum is with the longs. The highlight of the LME stocks was a fall in cu. Last week last week Chinese power authorities allowed users to negotiate electricity and transmission  costs directly with generation and power companies. The present financial environment has been a tremendous advantage to the longs - interest rates are at record lows; the business environment has been poor so lenders are searching for safe havens; LME metals warrants are durable (the safe keeping of metals is far easier than other commodities such as agricultural, fibres and oils) and can be easily converted into cash; a weak economy means an almost full contango in the forward curve that can be locked in. Warehouses, banks and investors have combined to create an above norm yield return from storing metal, not to mention the hedge against inflation argument. This has achieved a floor under the price and a tight physical situation that has eased the erosion of premiums. With this solid foundation it is no surprise investors are building positions in long only index funds. Mid morning session and the metals were outperforming.

On the economic front, May UK industrial production fell 0.6% (Apr +0.2%) and yoy -11.9% (-12.4%) with manufacturing output down 0.5% (0%) and -12.7% yoy (-13.2%). The German May manufacturing orders rose 4.4% (Apr +0.1%) yoy down 29.4%.

With no US data it was in the lap of the investors as a weaker than expect DJI opening pushed the metals off their highs. The metals have glided higher in the morning went into sharp reverse. Bloomberg reports the US Commodity Futures Trading Commission will hold hearings into the need for government imposed restrictions on speculative trading in energy markets (and one presumes others as well eventually). Yesterday the shorts set positions in the morning with the market trough at 12:00 then forced out in the afternoon with highs at the close. Today the game plan was reversed, buyer hit the peak at 12:30 then forced out with new lows at the close. The technical picture could best be described as “ragged” while DJI has a head and shoulders pattern developing and a close below 8250 would not be good.

The Jne US employment data seems to have put a large dent in the “optimism express” or maybe the holiday has just sidelined players. Outside the financial markets there are some big political events, today the US & Russia hold the first super power summit since 2002 with the focus on a new treaty on nuclear arms. This is followed by a G8 leaders summit in Italy and fringe BRIC and developing world meetings. Wed sees the world’s largest democracy, Indonesia holding presidential elections with the incumbent set to be returned. In the economic hot spots China suffered flooding in the south and racial riots in its western extremities. In India the budget sent the Sensex stock index spiralling 5.8% or 870 points as the gets started monsoon.

Metals under pressure in Asia after last week’s relatively poor closes and the selling momentum built up in early London with near term support being tested on the metals. The LME stocks with a rise in cu and fall in al had no bearing on things. In thin volume the markets waited for the US data. It is reported on Bloomberg that Guangdong province in China has tightened import inspection of scrap cu.

In Japan the May leading index came in at 77.0 (Apr 76.0) and coincident index up at 86.9 (86.0). In the UK Jne new car registrations were down 15.7% yoy (May -25%) as the car scrappage scheme lifts demand.

The US Jne ISM non manufacturing index 47.0 (44.0) as expected while the Conference Board employment trends index declined 0.8% to 88.4 (89.1). Markets remained very quiet however as the afternoon wore on the early shorts began to feel the heat as they looked to cover. The risk / reward of being short the metals has not been all that compelling of late. Technicians are saying the DJI needs to get back above 8250 to avoid a head and shoulders pattern gathering momentum.

A rouge trader caused oil to spike to its ’09 higher of over US$ 73 / bbl on Tues. In Asia the Jne Australian service sector PMI jumped to 50.2 (May 39.9). On the currency from comments continue to flow out of China musing on the future of the US$ as the reserve currency or some other as yet undecided alternative. Any changes are most likely years away but currency micro traders pounce on such statements to push them about.

Subdued start to the metals with cu rushing to a high of 5068 just before London kicked off. The Shanghai weekly stocks all rose dominated by zn 19,582 tonne to 108,068; cu 3892 tonnes at 59,980 and al 1973 tonnes to 169,627. There is growing talk of Chinese bonded metals especially cu likely to be redirected back to Korean warehouses. The LME also saw gains in cu (Rott and Sing) and al while on the week cu stocks declined by 2 k while all the others rose al 35 kt; zn 6.5 kt; pb 4 kt; ni 664 tonnes and sn 280 tonnes. In Australia BHPBilliton announced the sale of the Yabulu ni smelter to a private Queensland investor.

In Europe the Jne service PMI data saw Italy 42.3 (May 43.1), France 47.2 (48.3), Euroland 44.7 (44.8) and UK 51.6 (51.7) while the Euroland composite index was 44.6 (44.0). Then Euroland May retail sales were recorded down a more than expected 0.4% and yoy -3.3% (+0.1% / -2.5%).

In the US the state of California will pay remittances to taxpayers and local government by issuing IOU’s after a worsening budget deficit and political paralysis sees funds dry up. They mature in Oct and carry a 3.75% coupon.

Over the week prices acting like they did in the 90’s cu down 68, al off 46, zn fell 29, pb declined 5, ni up 400, sn off 450, gold fell US$ 5 / oz, oil dipped US$ 2.9 / bbl, DJI off 300 points and US 10 year yields unchanged.

The metals landscape looks very similar to a year ago, the physical market is quiet with supply well able to cover demand and reports of producers and large traders offering excellent cif premiums to reduce stocks ahead of the northern summer. Against this the financial investors are riding a momentum trade with commodities being one of the best returning investment classes, money is feeding on itself, the “herd mentality”. The recent economic data has given encouraging signals that the worst of the global growth slump is behind us but that said the Jun JP Morgan composite global manufacturing PMI index rose to 46.9 (May 45.3, the Jne ’08 reading was 49.5 the first contraction since Apr ’03) still signalling a contraction in the sector albeit easing. Against this the falling commodity prices and interest rates that cushioned the blow to falling consumer disposable income are being eroded. The test going forward is does the recovery have legs.

The metals arena seems to be dominated by the Chinese official’s comment that stockpiling had ended. The wash up seems to be that the biggest beneficiary of the process was speculators and arbitragers who benefited from the government’s decision to purchase metal at domestic Chinese prices that were well above prevailing free world prices. As an article quoted  “Even the most stupid person could make money importing copper to China from February to April this year,” said an official from a major trading house in China. “We never thought our business could be so good,” he said. “Thanks to the SRB’s plans, we got more and more orders from our clients, who were betting on copper prices recovering because the Chinese government was in the market.” Uninteresting LME stock moves.

Further evidence of the successful European car scrapping schemes was a 40% yoy jump in Jne German new car registrations set against US vehicle sales falling 28% yoy to 9.69 million units. In Europe, Euroland May unemployment was 9.5% the highest level since May ’99. (Apr 9.3%).The ECB left rates unchanged at 1% and whatever the president was going to say at his press conference was drowned out by US data.

The US employment data was very poor the weekly jobless claims fell 16 k to 614 k then Jne non farm payrolls came in down 467 k (May -345 k) as unemployment was 9.5% (9.4%) in the breakdown manufacturing saw losses of 136 k – how did the Jun PMI employment sub section improve?), construction -79 k, services -118 k, retail -21 k and government -52 k as censorship employment was unwound.  The markets too fright with falls across the board except for the US$ that had another bad news sensation! At 15:00 the May factory orders showed a 1.2% rise (Apr +0.5%) with durable goods unrevised at +1.8%. The afternoon numbers saw the herd change direction. The US is closed Fri and we will be out early.