Against the Grain

Metals outperformed other markets hopping on the only carriage moving forward in Asian time, a weaker US$ as equities, oil and gold remained steady. This followed on from y/days action. Shanghai is now out for a week that brings us to a warning with one of the exchanges out big movements can occurs and as Shanghai has capped prices recently with the arbitrage the path of least resistance is up.

In Asia there was some limited support on the economic data side; the Spt Chinese HSBC manufacturing PMI was 55.0 (Aug 55.1), was the CLSA survey that tracks medium to small businesses. In Japan the Spt manufacturing PMI 54.5 (53.6), Aug industrial production rose 1.8% (+2.1%) yoy -18.7% (-22.7%), vehicle production -25.9% yoy (-31.9%), construction orders -25.2% yoy (-42.8%), housing starts -38.3% yoy (-32.1%) and labour cash earnings -3.1% yoy (-5.6%). In Australia Aug retail sales rose 0.9% more than expected (-0.9%) as NZ Spt business confidence jumped to 49.1 (34.2).

In China it is reported the State Council has set a ban on new al smelters for the next three years and curb capacity at inefficient smelters by 800 kt in the next year (Chinese total output is around 18 mtpa or 45% of world production). This further highlights the growing problem of excess capacity in base industries following on from steel and in the future ni, zn and pb. The problem will be making the provinces enforce the cuts. With Shanghai weekly stocks were reported cu declined 1970 tonnes to 96,719; al fell 2527 tonnes to 227,261 and zn off 2724 tonnes at 109,200. This was offset by LME stocks rises across the board except sn. It is reported that Codelco has set its ’10 European cu premium at US$ 80 cif over LME cash price unchanged from ’09. In the morning session other markets began to catch up the metals lead. The Pacific has been ringed by earthquakes first Samoa then Singapore and Indonesia, the on the island of Sumatra but away from INALUM’s location.

In Europe the Spt UK GfK consumer confidence survey rose strongly to -16 (-25). The Spt Euroland CPI fell 0.3% yoy the fourth monthly fall (Aug -0.2%). The Spt German unemployment rate 8.2% better than expected (8.3%). The German VDMA reported Aug plant and machinery orders down 43% yoy (this accounts for around 20% of country’s manufacturing).

The US has a good flow of data so the 70 / 30 rule applies. The weekly ABC consumer sentiment index was steady at -46. The weekly MBA mortgage applications fell 2.8% (+12.8%) worryingly the purchase index was -6.2% and refinancing -0.8%. The Spt ADP private employment survey saw 254 k more losses than expected (-298 k). The final Q2 US GDP improved to -0.7%. The Spt Chicago manufacturing PMI 46.1 call it a shocker (50.0). This immediately took the shine off the equities however metals, gold and oil remain well supported by investor interest. Things where capped off by DoE oil data while crude stocks rose the gasoline fell so crude rallied. All this got the markets prices back to about where they were this time last week. Now we look ahead to a rush of new data and the prospect of new funds as Oct and Q4 begin.

First thing this is how we expect the day will pan out – in the morning watch the US$ and oil, metals will follow their direction. Around 14:00 we have some US housing data and working on the recent 70 / 30 rule (data these days more likely to be supportive of prices than not) they could give the metals an uplift but dependant on the US$ and oil. Then at 14:30 DJI opens and we will become starry eyed. Day over, that is the dreary life of a sector that ignores its own fundamentals. Looks like during LME Week we will have to talk about currencies, equities and oil.

A slight pullback on the DJI before its close left Asian markets unsure of the move. In Japan Aug national CPI ex fresh food fell 0.9% (-0.9%) as deflation worries mount, yoy -2.4% (-2.4%). The Korean stainless steel producer POSCO lowered prices 4% after three months of increases. London saw all eyes on the US$ and oil. In Guinea troops opened fire on opposition demonstrators heightening tension in the largest bauxite producing nation. Following the “geotechincal failure” at Newmont Mining’s Indonesian Batu Hijau cu / au mine ’09 expected output of 227 kt of cu is seen falling short by 10%. The LME stocks, well really why bother they are inconsequential but for the traditionalist they were routine, dominated by further global al withdrawals. The Peruvian mine workers union is threatening a national strike for Oct 19 -20 demanding better benefits. With the front runners (US$ and oil) on hold resulting in the metals left treading water. During the officials US$ and oil edged towards their lows with the metals reluctant to follow ahead of the US (and they were right). There is a clear divide with pb (back of possible battery plant closures in China and Warren Buffett into a Chinese rechargeable battery firm) & zn showing more strength than cu / al.

In Europe Italian business confidence slipped to 74 against and expected improvement (74.4). The UK final Q2 GDP improved to +0.6% as expected. In Euroland the Spt economic confidence index was 82.2 (80.6), business climate indicator -2.07 (-2.21), industrial confidence -24 (-26), service confidence -9 (-11) and consumer confidence -19 (-22). Read the FT Spt 29 edition, Mohamed El-Erian of Pimco “Return of the old ways of thinking threatens recovery” we think neatly sums up the future (www.ft.com).

The US Jul S&P / Case - Shiller home price index of 20 cities rose 1.6% that is down 13.3% yoy better than expected (-15.5%). Prices improved in 18 of the cities with a big variance in moves Cleveland has seen prices slip 1.3% yoy while Las Vegas has slumped 31.4%. The DJI came in just in positive territory. Then at 15:00 the Conference Board consumer confidence index was 53.1 below an anticipated rise (54.1), current 22.7 (24.9) and expectations 73.3 (73.8). The DJI dropped 50 points in seconds give up a 40 point gain then it led the way in the now usual pattern. The poor consumer numbers seemed to spur investors into metals as “hard assets” as gold and oil did not react. Wonder if there was not a large base metal long only, ETF or bond trade?

The G20 Pittsburgh meeting sank without trace partly because the finance ministers said it all a fortnight ago, interest rates would remain low and stimulus on going. We think the market was suffering from “meeting fatigue” having just endured a run of UN performances led by the issue of the moment, climate change a much better topic to woo the public than fiscal and monetary policy. Finally many leaders had more pressing things at home, Merkel had elections; Brown a party conference; Obama the health care issue and Hu Jintao the 60^th anniversary of the revolution. To cap it off Iran cropped up. Most worrying is the formalisation of the G20 setting off its long term demise as like its predecessor the G7 it becomes meetings for meeting sake. Markus Jager from Deutsche Bank has done a good analysis on “Will the BRICs (read: China) really become the new global growth engine” (http://www.voxeu.org/index.php?q=node/4026).

The markets took no notice of the G20, as Asia handed over to London selling pressure increased with cu breaking 5900. Asian equities under pressure after the US decline Fri with Shanghai off over 2.5%. In China a leading car producer Geely Automobiles saw it shares fall 10% on concerns the government will soon curb auto stimulus measures. The LME stocks are settling into a new pattern with cu stocks mounting (Rott and US today) and al on the decline with global outflows we believe denoting producers wanting to avoid customer risk by dropping material onto the LME as well as whatever RUSAL and its cohorts are doing. Otherwise Rott received good parcels of ni and sn. The IAI reported Aug Western world unwrought al stocks rose to 1.232 million tonnes (Jul 1.179 mt and Aug ’08 1.707 mt).

In Europe Spt Italian consumer confidence rose to 113.6 (Aug 111.8), at the same time as Jul retail sales unexpectedly declined last week. The market struggled for traction as US$ and oil got the go slows if anything they gave a slightly bid tone ahead of the US. No significant data from the US but with the state of the markets a strong rally could not be ruled out on any encouraging data and will be referred to as month end “window dressing”.

Two Fed surveys provided the day’s excitement, first the Aug Chicago Fed national activity index -0.90 (-0.56), US$ and oil action ruled until a strong DJI on M&A in the computer / pharmaceutical areas further lifted metal prices. Then at 15:30 the Spt Dallas Fed manufacturing activity index -0.5 (-9.7%) by then the DJI ruled.

The general market rally has be attributed to lessening risk aversion as confidence in the world economy was restored. Perhaps it is better to view the rally not as “confidence” but “necessity” as extremely low interest rates drove investors to be more risk averse to provide customers with yield, so maybe the cart got ahead of the horse. This raises the question has the government / central bank actions just created a new distortion in the market? On the economic front we continue to worry about the lack of any punch in final demand data after a recent run of disappointing numbers Canada, Italy and France and anecdotal evidence.

All quiet in Asia with metals beginning here little changed from y/day kerb close. The weekly Shanghai stocks saw cu fall 5559 tonnes to 98,689; al rose 761 tonnes to 229,788 and zn off 2524 tonnes at 111,924. The LME stocks dominated by another global fall in al while over the week cu rose 13 kt; al down 25 kt; zn off 700 tonnes; pb up 1 kt; ni declined 1350 tonnes and sn increased 670 tonnes. According to Bloomberg China’s Antaike metal research group expects the country’s refined cu imports to average 150 kt per month till the end of the year (Aug 220 kt) as stocks are run down. China’s refined cu output may rise 4.5% this year to 3.95 million tonnes and up to 4.2 mt in ’10. Consumption this year could rise 10% to 5.4 mt. In al imports are seen averaging 100 kt from 117 kt in Aug and 362 kt in Apr as the price advantage eases. They expect production of primary aluminium to decline by 4% to 13 mt from 13.6 in ‘08 and increase to 14.5mt in ‘10. Consumption is expected to be the same at 12.5mt. The Peruvian Congress has granted a 30 month extension to Doe Run’s La Oroya zn / pb smelter to resolve environmental issues allowing it to restart operations. On the freight front the Baltic Dry Freight index is down 74% from its Jne peak yet still 228% above its ’08 low of 663 points. The metals danced to the tune of the US$ in the morning session.

In Europe the focus will be on the German Federal election this Sunday, head of this the German Oct GfK consumer confidence was up to 4.3 (Spt 3.8). French Spt consumer confidence slipped to -36 (-37) while Italian Jul retail sales fell 0.4% against an expected rise (Jne -0.4%), yoy -2.6% (-0.8%). The ECB reported Aug European bank loans to the private sector rose 0.1% yoy, the slowest pace since records began in ’91 (Jul +0.7% yoy), this is ditto to US and UK. The UK Aug car output was down 31.5% yoy at 56,737 units affected by holiday plant closures (Jul -17.9%).

We have US data today so the 70 / 30 rule applies, first Aug durable goods orders fell 2.4% another surprise to the downside (Jul +5.1%) and ex transport 0% lower than expected (+1.1%). Markets lower but cautious ahead of further data, cat on a hot tin roof springs to mind. At 15:00 Aug new home sales rose 0.7% at 426k units less than expected (revised to +6.5% at 426 k from +9.6% at 433 k units) and Spt Uni of Michigan consumer sentiment 73.5 (65.7), current 73.4 (66.6) and expectations 73.5 (65.0). Otherwise there was a lot of news traffic from the G20 summit but it was best to let the dust settle and watch equities, US$ and oil as they indicate what the market thinks, by 17:00 the answer is not much.

Over the week cu down 171, al off 100, zn dipped 50, pb up 5, ni fell 400, sn declined 100, gold off US$ 18 / oz, oil dropped 5.7 US$ / bbl, DJI at time of writing off 130 and US 10 year bond yield fell 0.1%.

The Fed left rates unchanged and in their press release vowed to “ to employ all available tools to promote economic recovery and to preserve price stability”. Now onto the G20 in Pittsburgh.

The metals were steady in Asian time as a better tone in their equities cancelled out a fall in the DJI. The metals were steady overnight as they switched horses from the DJI to oil and the US$. This ability to follow the “best of the bunch” has keep investor support behind them. In London a rise in LME cu stocks combined with lower oil and stronger US$ to drive prices lower with the red metal at 6030 (the 50 dma). The cu arrived into Rott and NO, al saw general global withdrawals and sn flowed into Sing and Rott. A pick up in oil and dip in the US$ saw metals recover their composure with cu far more volatile than the others. They are certainly very robust with sell offs quickly clawed back if outside factors improve at any time hence so many “traps” sprung. A perfect storm seems to be brewing in cu the threat of a strike at BHPBilliton Spence cu mine in Chile around the start of LME Week.

In Asia the Japanese Jul all industry activity index rose 0.5% (+0.2%), Aug exports fell 0.7% that is off 36% yoy (Jul -36.5%) while imports dropped 41.3% (Jul -40.8%). Interestingly in NZ Q3 consumer confidence jumped to 120.3 (Q2 106). Australia had very good Aug new home sales rising 11.4% (Jul +0.1%). In Europe the Spt German IFO business climate index rose to 91.3 (Aug 90.5), current reading 87.0 (86.1) and expectations 95.7 (95.0).

The US has at last had some data and the 70 / 30 chance rule came into play, that is a larger chance of the figures boosting prices than see them lower and so it proved with unexpected bad data. The weekly jobless claims fell 21 k to 530 k (revised to 551 k from 545 k). At 15:00 Aug existing home sales fell 2.7% to 5.1 million units against an expected rise (Jul +7.2% or 5.24 million units). This clattered the DJI 50 point gain back to unchanged, lifting the US$ and sinking oil. Around 16:00 the equities steadied, € recovered and oil bounced hauling the metals higher. We get another look at housing tomorrow with Aug new home sales expected to rise 1.9% (Jul +9.6%).

Looking ahead to the G20 heads of government meeting we expect to hear a lot about the Alphabet “Recovery” Handicap, at the moment V is a few lengths ahead helped by a weakening US$ and very accommodative monetary policy. Behind comes U which will cut back that lead if the economic data shows the recovery losing steam. Further back is W, the bookies favourite before the start but unable to handle the going so far. Behind the leaders, L looks the best placed however this will mean the race has been extended. Whichever wins the danger is like pouring champagne into the winner’s glass it fills with froth and bubbles over then the contents disappears quickly.

In Asia lower equities (Shanghai off 1.8%) pressured the metals to varying degrees, cu and pb the most while al and ni least (the other influences US$ - at a 12 month low on the US$ index, oil and gold were steady). Reuters reports China is holding around 1.2 million tonnes of refined cu stocks equivalent to 80 days consumption. They quote the state research group Antaike breaking it down as SRB 235 kt, Shanghai exchange 104 kt and private 860 kt. We wonder how much the SRB had before the recent buying spree as we have heard in the past of 10 year old stock being sold by them and what did the provincial government do. Early London oil rose and FTSE up diverting attention away from Asian equities. The LME stocks dominated by continued good falls in al on a global scale. The run up in pb y/day seems to have been triggered by a power outage at Perilya’s Broken Hill pb / zn mine it could last 6 days but will not impact on Q4 production. (Take a look at the Australian ABC news website, the weather conditions brewed up a spectacular dust storm that hit Sydney). In very light volume cu hit an air pocket around 11:00 taking it to 6100 but suspect shorts were wary of any “traps”. The metals then tracked oil, tick for tick ahead of US equities.

In Europe the preliminary Spt PMI data was mixed French manufacturing 52.5 (50.8), services 52.2 (49.9); German manufacturing 49.6 (49.2) and service 52.2 (53.8) and Euroland manufacturing 49.0 (48.2), service 50.6 (49.9) and composite 50.8 (50.4). The Spt French business confidence indicator was 85.0 (79.0) and now the rub French Aug consumer spending fell 1% (+1.4%) and yoy -1.3%(+1.2%), again final demand is a worry. The Euroland Jul new industrial orders rose 2.6% better than anticipated (Jne revised higher to 4%) yoy -24.3% (-25.7%).

Overnight the weekly ABC consumer sentiment index improved to -46 (-49). The weekly MBA mortgage applications jumped 12.8% and is becoming pretty erratic (-8.6%) lower yields saw refinancing rise 17.4% with the purchase index up 5.6%. The only other data is the “hot ticket” DoE weekly oil inventory numbers and they were not good crude stocks rose against an expected fall and gasoline demand fell to an eight month low. Add to that various gatherings (UN / G20) of major world leaders in the “land of the free” till the weekend. Equity surfing on oil ensued, however the metals followed the DJI more than oil. After the close the FOMC decision will be released with rates expected to be unchanged however markets will study the attached press release closely. NB. any move off its sentiment could be quite volatile.

Today world leaders are meeting at the UN in NY to discuss climate change however the metals will remain driven by equities, oil and the US$. In Asia, Japan was closed and Shanghai down 2% while US$ weakened and oil was stronger so metals opened with a bid tone. There is no headline economic data to divert attention away from these main drivers.

In the metals the Chinese sovereign wealth fund CIC has purchased 8% of Noble Group the HK commodity trader with integrated interests in metals, bulks and agricultural sectors, as an analyst said “What China needs, Noble helps to provide” (Glencore got approved investment status from them last week). The Chinese customs reported Aug refined metals imports of cu fell 24% to 220 kt (Jul 292 kt); al off 10% at 117 kt (131kt); ni fell 53% to 22 kt (47 kt); zn declined 46% 30 kt (56 kt); pb off 56% at 5 kt (11.5 kt) and sn dipped 26% at 1637 tonnes (2222 tonnes). Recently this data was earth shattering now it is trumped by the overall bullish tone. The LME stocks saw cu register a fall for the first time in over a fortnight that helped the upward momentum.

The Italian Q2 unemployment rate was 7.4% (7.3%). The better mood in the markets about economic recovery going forward was set by an Asian Development Bank report raising their growth estimates for developing Asia to 3.9% (Mch outlook 3.4%) hence US$ down others up. Into the afternoon and stronger oil plus weaker US$ (€ above 1.48 the highest since Spt ’09) kept cu ahead of the pack.

In Canada Jul retail sales fell 0.6% against an expected rise (Jne +1%). What US data there was came at 15:00 the Spt Richmond Fed manufacturing index was 14.0 less than expected (14.0), manufacturing shipments were 22 (21), service revenue -12 (-8), retail revenue -6 (-35) and Jul house price index rose 0.3% less than expected (revised to 0.1% from 0.5%) yoy down 4.2%. The DJI lost traction after this data dragging the metals off their highs. After that the metals headed off for some equity surfing as is the recent trend. A US analyst said “the asset classes are so incredibly correlated right now…. It is an asset allocation play and has nothing to do with traditional financial metrics. The market itself is a commodity”.

For a third Mon in succession metal came under early selling with a mixture of macro and fundamental reasons cited such as stronger US$, lower Asian equities on the back of broader market concerns, rising metal stocks, lower oil and fund profit taking. In past weeks this early selling has turned out to be a “bear trap” as things snapped back. Ahead this week is a series of high profile political meetings with the annual General Assembly meeting of the UN through to a G20 heads of government meeting Fri in Pittsburgh. In between all this the Fed FOMC meets with a press release after the LME closes Wed. The expectation are for no significantly change; interest rates will remain low; governments will stress stimulus packages although for democracies the public opposition to carte blanche public spending is becoming problematic. For the metals expect the US$ and equities to continue being the directional drivers.

Having held in well during Asian time base metals came under pressure in London trading driving prices lower in reasonable volume. The LME stocks saw cu rise as material flowed into Busan, al saw continued broad withdrawals while the other were little changed. In China Jiangxi Copper Co its largest integrated cu producer, plans to expand its annual capacity of refined copper by more than 10 percent to 1 million tonnes by ’12, the danger is the efficiency of the Chinese to build processing plants outstrips miners ability to increase concentrate output further pressuring TC / RC rates. The IAI reported average daily output rose to 63 kt (Jul 62.8) while total output was 1.954 million tonnes (1.948 million tonnes from Aug ’08 2.175 million tonnes). The am session seemed to see the heavy beat of selling. The officials did little to stem the tide with cu hitting a news low at around 13:30 of 6050 in a general commodity downturn, gold 997 and oil US$ 70.2 / bbl.

Ahead of the DJI opening cu seemed to flow with oil, then it was surf time! Very little data around today at 15:00 the Aug Conference Board leading indicators rose 0.6% at 102.2 (+0.6%), coincident index was flat at 99.8 and lagging indicators declined 0.1% to 110.2. A recovery in the DJI saw short covering cascade into the metals predominantly cu as for the third week the “bear trap” snapped shut.

With US equities ending Thurs session unchanged Asia lacked a lead and was likewise subdued except for Shanghai down 3%. The metals similarly had little to trade off as prices eased in light volume gathering some selling pace as London began. Japanese Jul leading index dipped to 82.5 (Jne 83.0) with the coincident reading at 89.8 (89.6) while Aug department store sales declined 8.8% (-11.7%). The Aug German PPI rose 0.5% (-1.5%) yoy -6.9% (-7.8%) as energy costs rise. Italian Jul industrial orders rose 3.2% (+2.6%) yoy -23.2% (-22.7%) and industrial sales +0.7% (-1.6%) yoy -21.7% (-25.4%).

Bloomberg reports a battery factory in Fujian province was closed last week over pb poisoning, authorities cut the power supply. While Platts noted up to 70% of Yunnan provinces 500 ktpa pb production could close by end Oct on the back of safety checks. These units are big employers so authorities will have to weight up economic well being against environmental well being. The LME stocks were routine, on the week cu rose 9 k; al jumped 26 k; zn up 1 k; pb increased 2 k; ni dipped 300 tonnes and sn put in 1380 tonnes. The weekly Shanghai stocks were very late eventually showing cu up 6852 tonnes at 104,248; al rose 493 tonnes to 229,027 and zn down 2072 tonnes at 114,448. We saw on a equity broker report today that Glencore has been registered as an approved investment partner for China’s US$200bn sovereign wealth fund China Investment Corp (CIC).  Adding further to the general noise that Glencore is looking for new investors. The zn producer Nyrstar is to start up production at its Belgium Balen smelter after a 9 month shutdown at 70% of its 275 ktpa capacity.

With no US data the metals settled into an afternoon of equity surfing and stocks have a famous “quadruple witching”, as options expire across the board after our close.

Over the week cu was the odd one out down 104, everything else rose al 73, zn 57, pb 117, ni 400, sn 200, gold US$ 6 / oz, oil 1.1 US$ / bbl, at time of writing DJI 88, US 10 year bond yields 0.16% and US$ weaker against the € by 1.2 cents.

Equities are king as expectations of low interest rates out to the twelve month horizon compressing government debt yields leaving investors to chase alternatives returns in equities & certain commodities. The DJI rallied 108 points on more encouraging data and Asian markets scrabbled to catch up with the Nikkei and Shanghai up over 1.5%. The economic data in the near term will continue to be supportive with the real test coming Oct onwards as government stimulus measures in industries such as autos and housing roll off. In the US Nov sees a US$ 8000 tax credit to first time home buyers set up in Feb end. It is estimated this has accounted for 40% of all home buyers this year and cost the tax payer US$ 15 billion (twice the amount projected). The data we look at continues to highlight a lack of any real recovery in the important final demand arena.

The BoJ left rates unchanged at 0.1% as the Jul tertiary industry index rose 0.6% (Jne +0.2%). In Europe UK Aug retail sales were flat against an expected rise (+0.4%) yoy +2.1% (+3.3%) and the Spt CBI industrial trends total orders -48% (-54%). The BoE sees UK CPI expectations at 2.4% a year forward (Aug CPI was recently reported at 1.6% the lowest since ’05).

The metals followed the equities and oil higher but continue to lack any significant traction selling off from their Asian highs in early London trading. Al is getting support from talk that the Russian al producer RUSAL is contemplating selling Glencore (its 9% shareholder) a further 500 kt of al (on top of 800 kt earlier this year after which the producer informed Japanese customers they could not supply them in Q3 forcing Q4 premiums to US$ 115 above LME, the first time the premium broke the US$ 100 barrier since ’95). It shows the interplay between large traders and cash strapped Russians. In a twist to this story Reuters ran an article that Glencore and CS Bank are looking at launching a physical aluminium ETF contract. The DRC is reported to be reopening contract talks with First Quantum over the recently cancelled licence of the Kolwezi cu / co project (expected to be on stream ’10 at 70 ktpa cu and 14 ktpa co). LME stocks dominated by deliveries, cu into Asia, al out globally and the spread suggests end demand, pb into Europe and sn Asia of course. One thing we missed from the ILZSG data released y/day is the rising stock to consumption levels for zn 7.9 weeks (6.0 end of ’08) and pb 3.8 (3.0). Mid session cu sold off to 6330 as US$ improved slightly, equities improved and oil / gold slipped. Big divergence in the metals from London opening to officials cu was down US$ 99, al off US$1, zn up US$ 9 and pb fell US$ 84.

In the US overnight the Spt NAHB home index rose to 19 (Aug 18). At 13:30 weekly jobless claims fell 12 k to 545 k (557 k) and Aug housing starts rose 1.5% to 598 k units less than expected (revised to -0.2% or 589 k  from -1%) and building permits rose 2.7% at 579 k units (revised to -1.1% or 564 k from-1.8%). At 15:00 the Philadelphia Fed manufacturing index rose to 14.1(4.2). After things equity surfed with metals tending to faint down moves however just after the close the DJI was struggling to stay in positive territory.