Against the Grain

In the present low interest environment the path of least resistance is up hence 70% up / 30% down each day is a good guide to the metals, pullbacks come when economic data is thin or the equities / oil have a bad day. Looking at the authorities we see them having two near term and two longer term goals. Near term the priority is to get the tax payers money back as soon as possible so improving incumbent government election prospects. Longer term the emphasis is to get growth back on track then maybe change regulations. To achieve the first goal it is imperative interest rates stay low to allow banks to make as much money as possible in the shortest time to rebuild balance sheets, expect this to be done at the expense of a broader economic recovery. Needs must! A commentator gave an good analogy of the present economic situation saying since the darkest days the governments gave us a parachute that is taking us towards a landing however we are not there yet and a lot of things can go wrong before we land safely.

In Asia equity trading was mixed with Nikkei small up and Shanghai slightly down, the metals advanced but what is interesting is how poorly, a couple of weeks ago and cu would have jumped on y/days outside factors (last Wed morning prices were as follows - cu 6490, al 1909, zn 1975, pb 2475, ni 18240 while gold was 1002, oil 71.4, € 1.451, DJI 9497 and FTSE 4947). Maybe the message is filtering through of rising exchange stocks and robust offers of material out of China - just a chance fundamentals might be gaining some traction. The LME stocks were routine - cu and al into US and sn into Johore rather than Sing, still close to producer but harder more expensive for customers to get. The ILZSG saw ’09 zn surplus at 290 kt in year to Jul and pb at a 52 kt surplus but this is fundamental metal data and of no consequence in the present market.

The Europe Aug Italian CPI rose 0.2% (+0.3%) and Euroland CPI rose 0.3% (-0.7%) yoy -0.2% (-0.7%) and yoy core CPI +1.3% (+1.3%). The Aug UK unemployment was 7.9% (7.8%). A very strong equities sector literally dragged metals higher.

The US weekly ABC consumer confidence index dipped to -49 against an expected gain (-48) and in a separate ABC / Washington Post poll 47% of Americans reported job loss or pay cut in their household in the past year, with many expressing scepticism that either the federal government or the financial industry are taking steps to help prevent another crisis (against this the NYT says wages grow for those with work http://www.nytimes.com/2009/09/16/business/economy/16leonhardt.html?_r=1&hp). Despite lower bond rates the weekly MBA mortgage applications index fell 8.6% after last weeks strong gains (+17%) refinance index -7.4% and purchase index -10.3%. The Aug US CPI rose 0.4% (Jul flat) yoy fell 1.5% (-2.1%) with core CPI up 0.1% (+0.1%) and yoy % (+1.5%). The Q2 current account balance was US$ 98.8 billion (Q1 US$ 101.5 billion). At 15:00 Aug industrial production increased 0.8% (+0.5%) and capacity utilisation was 69.6% (68.5%). Again metals watched the equities and oil like a hawk with US DoE weekly stocks keeping oil firm.

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Another day another public pronouncement from President Obama however the lack of any substance from his administration is in our view the major cause of the weakness in the US$ and why commodities are not reacting to the move as aggressively as they have in the past when risk aversion was being unwound. The weakness of the present US government is a long term economic and political global negative. As expected metals followed equities and oil over the session with US data injecting some increased excitement in the afternoon in very light volume.

Asian activity was very quiet with little movement in the regions equities and metals in tight ranges the most jumpy being pb as investors readjust after the recent volatile health induced moves. LME stocks dominated by the usual al flow into the US that was joined by significant deliveries to all except pb, cu arrived in Livorno; zn to the US, ni Rott and Sing and sn the Far East of course. Sn is now a market with a dominant producer, Indonesia right next to LME dumping points Sing / Johore. Vale has restarted its Thompson Manitoba ni operations after a month maintenance, Sudbury and Voisey Bay units are still strike bound. China’s Aug ni production rose 7.7% to 18,853 tonnes that is up 63.3% yoy, no surprise with the ni prices at these levels every pig ni plant is profitable and we suspect working at full capacity with ni ore imports close to record levels. The vagaries of mining in Africa was highlighted again y/day as the DRC cancelled First Quantum’ Kolweizi tailing dump mining contract as part of the country’s review of all contracts. The project is 65% completed at the cost of over US$ 500 million. The one outstanding contract is Freeport’s Tenke Fungurume cu operation that has just commenced production. The Shanghai Exchange has increased minimum margin requirements for metals ahead of the week long National Day holidays (Oct 1 to 8).

The Chinese reported Aug foreign direct investment rose 7% to US$ 7.5 billion, the first increase in eleven months (Jul -35%) and year to Aug -17.5%. In Australia Q2 housing starts fell 3.7% against and expected 2% rise (Q1 -2.1%). Western European Aug car registrations rose 3% (Jul +2.8%) and yoy -6.6%. The German Spt ZEW investor confidence index improved to 57.7 however below expectations (56.1), current situation -74 (-77.2) and the Euroland reading was 59.6 (54.9). The UK Aug CPI rose 0.4% on the back of a rising oil price (flat) yoy +1.6% (+1.8%) still below the BoE target range while the retail price index increased 0.5% (flat) yoy -1.3% (-1.4%).

In the US Aug retail sales rose 2.7% (Jul -0.2%), ex auto up 1.1% (-0.5%), seems like a one sector recovery as auto sales rose 10.6% (+1.5%), PPI rose 1.7% (-0.9%) yoy -4.3% (-6.8%) the rise attributed to oil as core PPI was up 0.2% (-0.1%) and Spt NY Fed Empire State manufacturing index up to 18.88 (12.08). The kneejerk reaction in the metals was very muted then the DJI opened lower before quickly going positive and cu moved erratically. At 15:00 Jul business inventories declined 1% as expected (-1.1%). Finally at 16:00 Fed Chairman Bernanke spoke on the current economic situation, giving the same speech he gave at Jackson Hole in Aug. In between these interruptions it was very easy just keep an eye on equities and oil.

Away Fri so missed the Aug Chinese data that threw up an interesting divergence, industrial production, retail sales and investment showed reasonable growth while exports and imports decline. This morning saw a “commodities horror”, the threat of trade disruption putting them immediately on the back foot. The US placed tariffs on Chinese tire imports after a WTO ruling sending the rubber futures down just over 9%. Retaliation (rumoured in the auto and chicken part sectors) is no doubt around the corner and this is not the only trade dispute on the table and we expect numbers to increase. On the anniversary of the Lehman’s demise it is interesting to see a comment by Nobel economics laureate Joseph Stiglitz who quite rightly points out that “In the US and many other countries, the too-big-to-fail-banks have become even bigger” and many by government encouragement, in the UK Lloyds Bank, France BNP and US Bank of America.

The LME stocks saw the usual inflow of cu (location change to Sing) and ni (Rott) while al rose with 11 k into US locations ahead of third Wed settlement. In the area of political risk Guinea Fri stood by its decision to strip RUSAL of its Friguia alumina smelter (640 ktpa). In a very quiet session a recovery in oil steadied the metals.

On Fri the OECD published their Jul composite leading indicators showed stronger signs of recovery in its member countries and BRIC nations, surprisingly the Euro area is the only region who’s LEI are higher than a year ago. The gains are supported by strong equities, low interest rates and high business survey confidence. In Japan Jul industrial production rose 2.1% (Jne +1.9%) and yoy -22.7% (-22.9%) against Euroland where it fell 0.3% (-0.2%) and yoy -15.9% (-16.7%).

With no US data oil was leading the metals around breaking above US$ 69 then dropping away ahead of the DJI open. After that you briefly had equities falling and oil rising before “equity and oil surfing” took hold for the afternoon with cu looking more like a roulette table rather than a traded commodity (black being the DJI / red was the oil price and the numbers how much it gapped per directional change), by the end of the day it still remained in the US$ 130 range set in Asia.

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The Federal Reserve Beige Book summary was that reports from the 12 Federal Reserve Districts indicate that economic activity continued to stabilise in Jul and Aug. On the fx front, the recent US$ weakness has been attributed by some sources to the Chinese injection of US$ 50 billion into IMF SDR bonds the latter currency is make up of US$ 44%; € 34%; Y 11% and £ 11%, with India following suit with US$ 4.8 billion. As an old currency hand said to us that is a significant structural currency transaction which no doubt provoke a considerable amount of front running. From a commodities perspective it is noteworthy the detachment of them from the US$ weakness.

We have a flood of numbers from China tomorrow which will give us a picture of their economy during August, today it was reported house prices rose 2% during Aug in the 70 largest cities (Jul +1%). In Japan Jul machinery orders fell 9.3% to the lowest level since ’87 (Jne +9.7%) yoy off a stunning 34.8% (-29.7%). The Australian Aug unemployment was unchanged at 5.8% as employment fell 15 K (+33 K). In Malaysia Jul industrial production fell 8.4% (-9.5%). Into Europe French Jul industrial production rose 0.6% (+0.2%) yoy -13% (-12.9%) as Italian Q2 GDP declined 0.5%. As expected BoE left rates unchanged at 0.5%.

The LME stocks were routine with al withdrawals accelerating from global locations reflecting the ending of rent deals and therefore increased availability of material, so things getting back to normal. From all accounts physical demand remains quiet and cancelled warrants remain low at 3% or less on all the metals. The OPEC meeting left quotas unchanged as the International Energy Agency raised world oil demand estimates on growing Chinese demand to 85.7 million barrels per day next year. They estimate demand will shrink 2.2% this year with OPEC providing 26.25 mbpd. The run by pb seemed to hit the buffers today as it dropped 12%.

In the US weekly jobless claims were 550 k (576 k) and Jul trade deficit jumped 16% to US$ 31.96 billion well above expectations (-US$ 27.5 billion). The Bank of Canada left rates unchanged at 0.25%. Then it was sit back and watch the DJI, the slavishness of metals to it in the past month is amazing the DJI could rally on the back of a cosmetics stock (not far wrong, today it was Procter and Gamble) and the metals just follow. It just seems to have become an fetish.

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The US consumer remains extremely cautious and without them I think we have a very hard recovery road to hoe. It appears inflation dominates investor worries and that seems to be boosted by them buying metals and oil as an investment hedge, (noticeably agricultural commodity prices are in retreat as grains expect a bumper crop wheat is at its lowest since Apr ‘07). So in the metals investors are trumping the metal users (we hear scrap cu discounts have widened quite dramatically recently), what trumps investors (with low interest rates), we would suggest a lack of significant growth and if you look around you are seeing more signs that could be occurring. A Bloomberg article on US Endowments moves into commodities spurred by fears inflation could rise to levels it averaged in the 70’s of 7.9% from its ’08 average of 0.1% underscores the investment drive for the sector. More interestingly it reveals the huge divide between the ways and means of the traditional market and fears of the investment community. The article highlights George Washington University with a US$ 1 billion fund looking to invest as much as 30% into natural resources in the next 3 to 5 years up from 13%. It shows you the fire power looking to invest and the fear of inflation that in the 70’s wiped out over 50% of their portfolios (www.bloomberg.com/apps/news?pid=20670001&sid=aerE4nbTkUjI).

The metals see the LME settled into a new pattern cu (Busan) and ni (Rotterdam) rising while al declines. We are also seeing an increase in the availability of LME warrant material in part from the ending of financing deals. In China, Baiyin Nonferrous Group Co Ltd, the third-largest zn producer and a major cu smelter, plans to more than double its annual metal production capacity to 650 kt in 3 years without breaking it down. While the LME pb price has jumped 17% this month in China the spot market has only improved by 9% this means Guangxi Chengyuan a smelter producing 100 ktpa from imported concentrates is going on maintenance from Spt 15 as input costs affect margins. Morning trading is hard to pick as traders bounce off €, oil and equities (esp. DJI futures) however once the DJI appears the metals become infatuated.

In Asia Jul Australian retail sales fell 1% against an expected rise (-0.8%), home loans were down 2% (+0.4%) and investment lending off 4% (-2.3%). as Spt consumer confidence rose 5.2% (+3.7%). In Japan preliminary Jul leading index was 83.0 (80.9).

From Europe Aug UK consumer confidence improved to 63 (Jul 61.0), as we have said before we are more interested in actual consumer data than happiness surveys. On the inflation front German Aug CPI rose 0.2% (0.2%) and yoy remained flat.

The focus is on the US consumer as the weekly ABC / WP consumer sentiment index backtracked against expectations to -48 from -45 and Jul consumer credit slumped by a record US$ 21.6 billion against an expected – 4 billion (Jne -10.3 bill). The weekly MBA mortgage applications jumped 17% (-2.2%) with lower US treasuries seeing refinancing up 22.5% and purchase index +9.5%. Another US session without data ending with the Fed Beige Book at 18:00 GMT and again DJI failed to live up to expectations. The weekly US DoE oil stocks had little impact and metals concentrated on equity surfing.

Interest rates near 0%; gold at 1000; base metals firm, oil steady, equities up and the US$ losing ground – it was up from the opening bell. In Australia Aug business confidence improved to 4.0 (Jul +1.0) while in Japan the Aug economic watchers survey declined to 41.7 (42.4). The general official concern about a global recovery is evident even in China were a senior state official China’s is seeing more signs of economic strength but Beijing will continue its simulative policies because the recovery is still not very solid. The Association of Automobile Manufacturers said Aug Chinese car sales boomed 90% yoy to 858 k units boosted by incentives with commercial vehicles up 60% at 280 k units.

Asian metal trading but came into London on its high providing the platform for the day. The LME stock movers were Busan (cu) and Rotterdam (ni). It is reported from Chile a landslide has blocked the access to Anglo’s Los Bronces cu mine without disrupting operations (’08 produced 235 kt). OPEC meets in Vienna tomorrow with the Saudi Oil Minister saying the oil market was in good shape with the present price range of US$ 68 /75 / bbl good for everybody.

In Europe the Jul UK industrial production rose 0.5% (Jne +0.6%) and -9.3% yoy (-11.3%) while manufacturing output rose 0.9% boosted by autos (+0.6%), yoy -10.1% (-11.3%). The German Jul industrial production declined 0.9% hit by a decline in capital goods (Jne revised to +0.8% from  -0.1%) as yoy it remains off 17% (-17.6%).

No US data but plenty of equity M&A that could draw the sting out of the commodity sector as it signals an interest by investors in moving into less tangible areas. The only data was Jul Canadian building permits that fell 11.4% against an expected modest rise (Jne +1.2%). Metals very strong into the US equity opening support by gold at US$ 1006 / oz, oil US$ 71 / bbl and € 1.450, however Wall Street did not live up to early expectations with traders falling off early in an afternoon of “equity surfing”. The Conference Board Aug employment trends index fell 0.1% to 88.1 (88.2) with the index down 18.5% yoy. Looks like traders were long the metals into the close as the DJI slipped back they ducked for cover.

The G20 finance ministers meeting in London left one “loud and clear” message, interest rates are not going up in the medium term leaving investors free to chase hard assets and keep the metals well supported. The only risk to such a very positive outlook is if the real numbers show despite all the efforts of central banks (lower interest rates) and governments (stimulus packages) the consumer, weighted down by unemployment, debt, rising oil prices and worries of future taxation fails to “feel good”. So the near term outlook is fair, metals will push higher as investors use easy money to chase yield with the occasional short, sharp pullback as they jump at shadows on the way. Should the macros change as we suspect then investors will have to adjust.  With the US out on holiday the LME chose to emphasis “disaster recovery” by operating from its alternative site in Essex which seemed to keep trading volumes slight.

The metals have pb continuing to blaze the trail higher supported by buying on the Chinese poison story. News that some pb smelters could be back on line as early as Oct (if not now) failed to dampen the enthusiasm of investors for a stake in this metals. The move has seen the LCH raise the LME deposit by 25% to US$ 6250 / contract effective Spt 9. Zn because of its “guilt by association” is continuing to benefit be it at a much slower pace, a fortnight ago the two were US$ 25 / tonne apart now around US$ 400. The LME stocks again dominated by cu flowing into Busan and ni hitting Rott. Overall the likes of cu, al and ni have lacked real oomph in Spt, so far.

The Spt Euroland Sentix investor confidence index improved to -14.6, less than expected (Aug -17). The Jul German factory orders rose 3.5% (Jne -3.8%) yoy -19.8% (-25.2%).

Without the US activity ground to a halt in very thin turnover. The biggest support came from higher equity markets as a string of M&A announcements hit, the largest being US Kraft Foods bid for the UK confectionary producer Cadbury lifting the latter shares by 40%. The FTSE was up 82 points.

An interesting week with the breakdown of many entrenched correlations, the US$ pretty steady, oil down, gold rockets, equities off as bond yields fall. In the metals cu down with ni as both have seen rising inflows of stocks while the “mystic” of China has seen the pb price rocket for a second week. On world trade a program on the BBC discussed shipping interviewing an executive from Maersk Line some points he made 10% of container vessels are laid up with others on slow / super slow steaming to save costs, emphasised how green it was but did not mention also forcing up rates. Said China exports picking up but the shipping business not too far from being non sustainable. Looking forward new orders are 40% of the total existing fleet with cape size orders at 105% of existing capacity. The Baltic freight rates continues to drift lower, down 0.4% this week and 40% from this years high.

More news that Chinese pb smelters are being inspected flung  the price higher and now the spread to zn is been above US$ 400 investors are beginning to warm to the latter’s expecting a catch up. On the physical front there is nothing to support the price rise in either with plenty of non LME grade material about but be warned do not let the fundamentals cloud your view. A Bloomberg article said China produced 1.95 million tonnes of pb in the first seven months of ’09 with the risk of capacity closure at around 200 ktpa, what it does not reveal is the amount of new modern plant capacity coming on line in the near future which we hear is around 400 kt. It goes on to quote a source anticipating lead acid battery production will rise 45% in ’10 to meet alternative energy demand and keep up with a 31% rise in car sales to 5.37 million units in the year to Jul boosted by government tax incentives. The weekly Shanghai metal stocks saw cu rise 483 tonnes to 87,108; al up 3028 tonnes to 222,678 and zn dipped 105 tonnes to 117,394. The LME is seeing another pattern develop with cu pouring into Busan and ni filling up Rott, on the week cu rose 9 kt; al off 6 kt; zn rose 2.5 kt; pb up 525 tonnes; ni put in 740 tonnes with sn following with 483 tonnes. On a quick reckoning any expiry of al warehouse deals will find it hard to roll as the margins have eased. The metals analyst CRU reports cu premiums in China have fallen 40% from the highs.

The UK Aug car sales rose 6% to 67 k boosted by the government scrappage stimulus (Jul +2.4%). Like bingo “all eyes were down” for Aug US employment data that set the tone going forward. The non farm payrolls declined 216 k (revised to -276 k from -247 k) the breakdown saw factory jobs fall 63 k (43 k), construction 65 k (73 k), service industries -80 k (-154 k) and retail -9 k (-43 k) finally government -18 k (-28 k) looks like a broad decline in employment continuing. Then unemployment rate rose to 9.7% (9.4%) unemployment amongst teenagers (16 / 19 years) is 25.5%, average hourly earnings up 0.3% (+0.2%), average work week at unchanged at 33.1 hours. We learnt something new today the broad measure of US unemployment is called U-6 capturing the unemployed, marginally attached to the workforce or working part time because it is the best they can do in Aug the rate was 16.8% (Jul 16.3%) – ever heard of it? All in all the employment data are awful a broad loss in jobs after a year or more of declines, you would expect them to ease up not because things are improving but the easy jobs have been slashed through the fat and meat and now we are carving up into the bones. Equity surfing ensued as NY desks emptied ahead of the Labor Day holiday Mon.

A mixed week - cu off 205, al down 50, zn rose 46, pb still flying +222, ni dropped 1500, sn blipped up 175, gold jumped US$ 46 / oz, oil dropped US$ 5.4 / bbl, DJI at time of writing down 180 and US 10 year bond yields dipped 0.07 %.

Surprisingly metals were not higher in Asia as the omens supported them, Shanghai equities up 5% (rumours the State will not let equities fall any further especially with the 60th anniversary of Oct 1 coming up), gold up (NY traders seem to link cu and gold much more closely probably because they trade next to each other on Comex), US$ weaker, oil up and the only fly in the ointment a lower DJI. The FOMC minutes had nothing shocking in them. G20 finance ministers meet in London Fri and expect all will say stimulus packages must continue for the time being. Otherwise nothing really new and markets will focus on US employment data Fri.

In the metals the LME stocks saw cu still rolling into Busan (suspect diverted from China) and ni keeps filling up Rott. The market set a mouse (rather than a bear) trap that pinged shut after stocks as pb rallied US$ 100 in an hour boosted by more bullish talk of pollution cutbacks in China. This time last year a US fund had a tight hold on pb and would not be surprised if history is repeating itself. Also running ahead of the pack is gold as stops rush it towards 990. In the world of economic dogma falling bond yields and rising gold should not happen. The head of Alcoa said in a briefing that they had upgraded their estimate of a decline this year in al demand to 5% from 7%. At the close pb was at a US$ 384 premium over zn and US$ 418 over al.

In Europe the Aug service PMI data appeared Italy 46.4 (Jul 44.5), France 49.3 (48.9), Germany 53.8 (54.1), Euroland 49.9 (49.5) its composite index 50.4 (50.0) and UK 54.1 (53.2). The French Q2 unemployment rose to 9.5% (Q1 8.9%) and Jul Euroland retail sales fell 0.2% the consumer continues to lag (revised to flat from -0.2%) and yoy -1.8% (-2%). In Germany the car scrapping scheme ended y/day the last of the high profile car incentive schemes while long running schemes in Italy and Spain continue. The German VDMA engineering federation (in ’08 accounted for 14% of manufacturing) forecasts plant and machinery production will decline 20% this year at the high end of expectations, with total Jul orders down 43% yoy (domestic -44% and foreign -44%). The sector tends to lag in a recovery. The ECB left rates unchanged at 1%.

The weekly US initial jobless claims 570 k (574 k). At 15:00 the non manufacturing PMI was 48.4 (46.4). Then equity surfing ensued ahead of tomorrows employment data. In summary, very nervous and fickle markets that are long and questioning their enthusiasm.