Against the Grain

In late London trading cu literally went into free fall dropping US$ 200 to 7047 as major technical lines were broken and failed to show any traction as things unfolded in the US. The Fed FOMC left rates unchanged (0.25%) with an upbeat take on the economy saying “economic activity has continued to strengthen and that the deterioration in the labour market is abating”. This was followed by a vintage Obama speak however the markets know he can do that what they are more circumspect about is the President’s ability to act. As we said yesterday zero interest rates are not the foundation of economic recovery only the cornerstone of investor decisions and when they lose faith in their positions anything can happen.

Cu is close to the psychological 7000 area after the late sell off without reacting to a recovery in global equities. The Select cu volume in Asia was close to 5000 lots as it bears the brunt of trader focus in volume and volatility. Early London trading saw other supports coming in higher equities, US$ have strengthened below 1.40 weakening and oil recovering. In China the curb on property loans is seen affecting the construction industry demand as the seasonally strong Mch / Apr period arrives. The LME stocks saw al keep moving out (cancelled warrants also fell) and cu coming in (NO while some out of Busan). An 8 k rise in cancelled US pb warrants. After an attempted pre market rally by 11:00 cu was testing 7000. A rally after the officials seemed to point at some forward buying at these lower prices but this recovery again faltered into the US data as the US$ strengthened below 1.40. Barclays reported that inflows into commodity investments rose US$ 68 billion in 2009 to assets under management of US$ 256 billion.

From Asia has come more evidence of what has troubled us most in the recovery of the past year, the lack of final demand, Japanese Dec retail sales fell 1.2% (Nov unchanged), yoy -0.3% (-1.1%), well under expectations. The Reserve Bank of NZ left rates unchanged at 2.5%. In Europe Jan Italian business confidence 83.2 (82.4) then German Jan unemployment rose 8.2% (8.1%). The Jan Euroland economic confidence survey 92.5 (91.3); business climate indicator -1.12 (-1.3); consumer confidence unchanged -16.0; industrial confidence improved -14 (-16.0) and service confidence up -1 (-3.0).

In the US the weekly jobless claims fell 8 k to 470 k (478 k) and Dec durable goods rose 0.3% less than expected +2% (+0.2%), ex transportation was better +0.9% (revised to -0.4% from -0.7%). The Dec Chicago Fed national activity index slipped to -0.61 (Nov -0.39). After some initial uncertainty buyers appeared pushing things higher but expect the metals to equity surf, as there is no other data.

Note early closes off to a meeting.

Many events strutting the world stage today; they began with an artillery duel between the two Koreas; the World Economic Forum started in Davos; a security conference in London on Yemen; then after dark our time in the US the Fed FOMC press conference (rates expected to remain unchanged); Fed Chairman Bernanke needs Senate confirmation and President Obama’s State of the Union address, where he will try to reboot his Presidency after a torrid first year capped by the Republican Senate win in Massachusetts. This is on top of the usual hubbub of the markets. Going forward interest rates are set to remain low and they are the foundation of the investor induced rally. However it is starting to get a bit ragged around the edges, low rates by themselves are not the basis of growth alone. Emerging markets dominated by China have been the vanguard of world recovery however the recent speed has caused cracks in the locomotive that appear to need repairs. The recovery needs others to grow and evidence so far of this is lacking.

The late metal rally in London was reversed in Asia as US equities gave back gains. In HK the Rusal IPO saw it shares fall over 10% from its HK$ 10.90 listing price. In zn the troubles go on for Minmetals as concentrate shipments from its Century mine is halted for a fourth day by a cyclone off the Queensland coast. The metals cascaded into LME warehouses (cu & zn US; pb Sing; ni Rott and sn Johor) with only al seeing some out with a massive 22 kt jump in European cancelled warrants (Rott 10 k, L/pool 10 k & Antwerp 3 k). The pre market trading was light and nervous with sellers on top.

In Asia the Australian Q4 CPI rose 0.5% (Q3 +1%), yoy +2.1% (+1.3%). In Europe the Jan French consumer confidence indicator -29 (-30).

Overnight the US weekly ABC consumer sentiment index improved to –48 (-49). Then emphasis on housing the weekly MBA mortgage applications fell 10.9% (+9.1%) refinancing down 15.1% and purchase index 3.3%. The under pressure metals staged a sharp recovery as the DJI picked as “equity surfing” set in. At 15:00 Dec new home sales fell 7.6% at 342 k units (Nov revised higher to 370 k from 355 k units and -9.6%) for the year ’09 they fell 23% the lowest since 1963 when these records began. The metals got beaten up after the data with cu breaking under 7200 and selling off in big volume and faster than equities. In a sign of the growing anxiety about the status of the world economy the US one month T bills traded at negative 0.0101% the first time since Mch ’09.

It seems the Chinese have decided on a 2010 growth rate of 9.5%, that is the rate mentioned over the weekend by the Development Research Centre a think tank of the State Council (’09 rate 8,7%), so unless you hear otherwise put that into your global calculations and do worry about doing any more work on China growth for this year. In the US the Fed FOMC begins a two day meeting, its chairman is up for Senate confirmation and tomorrow President Obama delivers his State of the Union address. It will include a proposal to have a three year freeze on government spending with the area exempt almost outnumbering those included.

At y/days close stability seemed to have returned to the markets with metals regaining composure and cu looking to be on the road to recovery. Then in Asia uncertainty returned, in Japan the BoJ left monetary policy unchanged at 0.1% however the S&P rating agency questioned the country’s sovereign rating. In South Korea the Q4 GDP was 0.2% (Q3 3.2%), the declined caused by a decline in exports, consumer and government spending. This combined to push equities lower, Shanghai down 2.5% and metals gave back gains. We hear funds have been consistent buyers during this period of intense screen trading activity, on at least two days last week cu traded an eye bulging 18,000 contracts on Select, in the past such volumes could indicate a change in direction however one of the days turned into a down day and the other was a recovery Fri. The LME stocks again dominated by al withdrawals getting back in the saddle and with another rise in cancelled warrants (US 2 k and Rott 1 k). In Zambia Mopani Copper Mine (owned by First Quantum and Glencore) agreed a 10.5% wage rise for ’10 with other producers to follow. In China a local coal miner elicited a 17.6% price rise from Shandong province power producers. The Dec IAI data showed inventories rose 2% to 2.227 million tonnes (Nov 2.184 mill tonnes and Dec ’08 of 2.959 million tonnes).

In Europe Dec French consumer spending jumped 2.1% well above expectations (+0.1%) yoy 5.9% (+3.5%) and Nov Italian retail sales were unchanged (Oct 0%), yoy -1.3% (+0.5%). The Jan German Ifo Institute business climate improved to 95.8 against an expect decline (94.7), current assessment 91.2 (90.5) and expectations 100.6 (99.1). The in the UK Q4 GDP limped out of recession, rising 0.1%, was expected to be +0.4% (Q3 -0.2%), yoy GDP remained in negative territory -3.2% (Q3 -5.1%). The IMF Jan World Economic Outlook has upgraded ’10 world growth by 0.75% to 4%. They see groups of nations, developed world with sluggish policy induced growth looking for private consumption to take over; emerging markets with stimulus but also consumer demand and those that would have faltered even in good times because of past excesses; PIIGS, eastern Europe and Dubai.

On the data front US activity starts at 14:00 with the Nov S&P Case-Sheller home price index of 20 leading cities dipped 0.2% to 146.28 (146.58), yoy -5.3% (-7.2%) just noticed how late this data is, Nov. At 15:00 the Jan Conference Board consumer confidence rose to 55.9 (52.9) present situation 25.0 (20.2) and expectations 76.5 (75.9) followed by the Jan Richmond Fed manufacturing index improved to -2 (-4). Not really the data, DJI opened lower then recovered strongly and general panic set in as shorts scramble, if these guys were in a confined space the death toll would be appalling, fortunately its only money.

The concerns that caused last week’s market decline are to the fore as this week’s trading begins, Chinese monetary policy and implementations of President Obama’s “Volker Rule”. Meanwhile the World Bank said Chinese official data may under represent the extent to which major city property prices have been inflated by speculation.

A very subdued Asian trading session as traders try to compose themselves after the volatile and volume markets of last week. The LME stocks saw al resume normal service with a significant withdrawal and 3 k increase in cancelled warrants, this should see us back to around the level of third Wed in Jan before the next gush of al in (when this pattern ends it could well signal a new game in the metal). As iron ore prices and trade volume touch recent highs, Chinese steel prices dropped the most in four months with hot roiled coil off 2.2% with inventories are estimated to be above 50 million metric tonnes a record high according to Antaike research. Uncertainty about government lending policies is a background worry. The whole metal sector is hugely reliant on China any slowdown there could have a damaging effect on prices. In ’09 Chinese steel output rose 13.5% to 567 million tonnes or 47% of global production, as the World Steel Association said output fell 8% at 1.2 billion tonnes. Platts reports that Freeport’s Grasberg cu operations (estimated ’10 output at near 550 kt) are unaffected by a shooting incident near the mine. In Europe Nyrstar the world largest zn producer has agree to buy zn concentrate from Talvivaara zn operations in Finland rising to 90 ktpa of zn / year by 2012. The smelter will supply the miner 150 kt sulphuric acid / year to leach out the zn.

Little global data around in Australia Q4 PPI fell 0.4% (Q3 +0.1%) and yoy -1.5% (+0.9%). In Europe the Feb German GfK consumer confidence survey slipped to 3.2 (Jan 3.4). Then at 15:00 the US Dec the NAR existing home sales shuddered down 16.7% to 5.45 million units (Nov +7.4% at 6.54 moll units), this quickly took the shine off a recovering DJI. The Jan Dallas Fed manufacturing activity index rose to 8.3 (3.2). The metals (cu to the front) help up best of all the sectors as the equities struggled for direction.

Well China capped the metals rally and investor euphoria then y/day Obama crushed them with a hammer blow at Wall Street, at first glance his proposal is a return to the Glass Steagall Banking Act of 1933 that was introduced to control bank speculation and repealed in 1999 under a Democrat President. However as we have seen so often in the US it is a long road between a Presidential wish and legislative law. The reaction to the announcement y/day afternoon was a classic example of how correlated the markets are at this time, equities (DJI off 2%, Nikkei 2.5%, Shanghai 1%), gold -2%, commodities swooned (cu 3%).

In Asian time the financial support to cu (LME / Shanghai arbitrage) could find no traction despite clocking up nearly 4000 lots on Select. There was a mixed report on weekly Shanghai metal stocks cu declined 3280 tonnes to 97,308; aluminium rose 20,944 tonnes to 328,397 and zn unchanged at 222,900 tonnes. London trading began in a very cautious mood and after an hour prices had hardly moved. The LME stocks saw withdrawals return to al around the globe and a 5 k jump in cancelled cu warrants in Korea. On the week stocks rose across the complex cu 9 kt; al 50 kt; zn 3 kt; pb 2.5 kt; ni 276 tonnes and sn 115 tonnes.

The Nov Japanese all industry activity index rose 0.1% (+1.1%). In Europe, Jan French business confidence rose to 92 (88). Then Dec UK retail sales +0.3% (-0.3%) disappoint considering all the hype about a bumper Christmas and the Jan increase in VAT, yoy 2.1% (+3.1%).

There is no US data so the ebb and flow of the market will drive prices.

The Chinese data lived up to expectations - Q4 GDP grew at 10.7%, yoy GDP 8.7% and unusually Q2 and Q3 GDP revised, higher. The Dec industrial production rose 18.5% yoy (Nov 19.2%); urban fixed asset investment rose 30.5% (32.1%) both less than expected; retail sales jumped 17.5% yoy (15.8%) better than forecast. The CPI was higher than thought 1.9% yoy (+0.6%) and PPI up 1.7% yoy. The World Bank has raised its global 2010 growth forecast to 2.7% (Jne 2%) and estimate China growth at 9%.

The Chinese data boosted metal price in Asia with good Select volumes it hit London at 7500 where it ran into concerted selling caused by we suspect by a changed mood, with the GDP higher than expected does the government need to push harder on the monetary handles? On top of this the general market weakness will see the spectre of margin clerks on the prowl. The LME stock sluice gates opened today with all the metals getting material dominated by al (dumped into US) and cu (NO 6 k and Sing 1.5 k), only sn bucked the trend. The Chinese customs reported Dec imports of refined cu rose 25.5% on the month to 244 kt with total ’09 imports up 118.7% yoy to 3.19 million tonnes. The domestic output rose 9.6% to 4.25 million tonnes with consumption jumping 38.9% to 7.29 million tonnes leaving a small surplus. The miner BHPBilliton reached ’10 benchmark cu fees with Japan’s Pan Pacific Copper the country’s top smelter as the same level agreed with the Chinese US$ 46.5 and US$ 0.0465. In Australia the zn miner CHB Resources has tied its flag to its largest shareholder Japan’s Toho Zinc and rejecting a Nyrstar approach. This secures for Toho the 750 ktpa of zn / pb bearing concentrate from the yet to be developed Rasp mine.

With the news above the data from Europe was of little consequence, this was preliminary Jan PMI data, French manufacturing unchanged at 54.5, service 57.0 (58.7); German manufacturing 53.4 (52.7), service 51.2 (52.7), Euroland manufacturing 52.0 (51.6), service 52.3 (53.6) and composite 53.6 (54.2) – seems exports are holding up manufacturing as services wilt.

The US began with weekly jobless claims jumped 36 k to 482 k (446 k) then at 15:00 the Dec Conference Board leading economic index rose 1.1% to 106.4 (1.0%), the coincident index up 0.1% to 99.9 and lagging index fell 0.2% at 108.5 while the Jan Philadelphia Fed manufacturing survey dipped to 15.2 (20.4) a mixed bag. Just after these numbers the DJI suffered a server sell off all the markets with it.

It rained on three parades today, in the US the voters of Massachusetts spurned years of Kennedy dominance to vote in a Republican to the Senate seat and change the political landscape. In the metals, China again stamped out the cu rally, about the third time this year a major reversal came from government actions or words in China. This means they are smothering rallies at the top and a financial formula (the LME / Shanghai arbitrage) is creating the base, creating a very interesting situation with funds wanting more exposure as the general market feeling is stacking against them, a “money versus mood” moment. Finally US equities tumbled after some poor results by the banks and IBM. The Governor of the Bank of England Mervyn King gave a speech www.bankofengland.co.uk/publications/speeches/2010/speech419.pdf, well worth a read.

A cu market rally was snuffed out as regulators ordered some banks to limit lending, further evidence that the government is taking steps to limit growth. It is reported one bank, Bank of China has ordered branches to stop making new loans as it has lent too fast in Jan. The Shanghai equities fell 3%. Tomorrow we see a raft of December Chinese data with Q4 GDP expected to be around 10.5%. We saw a report today saying the Chinese State electricity grid will spend 25% lesson (US$ 33 billion) building the network in ’10 compared to last year. Then they consumed 52% of all the cu the country consumed of which 60% was on the network, other uses air conditioners 752 kt and building 495 kt. This saw cu trade in Asia from an early high of above 7600 to 7500 in heavy volume, over 2500 lots on Select. The LME stocks were routine, with al steady after the flood y/day. In the pre market the US$ dominated as it strengthened further. The ILZSG reported zn in a 424 kt surplus in ’09 to Nov extending the stock to consumption ratio to 8 weeks. In pb their surplus was 58 kt for the period and 4 weeks ratio.

In Asia Jan Australian consumer confidence bounced back 5.6% to 120.1 (Dec -3.8%). In Japan the Nov tertiary industry index dipped 0.2% (+0.4%). The Dec German PPI declined 0.1% (+0.1%) and yoy -5.2% (-5.9%). Encouraging UK quarterly unemployment to Nov was 7.8% (7.9%) with jobless claims fall 15.2 k.

Overnight in the US the weekly ABC consumer sentiment deteriorated further -49 (-47) it was expected to improve. The Dec NAHB housing market index slipped to 15 (16) again it was expected to improve. The weekly MBA mortgage index rose 9.1% (+14.3%) again dominated by refinancing +10.7% and purchase index +4.4%. A rush at 13:30 of US Dec data, PPI rose 0.2% (+1.8%) yoy +4.4% (+2.4%) and ex food and energy PPI flat (+0.5%) yoy +0.9% (+1.2%). The housing starts fell 4% to 557 k units (revised to +10.9% from +8.9% to 580 k) and building permits jumped 10.9% to 653 k units (+6% to 589 k). This rush of numbers left the markets in an uncertain mood, then the DJI opened 100 lower holding others near their lows with a strong US$. As we said y/day; As we have seen as long as one is going their way (weaker US$, oil up or DJI up) traders will buy metals, only if three out of three against them will they sell.

All very quiet, after the poor close Fri the metals were rescued by Shanghai arbitrage buying in Asia, well to be honest  cu is now a financial product rather than a basic resource, the major driver being the financial relationship between LME and Shanghai. With China the major physical and investment cu location any sell off in Europe will quickly hit the “buy button”.

A change in the LME stocks with cu falling (out of Korea) as well as, al (globally) while of the other pb keeps rising (Antwerp) and ni down (Rott). Just as Minmetals got concentrates moving from the Century zn mine in Queensland after the slurry pipe issue short term shipments from Karumba have been suspended on a cyclone warning. In the pre market dealers seemed happy for some respite from the recent volatility.

In Asia the Nov Japanese industrial production rose 2.2% (Oct +2.6%) yoy -4.2% (-3.9%) and capacity utilisation rose 3.2% (+0.2%). In Tokyo today the IMF managing director “hedged his bets”; forecast faster than expected global economic recovery however cautioned governments removing stimulus measures as so doing could set off another downturn. The FTSE ended up 40 points at 5497.

In the US the Martin Luther King holiday, however as we know this often provides the opportunity for markets to be bullied. In Chile the incumbent President Frei was defeated by the challenger Pinera, the first conservative since the Augusto Pinochet in 1990. In the US tomorrow sees a by election for a successor to Massachusetts Senator Edward Kennedy. He retained the seat with 60% of the vote but this vote is too close to call seeing the Democrat leadership pour into swing it from Obama downwards. At stake is the 60 seats the Democrats hold that allows them to withstand Republican filibusters (the ability to talk out bills).

On the economy, it appears to us the world will divided into two over the course of 2010. Firstly those countries in the swing of recovery with reasonable unemployment rates, a budget surplus or minimal deficit situation will raise rates to slow any inflation threats, China and Australia to the fore, with Norway in Europe, Asia and at a push India. Then there are those that cannot raise interest rates as their economies are myriad in large budget deficits, slow growth, high unemployment and with some, more of a chance of deflation than inflation. Finally they do not want a strong currency to choke off the hope of export recovery. These countries will need to tackle recovery by ratcheting back excess fiscal positions - cuts in government spending and tax increases. These include the US, UK, the great new group, PIIGS (Portugal, Ireland, Italy, Greece and Spain) & Japan. Not hard to see where the investment emphasis will be. A hedge fund manager questioning of China’s growth path has certainly got the press going, see The Economist 14/01 “China’s economy – “Not just another fake” (www.economist.com).

Another quiet Asian session left London hunting for a cause with the US$ the likely host and so prices moved in narrow ranges. Over this week prices so far are little changed (except tin up US$ 1000) which will hearten those who worried about fund reweighting selling, if in fact it ever was an influence. BHPBilliton has settled its ’10 TC / RC cu rates at the same level as Freeport in late Dec, US$ 46.5 and US$ 0.0465. The weekly Shanghai stocks all rose cu 1774 tonnes to 100,588; al 9731 tonnes at 307,453 and zn 1000 tonnes to 222,900. The LME stock trend rolls on, main elements cu (NO) and ni (Rott & Korea) up while al (Europe large cancellation in Rott 10 kt & US) down. The al withdrawals in Europe we believe are connected to smelter closures in Italy. On the week cu up 15 kt; al down 20 kt (third Wed next week could temporarily reverse this trend); zn off 3 kt; pb rose 1 kt; ni increased 3 kt and sn rose 350 tonnes. A tight ranged US$ around €1.44 kept the metals quiet.

In Singapore Nov retail sales improved to falling 1.4% as opposed to Oct -4.6%. The data spotlight turns to inflation, in Europe the Dec German wholesale price index rose 0.2% (0.7%) yoy +0.2% (-3.2%) then the Dec Euroland CPI rose 0.3% (+0.1%), yoy 0.9% (0.5%).

Before the opening JP Morgan Q4 earnings reported at US$ 3.3 billion. The Dec US CPI rose as expected 0.1% (+0.4%), yoy 2.7% (+1.8%) and ex food & energy up 0.1% (0%), yoy 1.8% (+1.7%). Data continued throughout the afternoon, the Jan NY Empire State manufacturing index jumped to 15.92 (revised to 4.5 from 2.55); at 14:15 the Dec industrial production as expected up 0.6% (revised down to 0.6% from +0.8%) andcapacity utilisation 72% (71.5%). In Canada Nov new vehicle sales fell 6% (+3.4%). Then at 15:00 the Jan preliminary Uni of Michigan consumer confidence was below estimated 72.8 (72.5), current 81.0 (78.0) and expectations 67.5 (68.9). The DJI leading things lower looks like being an afternoon of equity surfing. After all that a warning - the US needs a break, Mon is a holiday with markets closed, as we always note with a major market away beware of volatile play.