Against the Grain

For physical consumers the “buying opportunity” door slammed shut as quickly as it appeared, as we have seen many times before over the past year. Investors will be emboldened surviving another “rate” shock. So expect markets to firm with the US$ the best indicator.

The metals were extremely quiet overnight, low volumes and little movement. Very cautious start in London, while Chinese rate move has been absorbed it has added some caution over the investor ’10 outlook. A split in LME stocks cu (NO), ni (Rott and Sing), pb (Klang) and sn (sing) upwhile al (UK and US with cancelled rising in Chicago) & zn (Klang) declined. Metals in a tight range all morning and went into the officials testing support before rallying to new daily highs after ECB left rates unchanged. The US data halted the rally leaving cu and pb hovering around their opening, while al & zn were up.

Mixed data in Asia, it was reported in China that Dec residential and commercial real estate prices in 70 cities rose 7.8% yoy. In Dec Australian employment jumped by 35.2 k well above expectations (Nov 31.4 k), unemployment rate fell to 5.5% (5.6%) with the participation rate steady at 65.2%. The employment increase was heavily skewed to part time jobs up 27.9 k and full time 7.3 k. In Japan Nov machine orders slumped 11.3%against an expected small rise (Oct -4.5%) yoy down 20.5% (-21%). The Nov Euroland industrial production rose 1% better than expected (-0.3%) yoy -7.1% (-10.9%). The ECB left rates unchanged at 1%. The World Economic Forum, in a report before it annual Davos meet Jan 27 -31,warned an overheating of China’s economy posed a major risk to global growth. A drop in its growth could adversely affect global capital and commodity markets.

Overnight the Fed’s Beige Book highlighted a modest improvement in economic activity, though it still remains at a low level. At 13:30 theweekly initial jobless claims 444 k (434 k) and Dec retail sales surprisingly fell 0.3% ( revised to 1.8% from +1.3%), ex autos down -0.2%(revised to 1.9% from +1.2%). The Nov business inventories rose 4% (4%).

The metals crumbled after the PBoC decisions of the past week trumping funds and arbitrage activity. Global equities retreated overnight(Shanghai fell over 3%) but interest rates remain near zero and investors keen, so beware. On the newswires overnight analyst acknowledged the falls but did not see it as a trend changer. We are pleased because it confirms the fundamentals that we put forward as the most important for ’10, interest rates and China. However, one move, as we saw when Australia upped rates last year, will not change the general zero interest environment and investor interest. You will never pick the bottom but general rule in this market is buy when it looks awful and sell when it looks wonderful!

The markets had a steady start in London one suspects because traders are unsure as whether the decline is a trend changer or a bear trap. The LME stock trend remains entrenched dominated by rising cu (into NO & Korea) and falling al. The Dow Jones newswire ran an article about what they say are record LME cu stocks pointing out that close to 50% in the US and over 20% Korea, the former location is a slow recovering giant and latter an arbitrage counterpoint. Investors have ignored this trend because zero interest rates have allowed then to us it as an instrument of profit converting it to “dead stock”. We believe all metals stocks are a lot higher than published but most are in China, an information black hole, they will be back in play when rates rise. In Peru the government has asked Doe Run to restart its La Oroya pb smelter as delays would complicate talks with workers. The US$ weakened over the pre market encouraging buyers and springing a “bear trap”, in very technical trading conditions.

On the data front in Europe French Dec CPI rose 0.3% (+0.1%) and yoy +0.9% (+0.4%). The Nov Italian industrial production rose 0.2%(+0.7%) yoy -5.2% (-13.9%) and Nov UK IP up 0.4% (-0.1%) and yoy -6% (-8.4%) while manufacturing production was unchanged at unchanged!; yoy -5.4% (-7.8%). In Europe EADS the parent company of the Airbus has warned of cancelling production of military transport A400M (180 planes ordered) unless governments renegotiate a fix price contract that is three years and 50% over budget. A meeting will be held this week that could hit European manufacturing hard. In the FT today Martin Wolf had an article “What we can learn from Japan’s decades of trouble” ends with this interesting paragraph - “Yet Japan’s experience also has a lesson for quite a different economy. It indicates that when very fast growth begins to slow in a catch-up economy with very high corporate savings and comparably high fixed investment, demand may well prove extremely difficult to manage. This is particularly true if the deliberate promotion of credit growth and asset price bubbles has been part of the mechanism used to sustain demand. And who needs to learn this vital lesson now? The answer is: China” (www.ft.com).

Overnight the weekly US ABC consumer sentiment index disappointed falling back to -47 from -41 last week. Nothing over the pond today except, the weekly MBA mortgage applications index rose 14.3% mostly refinancing +21.8% as the rise in rate encouraged people to lock in these levels, purchase index up 0.8%. At 15:30 the always interesting weekly DoE oil data. The first US bank to report ’09 results was the Federal Reserve earning a record profit of US$ 52.1 billion of which 46.1 billion to the US treasury (’08 earned 31.7 billion and 35.5 to the Treasury) wonder what bonus Dr B gets? Things pick up again with the Fed Beige Book after the close, ahead of the Jan 26/27 FOMC meeting and retail sales tomorrow.

Metals in Asia marked time after failing to follow the US equities or weaker US$ in late London Mon trading. Overnight the Chinese guided (great word) one year bill rates higher while in the US Alcoa Q4 earnings disappointed as rising costs saw the shares fall 8%. Good news Nov Indian IP rose 11.7% yoy. Late London morning Reuters reported the PBoC had raised bank reserve requirements by 0.5% to 16% for large banks and 14% for smaller banks, effective Jan 18, the first move since it lowered the rate in Dec ’08.

A very quiet opening in London as all eyes on the US and market gossip turning to fund rebalancing that should metal holding reduced and away from start of year fund buying. The LME stocks cu flowed in (Johor 2 k) with al (cancelled warrants fell) and zn (Klang) moving out. In the pre market the US$ leading the way down and up then down. More M&A in zn (although nearly always the same acquirers Chinese, Nyrstar or large traders),Blackthorn Resources the operators of the Perkoa development in Burkina Faso has sold 50.1% of the project to Glencore who will invest US$ 72 million and take all the remaining output (production target is 170 kt of concentrate). Reports in China that steel mills are experiencing coking coal supplies shortages as government gives rail priority to thermal coal during weather disruptions, probably a good thing as supply significantly outstrips demand.

A light flow of economic data in Australia Nov investment lending rose 2.1% (Oct -0.5%) however the value of loans fell 2.9% (-1.6%) and home loans declined 5.6% (-1.9%). The Japan Dec economic watchers survey rose to 35.4 for the current term (33.9) and outlook 36.3 (34.5). The Dec Bank of France business sentiment index rose to 101 (99). The decline in South African manufacturing slowed in Nov to -4.7% (Oct -9.6%). In the US the Nov trade deficit was US$ 36.4 billion as expected (Oct -33.2 bill). The DJI off a touch as plans come out of a plan by the US government to tax financial institutions to recoup losses from the TARP bail out. No final details but they will be in the ’11 budget appearing next month. Thoughts are it will raise US$ 120 billion.

The dominance of China in the commodity sector was further highlighted over the weekend when on Sun the country’s Customs released data showing, from the admitted dark days of Dec ’08 exports had risen 17.7% and imports exploded 56% (in volumes). Ten minutes after Select had opened it was trading 7630 (Fri close 7471), commodity currencies (C$ / US$) raced higher and the € recovered partly in delayed reaction to the US employment data and comments by Fed executives that rates would remain lower for longer. With Chinese data like the above their rates seem destined to move higher. It will be interesting to see if this steadies the Baltic dry freight index under pressure since mid Dec.

If the first 10 day of ’10 are anything to go by metals traders will need to become “night hawks”, with major price moves set to be Asian orientated.Amongst the import data cu imports rose 27% mom to 369 kt, yoy up 63%. At the same time in Dec LME – predominantly into Korea / Sing cu stocks rose 13% and  Shanghai levels were steady. This raises the suspicion that producers rushed to sell inventories at the highest price of ’09 before the year end. The LME stocks saw cu jump (NO 4225 and Klang Malaysia) and al fall, no cu cancellations but 35 kt of al cancelled in Baltimore and Chicago as it heads for car parks, what new. Even the ni stock rise is similar into warehouse in the hub of the world recovery, Asia. In China, Henan the top al producing province is warning smelters that weather induced power shortages could curtail operations. In znNyrstar has bid for Australian miner CBH Resources that runs the Endeavor zn / pb mine in NSW. The 59 kt of zn in concentrates presently goes to Toho in Japan the 23% shareholder in CBH, Nyrstar gets the pb. The unsolicited bid should create an interesting tussle. The metals found it difficult to get any real momentum with the US$ the main focus.

Dull day on the economic data front, Dec Australian job advertisements rose 6% (Nov -5.2%). In France Nov industrial production jumped 1.1% (Oct -0.6%), yoy -.38% (-8%) and manufacturing production rose 1.6% (-0.5%) and yoy -2.9% (-8.2%). In North America Dec Canadian housing starts rose 10% to 174.5 k units (158.5). With no US data a recovery in the US$ and weaker oil dragged the metals back to the London lows ahead of the equities opening. Here and now rather like clockwork DJI low around 15:30 and cu below 7600 then the equities recovered and metals staged their regular recovery. It is almost that the short term technicals have an inbuilt daily wave system. Finally finished up all over the shop metals lower, oil down, equities steady, US$ weaker so lets see what the Chinese make of it. After the US close Alcoa kicks off US 4Q corporate earnings that will drive equities for the next fortnight and influence the US$.

The metals rally suffered a shudder in Asian time as the People’s Bank of China signalled a rise in three month bill yields after y/days statement that policy makers will seek “moderate” loan growth in ’10 to support the economy. Cu touched 7796 early and in 30 minutes was at 7630 with over 2000 lots traded (by London open volume was over 4000 lots). This move supports our view that the two most important influence on the metals this year will be interest rates and China – they are for now the fundamentals of the metals market.

The metals had a tentative, low volume start in London as they absorbed the sell off above. The LME stocks saw al drop with further stock withdrawals from US locations mostly and heading into “dead stock” destinations, the biggest rises came in pb (Rott, despite battery failures)and ni (Sing). In cu cancelled warrants appearing in Asia on the back of the Chinese arb activity, expect it to pick up over the next week, certainly Asian cu warrants trading higher in price today and with Chinese NY Feb 15 they have quite a tight window to ship it out. The newswires have put y/days rally down to cold weather (the previous move was Chilean strikes) we must become less laid back when we see events like these experience says “well 48 / 72 hours things will get back to normal”, it seems most traders say “what a disaster” must buy! Or are reporters just trying to shoe horn an investment rally into a Cinderella’s shoe?

In Europe there were some disappointing Nov retail sales data in Germany they fell 1.1% against an expected rise (Oct -0.5%), yoy -2.8% (-1.6%) while in Euroland they skidded 1.2% (+0.2%) and yoy down 4% (-1.3%), again final demand is lethargic. In the UK the car scrappage scheme helped Dec new car registrations rise 39.9% yoy however full year sales fell 6.4% yoy to just under 2 million vehicles. The Dec Euroland economic confidence index rose to 91.3 (88.8), consumer confidence -16 (-17), business climate indicator -1.22(-1.53), industrial confidence -16 (-19) and service industry confidence -3 (-4), a general slow improvement continues. The Nov German factory orders recovered 0.2% (-2.1%), yoy +1.8% (-8.5%). The BoE left rates unchanged at 0.5%.

In the last warm up game before the big one tomorrow weekly US jobless claims 434 k (432 k). A colleagues friend of mine was at an address by a Fed bigwig at an Ivy League University and asked the question about if he was worried by commodity price inflation, the reply was that he was not concerned about inflation as long as US property prices remained under pressure. They seem to be, hearing that NY apartment prices are down 25% in the last six months. The Canadian Dec Ivey PMI saw a surprise drop into contraction 48.4 (55.9). After the jobs data metals set fair but a weaker DJI reined them back and then leads them up, back to equity surfing.

Arbitrage trading drove price, led by cu, ever upwards in Asian time as there is no let up in the buyer enthusiasm. Talking around the market the arbitrage is not enormous and as cu metal is still pouring into Asian LME warehouses with no cancellations there is a feeling some of the buying could be Chinese authorities diversifying US$ reserves. The reports we are getting from the physical market certainly confines this rally to the investment sector. The metals rise came despite a stronger US$ and weaker gold, oil and equities looks like the correlations of last year are breaking down. An interesting point is the number of reports saying the record or near record cold weather is partly responsible for the recent charge in oil and metals prices, so now we have global cooling.

The overnight cu move came despite the prospect that the strike that started Monday at Codelco’s Chuquicamata cu complex looks set to end Wednesday. Interestingly those in the physical market looking for a pull back when the strikes ended look like being disappointed, especially those holding hedged inventory. Jan option declaration day in London began with buyers in command and continued in that mode. The Indian al producerNalco sold ingots at a US$ 78.25 premium to LME cash (82.25). The LME stocks are settling into a regular pattern, cu into Asia (Korea 1500, Sing 600) and al out. We forgot to note the importance of zn produced from the expanding Peruvian Antamina mine in ’08 it produced 383 kt of zn and 358 kt of cu.

The dominant data today is the Dec service sector PMI, in Europe it was mixed - Italy 53.9 (49.8), France 58.7 (60.9), Germany 52.7 (53.1),Euroland 53.6 (53.0) and the composite index 54.2 (53.7), then UK 56.8 (56.6). Dec UK consumer confidence fell back to 69 (74).

Overnight the US weekly ABC consumer sentiment index improved to -41 (-44) the best level in a year of -54 / -42 range. The Dec auto sales rose 2.8% to 11.23 million units annualised, leaving total ’09 sales down 29% at 10.3 million units. The precursors to the employment data Fri, Dec Challenger job cuts were 45 k down yoy 73% (-72.3%) and the ADP private employment survey saw 84 k lost (Nov revised to -145 from -169 k). At 15:00 the Dec non manufacturing PMI 50.1 (48.7) under expectations. The weekly DoE crude inventories rose against expectations. Oil capped for a while then the US$ weakened back above 1.44 and the rally was on, the metals remained rampant as sellers melt away.