Against the Grain

Metals walked with the general market - US$ down and DJI up so no surprise good gains in late London and Asian activity (London close cu 7000 with DJI off 10,200 and US$ 1.348). There is plenty of broad macro news pushing the market in all directions, the next step in Chinese economic policy; European sovereign debt and US growth and the health care.

The metals being dictated by above with very little impact from their own fundamentals. After a fortnight Shanghai weekly stocks saw cu jump 32,309 tonnes to 149,478; al up 10,425 tonnes at 370,678 and zn up 302 tonnes to 223,602. The LME stock highlighted by a rise in pb which translated into a 5 kt rise on the week, the others over that time, cu fell 5 kt; al off 23 kt; zn up 650 tonnes, ni down 1 kt and sn 1135 tonnes. The metals ebbed and flowed with the US$. The IAI reported total world al inventories rose 66 kt in Jan to 2.293 million tonnes (Dec 2.227 mill tonnes and Jan ’09 3.010 mill tonnes). A Chinese advisor to the State Council said the country should prepare to buy gold from the IMF when prices decline.

In Asia the Indian budget had no significant effect on metal trading and Q4 growth was reported at 6% yoy (Q3 7.9%) effected by a poor monsoon season. A flood of Japanese data, Feb manufacturing PMI was unchanged at 52.5, further the national Jan CPI fell 1.3% yoy (Dec -1.7%), Jan industrial production rose 2.5% (1.9%), yoy +18.2% (5.1%) and Jan retail sales up 2.9% (-1.1%) well above expected yoy +2.6% (-0.2%) yet large retailers’ sales fell 4.6%. Continuing Jan housing starts fell 8.1% yoy (-15.7%) with Jan construction orders rose 15.7% yoy (+0.6%). The Feb UK GfK consumer confidence survey improved to -14 (-17) as Feb nationwide house prices fell 1% (+1.4%) yoy +9.2% (+8.6%) and the Q4 GDP rise was revised to +0.3% (+0.1%). The Jan Euroland CPI fell 0.8% (+0.3%) yoy +1% (+0.9%).

The revised US Q4 GDP 5.9% (5.7%). Later in the afternoon the Feb  Chicago PMI was 62.6 (61.5) with the final Feb Uni of Michigan 73.6 (73.7) and Jan existing home sales -7.2% at 5.05 million units (-16.7% at 5.45 million units).

A quieter week cu down 360, al off 15, zn fell 170, pb down180, ni up 520, sn rose 150, gold down US$ 5 / oz, oil dipped US$ 0.2 / bbl, DJI off 100, US bond yields fell 0.19%, US$ / € down 0.001 and Shanghai index up 33 points.

Mr Bernanke said nothing we did not know already and interestingly the metals for once were left in two minds, US$ up and DJI up which to follow. Focus now turns India with its budget tomorrow that should set the economic scene going forward then Mch 5 the Chinese premier addresses the National Peoples’ Congress which should give us the lead for that economy in ‘10. (Apologies y/day we credited Newton with a theory that was Einstein’s).

Hence Asia saw metals end little changed with good volume in cu and zn while al seems to have become a Western metal with another low Select turnover. The opening jousts in London saw low volumes in tight range with equities tugging metals higher and the firmer US$ dragging them back. The LME stocks made little difference to the mood cu (from Korea and cancelled warrants up in NO) and al down while rises in pb and ni (into Rott). Away from the LME coalface in Australia the mineral sands producer Iluka reported an annual loss to Dec ’09 as a decline in demand cut sales. Their main product is zircon used in ceramics, a metal that has no speculative instruments attached to it and relies more on OECD markets than China. While Ivernia has restarted the Magellan pb mine processing plant (’10 output 10 kt contained pb in concentrate) after shipping the 23 kt stockpile built up after the Freemantle pollution issue many moons ago. Is it just us or have the last couple of months seen a ramping up of metals mines with recent troubles, above, Century, Canadian nickel and various cu operations. The metals fluctuated throughout the morning between equities and US$. After the US opened the DJI

Some positive data out of Europe Feb French consumer confidence rose to 33 (Jan 32) and Italian business confidence 84.0 (83.2). The Feb German unemployment rate rose to 8.2% (8.1%). In the UK total Q4 business investment fell 5.8% (Q3 -1.8%) and yoy -24.1% (-20.8%), while the CBI reported Feb sales volumes index jumped to +23 (-8) . The Feb Euroland economic confidence 95.9 (revised higher to 96.0 from 95.7) business climate indicator -0.98 (-1.12), industrial confidence -13 (-14), consumer confidence -17 (-16) and service confidence +1 (-1), in all of this it is the consumer dragging their feet. In shipping the Shanghai futures exchange has announced plans to introduce a container shipping derivatives based on a newly developed Shanghai Containerised Freight Index. The markets in Europe came under renewed pressure after Moody’s Investors Service said it may cut Greece’s credit rating if the country does not fully implement the plan to reduce its budget deficit. The German two year bond yield fell to a record low.

The day started over the Pond with a snowstorm hitting NY during the am rush hour. The weekly US jobless claims again unexpectedly rose 22k to 496 k (473 k) with Jan durable goods rose 3% (+0.3%) as the less volatile ex transport fell 0.6% (+1.4%). Then at 15:00 the Dec home price index fell 1.6% again against analyst anticipation (+0.4%).

Well it turned out Asia was the calm before the next storm y/day as a poor Feb German Ifo business climate and US consumer sentiment saw the so called “risk reduction” trade - sell everything and buy US$. Looking at Asia last night and calm descended again ahead of the next storm, possibly Bernanke’s evidence to Congress this afternoon. Bernanke’s economic outlook to the House Committee (the first of two) painted the picture of a slow and painful economic recovery with growth roughly 3 to 3.5% in ’10 and 3.5 to 4.5% in ’11. Which to translate means US rates are likely to remain low for longer so traders tentatively loaded some risk on board. Then it became a Newton, for every action there is an opposite and equal reaction, US$ weakened and other instruments strengthened.

A very quiet start to London trading as the US$ / € rate was very steady just above 1.35. The LME stocks again dominated by falls with only pb rising. Sometime ago an old hand in the al business cautioned us to beware with al saying large stocks can disappear very quickly are we beginning to see that happen. With al and ni they seem to be metals that are very concentrated on the production side and can trade weird and wonderful ways. In Jan Chinese cu imports declined 19% to 197 kt, though up 9% yoy, while concentrates rose to 600 kt and scrap 337 kt. We believe the best way to look at Chinese cu imports is as a package as they daily juggle to get the best price. Despite a steady US$ and stronger European equities (suspect currency driven) the metals and other commodities remained under pressure with cu touching a 7020 low.

In Asia further news from China with a report banking regulators have told commercial lenders to restrict new loans to the financing arms of local governments and in HK plans were announced to increase taxes on luxury home purchases. Feb South Korean consumer confidence index slipped to 111 (113). The World Trade Organisation said world trade fell 12% last year the largest drop since 1945. In Europe the German Q4 GDP revision remained unchanged at 0%, while the Mch GfK consumer confidence survey slipped to 3.2 (3.3). Some good news Dec Euroland industrial new orders rose 0.8% against ban expected fall with the lower currency helping exports and yoy +9.5% (-0.6%). The South African energy regulator has approved a 25% increase in electricity rates for the next three years starting Apr 1.

In the US overnight the weekly consumer sentiment survey slipped further to -50 (-49). The weekly MBA mortgage applications fell 8.5% (-2.1%) with purchasing index off 7.3% and refinancing down 8.9%. At 15:00 Jan new home sales dropped 11.2% to 309 k units against an anticipated rise and now the lowest level on record (-3.9% at 348 k units).

All quiet on the Asian front as we seem to be in a calm before the next storm whatever that will be with trading US$ driven. A common theme for this calm seems to be the upcoming appearance before both the houses of Congress on Wed and Thurs with the focus on how long will the Fed maintain low rates with the general expectation a long time. Just a word of caution on the recent European, US and Chinese data it covers a time of very heavy winter weather that has sent consumers in hibernation and industry trying to cope the best they can.

In London the metals immediately latched onto the US$ and as it weakened so metals strengthened. The LME stocks saw falls bigger than gains, with the declines in cu (out of Korea into US), al (Rott & US) and ni (Sing), the latter most interesting have grown strongly throughout 2009 they are now flowing out on bullish signs in the stainless steel industry and suspect some moves into dead stock. The ICSG reported that in the year to Nov ’09 refined cu was in 144 kt surplus (‘same period ’08 58 kt). Just as quickly as the € strengthened in turned lower following the poor European data below and by 11:30 was on its low at 1.356 with the commodities on their lows, cu at 7250, oil 78.6 and gold 1106. The currencies are like a tank of water being tipped from side to side with other financial instruments the flotsam and jettison, as the currency volatility picked up so did the volume in the metals. Barclays reports investments in commodities fell in Jan to US$ 245 billion (Dec 257 billion) the first monthly fall since Nov ’08. You could hear the sigh of relief as the DJI opened higher and metal traders could go back on a bullish tack, then the US data renewed the selling. After 15:00 it became a very fractious market as dealers traded against the US$ and equities. Interesting the cu volumes were significantly higher on another down day.

We continue to worry about final consumer demand last week the US data was reasonable, poor in Canada and UK and now Jan French consumer spending is reported falling 2.7% more than expected (Dec revised to +1.3 from +2.1%) yoy +1.5% (+5.8%). The Jan French CPI fell 0.2% (Dec +0.3%) yoy +1.2% (+1.1%). In Italy, Fiat halted vehicle production in the country for two weeks after demand fell as the car scrappage scheme ended, as their Feb consumer confidence index dipped to 107.7 (111.6). The Feb German Ifo business climate survey 95.2 (95.8), current assessment 89.8 (91.2) and expectations 100.9 (100.6). Further to Italy above the ending of government incentives are beginning to tell, in the UK the British Bankers’ Association reported a 24% decline in Jan mortgages after the re introduction of stamp duty. Total borrowing was £ 8 billion the lowest monthly level in eight years.   In South Africa Q4 GDP rose 3.2% annualised (Q3 +0.9%), the African Development Bank sees the continent growing 5% in ’10.

The Dec US S&P / Case-Shiller home price index 145.9 (146.3) the composite 20 city index  +0.32% (+0.26%). At 15.00 the Feb Conference Board consumer confidence index slumped to 46.0 (55.9) current reading 19.4 (25.2) and expectations 63.8 (77.3).  Then the Richmond Fed manufacturing index improved to 2 (-2) however was overlooked.

All eyes were on the reopening of China and the metal caught up with the LME however the rise was just under the 5% daily limit while the Shanghai equities had no truck with DJI led rally dipping 0.17% or 6 points. In China the focus is on a growing body of opinion that believes the authorities will appreciate the currency to throttle back inflation and slow foreign investment. In the FT Feb 22, a good balanced article on China by Geoff Dyer, “No one home”, (www.ft.com).

The volume on Select in Asia showed interest in cu trading 3300 lots and zn 1800 lots while al had only a 245 lot turnover. The Asian trading saw cu off its Fri close but no real selling momentum. The LME stocks dominated by declines in al (the usual Rott and US) & ni (Asia and Rott). The market has a very strong bullish bias and we expect prices to continue attract investor interest. The LME launched cobalt and molybdenum contracts, interestingly their contract is in US$ / tonne were the physical market convention is to trade US$ / lb. The IAI said world daily average primary al output rose to 64.4 kt in Jan (64 kt in Dec ’09), the total production in Jan was 1.995 million tonnes (1.984 million tonnes in Dec and Jan ‘09 was 2.094 million tonnes). Very quiet and tight ranged trading as the session went to the floor and in US trading. The markets just seemed to lack traction, was it a stronger US$, disappointment China did not do better or just some consolidation?

Last Fri we mentioned the influence of high frequency trading today the FT said a recent survey shows the average size of trades on major equity exchanges have fallen over 50% in the past 10 years. Very little economic data today in Australia Jan new vehicle sales fell 3.4% (Dec +3.1%) and yoy +15.6% (17.0%). Then in the US Jan Chicago Fed national activity index +0.02 (-0.58) then at 15:00 the Dallas Fed manufacturing activity -0.1% well below expectations (+8.3%).

Having flagged it last week the Fed acted after the NY close by raising the discount rate 0.25% to 0.75%, this is the rate banks have to pay to get emergency loans from the Fed (not an upfront rate but a signal). It was enough to take the edge off metals as the US$ strengthened. Mon sees the return of our second major issue for the world economy this year, China. Earlier this week we noted the rising political rumblings in Africa late yesterday the thing that frightens the political elite there the most occurred, a COUP, this time Niger the sixth largest producer of U3o8. The country had already been suspended by the Economic Community of West Africa (ECOWAS) in Oct because its then President had decided against the constitution to rule for life.

Today the metals markets will absorb the Fed move however, we suspect it will be a setback in a steadily rising but nervous market. The FT had an interesting article on algorithm high frequency trading (HTF -machine rather than human generated activity) in it they estimate the estimate the percentage of asset classes traded by HTF firms, equities 80%+, futures 65%, options 58%, bonds 35% and currencies 25% (Markets: Ghosts in the machine on www.ft.com). In Australia, Xstrata has been asked to explain what action it will take to stop excessive pb emissions after a breach of air quality limits in Mt Isa, Qld. The LME saw the al stocks begin falling again on cancelled warrants al up 12 k with Rott accounting for 10 kt and zn 5 kt in Asia. On the week cu rose 7 kt; al jumped 43 kt; zn rose 41 kt; pb up 1 kt; ni down 2 kt and sn off 555 tonnes. The kneejerk selling quickly dried up and a solid recovery began as was to be expected rate is technical and if anything the move a bullish sign. The US opened higher confirming the suspicion this is a setback in a steadily rising but nervous market. At 16:15 cu was at 7380 back where it started the year. Finally who wants to be short with China back Mon?

The Dec Japanese all industry activity index dipped 0.3% (+0.2%). In Europe the German Jan PPI rose 0.8% (-0.1%) yoy -3.4% (-5.2%), the Feb French business confidence indicator was unchanged at 91 then preliminary Feb PMI data highlighted strong manufacturing and struggling services, France manufacturing 54.7 (Jan 55.4) and services 54.7 (56.3); Germany manufacturing 57.1 (53.7), services 51.7 (52.2) and Euroland manufacturing 54.1 (52.4), services 52.0 (52.5) and composite unchanged 53.7. In the UK Jan retail sales slumped 1.8% (+0.3%) yoy +0.9% (+2.1%).

In North America Canadian Dec retail sales rose 0.4% (Nov -0.3%) and Jan leading indicators up 0.9% (+1.5%). The US Jan CPI +0.2% (+0.2%) yoy +2.6% (+2.7%) and ex food and energy -0.1% the first fall since 1982 (+0.1%), yoy +1.5% (+1.8%). Y/day PPI was above expectations and the metals rallied hard today CPI is under estimates and the metals rally, it seem everything is good for metals.

Overnight the Fed Jan FOMC meeting minutes painted a more positive economic outlook for 2010 predicting annual GDP between 2.9% and 3.2% with unemployment peaking later in the year. Attention now turns to how the bank will exit its monetary stimulus package supporting the growing view that the only way is for the policy to tighten and interest rates remain at present levels or going up. This news saw the US$ strengthen towards a 10 month high against the €, as the US recovery looks to be coming sooner and faster than the European Union still mired in slow growth and wrangling between its members. The BoJ left rates unchanged at 0.1%.

In two days a seismic shift in the LME warehousing sector as US investment banks snap up a position (Goldman Sachs is said to have acquired Metro and JP Morgan - H Bath). A stronger US$ threw a spanner in the recent metals rally despite a stronger DJI. The metals are still suffering from the absence of the Chinese so Asian volumes are light. The London open saw light currency related selling with LME stocks dominated by a rise in cu (Rott 6 k and St L 1 k) and decline in al (Rott) and ni (Rott and Sing)– very little attention was paid to it with focus on the US$. An article in the NYT highlights how shipping companies have slowed ships to reduce fuel costs and emissions, achieving two savings (www.nytimes.com/2010/02/17/business/energy-environment/17speed.html?emc=eta1). In light volume the metals micro traded around the US$ move. Y/day the IMF announced it will offer gold for sale in the second phase of its 403 metric tonne approved sale. As we reported last week Teck’s Alaskan Red Dog zn mine’s permitting issue is now to the fore and likely to add support. After a quiet morning prices pushed higher as the larger than expected inflation data set off buying in the commodities with cu over 7300. Like y/day a strong US$ halted the rally into the close.

In Asia Japanese Dec leading index was 94.3 (94.0) and Jan nationwide department store sales were down 5.7% with the focus on Tokyo (-5%). The Hong Kong unemployment rate in the three months to Jan was 4.9% higher than expected. The Feb advanced Euroland consumer confidence survey slipped to -17 (-16.0). The UK  posted its first Jan monthly budget deficit since such records began in 1993.

The US weekly jobless claims rose 31 k to 473 k (442 k). The Jan PPI jumped 1.4% (+0.4%) led by energy prices, yoy +4.6% (4.4%), while ex food and energy up 0.3% (0%) and yoy 1.0% (+0.9%). At 15:00 the Feb Philadelphia Fed economic index rose to 17.6 (Jan 15.2) and Jan Conference Board leading index rose 0.3% to 107.4 (1.2%), the coincident index up 0.2% at 100.1 and lagging index fell 0.1% to 108.0.

The beat goes on, stronger equities and weaker US$ boosted commodities back to levels before the China rate move fright sent them tumbling three weeks ago. The general market move reminds us of the initial reaction to the breaking of the US sub prime story in 2007. There was a falter then denial as amazingly the investors believed the reassurances of the authorities (central bankers and governments – in the case of Greece deliberately deceived their people and partners. Do you think that investment banks having found a money spinner and only sold it to one client, some call it the “cockroach” theory) it is now a matter of time before the reality that things are not fixed sets in. Back then cu was around 7000 but went on to 9000+ before reality hit.

The US$ weakened quickly on the London open and commodities moved higher with cu breaking above 7200 (since Fri close cu is up US$ 400; zn and pb US$ 200 with ni jumping US$ 2000). The LME stocks dominated by a dump of zn in US warehouses (suspect a trader’s reaction to the present tight spreads) and more al into US and Port Kalang, Malaysia (10 kt each) with no cancelled warrants. The Chilean mining minister today expressed concerns about the rising trend in cu inventories and possible price implications. After a rampant start a US$ recovery reined in the advances. It is reported the ILZSG judged the zn market in a 445 kt surplus at the end of ’09 as the slump in usage outstripped the decline in production and in pb a 77 kt surplus. The US housing data lifted the metals out of their usual mid session doldrums however the US$ strengthening to € 1.37 was a drag (when cu was last around 7200 the US$ / € was above 1.40, cu tends to follow the US$ on a daily, mostly am, basis without longer term correlation). In the afternoon the umbilical cord is attached to the DJI, it opened up and the afternoon sport of equity surfing resumed. Sods law after writing this a strong rally in the US$ to € 1.36 saw the metals switch horses to currency skating, could not ignore the move and cu teasing near term support.

The Chinese NY holiday keeps Asia quiet with some countries returning to the coal face today. The Dec Japanese tertiary industry index fell 0.9% (Nov -0.1%). The UK Jan jobless claims disappointed rising 23.5 k against an expected fall (-9.6%) the Dec quarter unemployment rate was unchanged at 7.8%. Yesterday we highlighted the recent growth of political standoffs in African nations today there are several articles about moves by countries to increase resource taxes, in particular Australia and South Africa.

Overnight in the US the Feb NAHB housing index improved to 17 (15) and the weekly ABC consumer sentiment index slipped to -49 (-48). A torrent of data today the weekly MBA mortgage applications declined 2.1% (-1.2%). The Jan housing starts rose ..2.8% at 591 k units (revised to -0.7% from-4% or 575 k units), building permits fell 4.9% at 621 k units (+10.9% at 653 k units). The Jan import price index up 1.4% (Dec +0.2%), yoy +11.5% (+8.6%) on the weaker US$. Then at 14:15 Jan industrial production rose 0.9% (+0.7%) and capacity utilisation improved to 72.6% (71.9%). After the close the minutes of the Jan Fed FOMC will be released.

The financial players are back in full control and it looks like the Chinese will return to a “limit up” Shanghai market (last year they came back to a “limit down” market and an emergency settlement was needed to let the longs out). Away from problems in Europe keep an eye on Africa in the past fortnight political problems have increased or reappeared in five countries; Zimbabwe, Kenya, The Gambia, Guinea and Ivory Coast. In a recent Bloomberg article it is pointed out that a DRC parliamentary commission has found that over half of the US$ 50 million signing bonus paid by three Chinese companies to the state owned Gecamines mining group for the US$ 6 billion agreement of infrastructure for metals deal has gone missing.

Without most of Asia, investors kept the upward momentum in metals helped by a weaker US$. This movement continued into London trading with heavy turnover led by cu and ni as technical funds are turned around and the US$ weakness speeds up. Like clockwork the LME al stock pours in (at the same time cancelled warrants jumped 22 kt – material in and immediately out to the car parks – an accountancy move) after third Wed (US) with rises in cu, zn and pb, however in the present mood doubt the market will take any notice. In Spain workers at Lundin’s Neves Corvo cu mine (’08 – 89 kt) have gone on two hour strike at the start of each shift over pay.

In Australia the Jan NAB business confidence rose to 15 (Dec while the business conditions reading fell to 3 (10). The UK Jan CPI unexpectedly fell 0.2% (+0.6%) yoy +3.5% (+2.9%) as the R(etail)PI was unchanged ( +0.6%), yoy +3.7% (2.4%). The Feb German ZEW economic sentiment survey dipped 45.1 (47.2), current situation improved -54.8 (-56.6) and expectations down 40.2 (46.4) with the Euroland economic sentiment a poor 40.2 (46.4). A good example of the uncertainty in the markets is two Bloomberg articles on the Russia one says - emerging-market stocks rose to their highest in almost two weeks, led by Russian equities, as increases in commodity prices boosted the earnings outlook for energy and materials companies; the other - options traders are making the most bets in 14 months that Russian stocks will drop on concern demand for commodities from China and Europe will weaken.

In the US the Feb NY Fed Empire manufacturing index 24.9 (15.9), as with Fri good US data boosted metals despite a steady to firm US$ and when the DJI came in up the race higher was back on led by ni. The Fed reported China continued to sell US government securities reducing its holdings to Feb ’09 levels. We end the report as we began the investors are back in full control.

Metals faced a shutdown with China and the North American markets in holiday mode, this was reflected by the extremely low Select turnover. If the metals fell a fortnight ago on the emergence of fundamentals with tightening spreads it seems the financial players have regained their composure and could walk these markets relentlessly higher again. However the path is not as risk free as in ’09 as the direction of official interest rates turn up.

A bright spot was Japanese Q4 GDP that rose 1.1% (Q3 0%) yoy 4.6% (Q3 0%). The recovery was fuelled by exports and overseas earnings as consumer spending that accounts for over 50% of the economy rose 0.7%. For instance Panasonic saw flat panel TV sales rise 48% yoy driven by Chinese and South American demand. The Dec Japanese industrial production rose 5.1% (Nov +2.2%). Two interesting articles on commodities if you have time, in the FT 15/02 a good argument on their place in the investment pyramid by John Plender “Commodities: Delivery due”, http://www.ft.com/cms/s/0/473ce3ee-199b-11df-af3e-00144feab49a.html and from BBC Radio 4 the IPlayer has stored a report by Mark Miodownik exploring the supplies of a host of important metals - http://www.bbc.co.uk/iplayer/episode/b00qjx5q/Out_Of_This_World/ .

The LME stocks saw good rises in cancelled warrants in al (Chicago 9 kt) and cu (Busan 1.3 kt and Rott 3 kt). This took cancelled warrants to 6% in al, cu 3% and pb still 9% in the US and not moving out. It is Feb third Wed which sees the focus back on al stocks and whether the now usual monthly warrant slues gates are opened. The early pre market trading was a case of follow the US$ with an early bias to the upside no surprise as suspect more support for the € this side of the Pond. This currency watch continued throughout the day with low volume firm support for zn and pb. The Zambian ’09 cu output was 698 kt up 14% yoy. Ni the star performer up nearly US$ 1000 / tonne as this tightly held metal catches the unwary.

Apparently in the US an mystery billboard appeared at the side of a highway outside Wyoming, showing a picture of George W and the words “Miss me yet?”. In the US the individual States are beginning to roll out the US$ 300 million Federally funded “cash for appliances” programme, the rebates range between US$ 50 and US$ 250. We suspect London traders took an extended weekend with China and US out if not the Select volume might give a worrying insight into the state of European traders.