Against the Grain

Y/day a major correlation broke down as the metals rose strongly at the same time as the US$ rose. The catalyst appeared to be the significant fall in weekly US jobless claims Underneath the metal rise is could also be some large forward position taking activity especially in cu and zn that is starting to squeeze short from the field. The forwards are a rather black art that are the preserve of the professional players and often trip up the more technical / CTA style traders. If you can go onto the BBC …

After the strong rise the Asian market was subdued ahead of the Chinese New Year break. The weekly Shanghai stocks all increased cu 3467 tonnes to 117,769; al 5000 tonnes at 360,253 and zn 640 tonnes to 223,300. The LME stock saw cu post a good rise as did cancelled warrants as al and ni fell. Over the week cu rose 6.5 kt; al fell 32 kt; zn inched 25 tonnes higher; pb rose 1 kt; ni fell 1 kt and sn down 130 tonnes. The calm of the pre market was shattered around 10:00 when news broke that the PBoC again increased bank reserve requirements by 0.5% to 16% for big and 14% small banks respectively from Feb 25. The price turn down was short and sharp with cu dropping US$ 200 before levelling out. It seems going forward interest rate shocks will be from the upside. It is reported from China that the authorities about the oversupply of al with production this year estimated to be 20 million tpa exceeding demand by 8 mtpa. In Jan China power consumption rose 40.1% yoy to 353 billion kWh and up 2.7% from Dec. In Chile Barrack is expanding extraction capacity at their Zaldivar cu mine (’08 133 ktpa) to 260 ktpd from 220 ktpd. It is reported from China BHPBilliton and the steel mills have agreed a 40% iron ore price increase.

In Japan Jan consumer confidence was 39.4 (37.9). The Indian industrial production in Dec rose 16.8% well above expectations (Nov 11.8%). This type of growth could not be emulated in Europe, preliminary Q4 GDP in Germany was flat (Q3 +0.7%) yoy -2.4% (-4.8%); France +0.6% (+0.2%) -2.8% (-4.6%); Italy -0.2% (+0.6%) -2.8% (-4.6%) and Euroland +0.1% (+0.4%) -2.1% (-4.0%). The Dec Euroland industrial production fell 1.7% (Nov +1.4%) yoy -5% (-6.9%).

In the US Dec retail sales rose 0.5% better than anticipated (Nov -0.3%) and ex auto +0.6% (-0.2%) however the gloss of this was taken off by the preliminary Feb Uni of Michigan consumer confidence survey dipping to 73.7 (Jan 74.4). The Dec business inventories fell 0.2% (Nov +0.5%), the surprise move showed US firms destocking the issue is was it because they are worried about future demand or demand is outstripping them.

The nervous nature of the financial markets is seeing minute by minute trading and even that is probably a long term investment. This has been highlighted this week with the Greece story. At the start traders pounded the € as fears the country would drag down the whole EU. Then a German comment that help was on the way saw a stampede higher scattering the shorts before it. That continued till y/day afternoon when Bernanke hinted the Fed might nudge up rates that hurtled the US$ higher and the € lower with all the financial markets clattering along behind. Just after 17:00 more Greek relief and the traders began to storm the € higher. To sum it up order, counter order and disorder making it very difficult for business to plan activity. A good summary of the problems facing countries with fiscal deficits was in the FT 11/02 edition by Niall Ferguson “A Greek crisis is coming to America”, (http://www.ft.com/cms/s/0/f90bca10-1679-11df-bf44-00144feab49a.html?nclick_check=1).

After the London close Wed metals got another boost as Greece bail out trumped Bernanke rate move hint. The charge was again led by cu which jumped US$ 200 from the 17:00 kerb close with heavy volume in Asia (3600 lots) despite Japan on holiday. We read a comment by a Chinese brokerage house cautioning the cu stocks in China are not a high as some are saying. The LME stocks saw a cu inflow (Rott material in and cancelled up) with al outflow. Well never has the premarket paid so much attention to Greece as metals (really only cu others very quiet) key off the US$.

Focus was some Jan China data the CPI rose 1.5% yoy less than expected (Dec 1.9%); the PPI jumped to 4.3% higher than expected (1.7%). Makes you wonder is China bidding the cost of raw materials by competing with itself? Then new bank loans catapulted by RMB 1390 billion (Dec  RMB 380 bill), this highlights a Chinese anomaly the banks are told by the government how much they can lend each year and then rush the loans out early so they cannot be reined back in later. Not quite what Western final authorities would approve of. Finally Jan property prices in the 70 largest cities rose 9.5% yoy. In Australia Jan employment rose by 52.7 k (37.5 k) mostly part time as unemployment fell to 5.3% (5.5%). The Jan German wholesale price index rose 1.3% (+0.2%) yoy +1.9% (+0.2%). By 13:00 the EU had agreed to give its full backing to Greece with no concrete measures because they had not asked for any.

In the US data the weekly initial jobless claims 440 k (483 k). At 15:00 Dec business inventories …% (+0.4%). This afternoon the US$ / metal relationship broke down as the US$ strengthened metals got a shot in the arm trading to new highs on the day with equities. Suggest the jobless data caused the rift, stronger economy good for US$, equities and commodities.

Talk of Germany bearing gifts to the Greeks boosted market confidence in Tues pm trading but left Asia little moved. Very little other news so keep your eye on the US$ it will drive the direction of metals. We view the price decline as a much needed correction from an overbought situation rather than a change in the fundamental outlook. So would be wary of looking for further big falls, as someone said to us if cu was trading on its fundamentals it should be under US$ 3000 / tonne (a problem with this view is its what everyone else thinks). The world’s largest cu mine Escondida produced 1.103 million tonnes down 12%, concentrate output fell 22% to 775 kt while cathode output rose 27% to 327 kt. The cash cost averaged US$ 83.8 c/lb (US$ 1843) from 77.1 in ’08. The LME stocks saw a small rise in cu and the rest fell led by al (UK & US). Again the pre market dominated by the US$. The Chinese prosecutor handed down indictments against the Rio 4 and said the trial would be held in Shanghai. In zn, Teck waits to see if it gets a permit next week allowing the expansion of its Red Dog zn mine in Alaska to keep it running beyond next year. The largest zn mine in the world produces 500 kt of zn concentrate. Any delay would further exacerbate an already tight concentrate outlook. Dec North American shipments of replacement automotive batteries rose 6.6%, yoy -2%.

The Chinese Jan exports rose 21% yoy as expected while imports jumped 85.6% yoy from Jan ’09 when they were at the lowest level since 2005 and iron ore and coal were big drivers. Imports of unwrought and semi finished cu declined 21% to 292 kt (Dec +27%). Cannot quite work it out y/day we saw startling Jan Japanese machine tool orders rising 192% yoy and today Dec machine orders rose 20.1% (Nov -11.3% yoy -1.5% (-20.5%). Australian Feb Westpac consumer confidence index slipped to 117.0 (120.1). Malaysian Dec industrial production rose 8.9% yoy (Nov -0.8%) and South Korean Jan unemployment rose to 4.8% a 10 year high (3.5%).

Mixed European Dec European industrial production, France fell 0.1% (revised to +0.6% from +1.1%) yoy -2.3% (-3.8%); Italy off 0.7%, yoy -5.6% (-7.9%) and UK up 0.5% (+0.4%) yoy -3.6% (-6.0%) and manufacturing production rose 0.9% (0%) yoy -1.9% (-5.4%). To throw some light onto the problems besetting Greece and the EU read the article in the FT 10/02 edition by Martin Wolf “Europe’s stragglers need German consumers” (http://www.ft.com/cms/s/0/3d744b46-15b7-11df-ad7e-00144feab49a.html?nclick_check=1). Amazing to read that even countries fabricate statistics it gave to others!

Overnight the weekly US ABC consumer sentiment survey improved to -48 (-49). The weekly MBA mortgage applications off 1.2%% (+21%) the purchase sector fell 7% and refinancing rose 1.4%. Then the Dec US trade deficit was US$ 40.2 billion (-36.4) worse than anticipated on oil imports. The afternoon saw Bernanke hint at raising the Fed discount rate “before long” this trumped all other news the US$ quickly regathered the loss of the past 24 hours sending equities & commodities lower. The discount rate is the interest charged to commercial banks and other depository institutions to borrow from the Fed.

Poor workmanship seems to be blighting that pillar of manufacturing excellence Japan, hard on the heels of Toyota it is reported a Japanese supplier of seats to Airbus and Boeing has to repair 150,000 seats because of falsified safety data. Its shares dropped 33% and its parent is a Toyota Motor Corp affiliate.

Metals shrugged off a poor close of US equities and advanced strongly in Asian trading with cu to the front on “arbitrage” buying. This would seem to be more a financial exercise as the fundamental news out of China was Minmetals Nonferrous Metals predicting Chinese cu imports would halve this year as the government unwinds the stimulus spending. The LME stock data again dominated by significant al withdrawals (US and Europe). Alcoa alumina and bauxite workers in Western Australia are staging a one day strike Thursday after wage talks stalled. On the corporate front the press has taken up the Xstrata / Glencore merger guessing game again. In Zambia vandalism is reported to have disrupted power to First Quantum’s Kansanshi cu mine (200 ktpa).  The strength in London has been attributed to hopes of EU help to Greece and comments that it helped emerging markets (not sure if Greece is classed as the EU or EM?). The EU council meets Thurs (reading this has been called early) so expect Greece to be on the agenda. By the pre market close metals were again dominated by the fax market drifting lower as the US$ gained above € 1.37.

Another data light day – in Japan Jan machine tool orders rose 192% yoy (Dec 63.4%) which perhaps say more about how dire this time last year, foreign orders leapt 290%. In China Jan car sales exploded by 115% yoy to 1.32 million units (Dec 1.1 million units and Jan ’09 610 k units), this perhaps supports the expected stratospheric rise in Jan bank lending ahead of the authorities turning the taps off. Put in your diary the World Expo begins in Shanghai May 1 to Oct 31, so nothing will go wrong in China between those dates. In the UK a survey of Jan retail sales had them down 0.7% (Dec +1.1%) as cold weather and tax increases kept shoppers away. In the US Dec wholesale inventories fell 0.8% against an expected rise (+1.5%). The weaker US$ and stronger US equities supported metal prices throughout the afternoon. In the last hour the US$ was hit hard and the equities jumped cleaning out all the metals shorts as newswire talk of a Wall Street expecting a Greek bailout. So its a case of beware of others bearing gifts to the Greeks!

Looking back over the past fortnight it seems the market reaction has been more corrective from an overbought situation than a fundamental change in the macro outlook.

In Asia metals bounced well one suspects rather in relief than earnest, the DJI Fri managed to scramble back above 10,000 and in the frozen north of Canada the G7 finance ministers agreed things are improving but it was too early to start scaling back government stimulus activity. Finally on the problem children of the EU the message seemed to be fix it internally. Good but not heavy Select trading saw the arb twins cu and zn post the best gains. The problem is now all Asian activity is attributed to the LME / Shanghai arbitrage, lazy broker speak which makes it hard to know what other issues are in play. The LME stocks were note worthy for another big fall in al and total zn stocks moving higher through 500 kt. The flick up in price saw reasonable warrant activity focused on cu in Korea. The pr market saw nervous trading by 11:00 total of 5500 cu lots had traded (less than half in London time yet the bid / offer spread often US$ 10. The Russian Federal Customs Service reported ’09 cu exports rose 150% to 509 kt; al exports were up 5.3% to 3.62 million tonnes.

Very little data out today after the recent flurry, in Japan the Jan Eco Watchers outlook survey rose to 41.9 (36.3) and current reading 38.8 (36.3). The Feb Euroland Sentix investor confidence index slipped to -8.2 (-3.7). With no data before the US equities it was very easy, cu up US$ 10 oh US$ must be a touch weaker or cu down US$ 10, ah US$ stronger. We think cu has pulled in a lot of professional day traders as volatility and volumes of late where the best in the business. As Reuters points out up to last week Select had only seen ONE 20,000 volume day, last week every day saw that volume. Today we have just scrapped over 10,000 lots.

The fragility and herd mentality of investors has been fully exposed over the past ten day as they realised they had been lulled into a false sense of security and 2010 is not going to be a repeat of the “easy money” of 2009. The next shock has been they were all holding the same position and this had correlated all the markets. Interestingly in the recent general retreat the 10 year US bond yield has been as steady as a rock around 3.60%, so far no frights about its finances.

The metal patient had a quiet night but the spasms still generated nearly 4000 lots of cu turnover in a tight range. The volatility is cu seems to be drawing in every gun trader as volume booms. The weekly Shanghai stocks cu jumped 13,092 tonnes to 114,302; al up 21,373 tonnes at 355,253 and zn unchanged at 222,660 tonnes. This sparked renewed selling of the sector. More evidence the Chinese are finding investment in Africa as problematic as others as the Chinese-owned NFC Africa has suspended at least 200 miners at Chambishi cu mine (150 ktpa) in Zambia accusing them of sabotaging underground operations. The LME stocks headed by al that saw material continue to move out, on the week it fell 24 kt; cu rose 100 tonnes; zn up 3 kt; pb put in 1 kt; ni rose 2.5 kt and sn down 470 tonnes. Incredibly nervous markets with 9,000 lots trade cu traded 6300 then gapped to 6286 ahead of US data.

In Asia the Dec Japanese leading index improved to 94.0 (90.7) and coincident index 97.6 (96.0). The UK Jan input PPI rose 2% (Dec +0.6%) yoy 8.4% (7.4%) while output PPI increased 0.4% (+0.5%) yoy 3.8% (3.5%). Then Dec German industrial production declined 2.6% (+0.7%) yoy -7.1% (-8.0%).

In the America’s Jan Canadian unemployment was 8.3% (8.5%) as employment rose 43 k. The US Jan non farm payrolls fell 20k (Dec revised to -150 k from -85 k, while Nov revised to +64 k from +4 k) on the plus side manufacturing employment grew by 11 k the first rise since 2006 and service producing jobs up 40 k, loses occurred in construction and government. The unemployment rate fell to 9.7% (10.0%). The average hours worked 33.3 (33.2). After this it became a session of cagey trading with each market nervously watching the other, equities, oil, US$ and metals.

Well cu was an eye opener y/day (and today) with over half the daily volume occurred between 12:30 and 15:00 on apparent fund liquidation. Since it touched its high of US$ 7796 on Jan 07 it has declined over 17%. It will be interesting to see how the market unfold, for some time fundamental analysts have been warning about oversupply but this has been emasculated by the start of year gallop by funds into commodities. This unwavering faith has been questioned by a swing in the interest rate pendulum from zero to rising. On a broader front the US fired another shot across China’s bow with Obama calling for them to abide by the spirit as well as the letter of  international economic policy. Last night it was basically “hey fellas your currency is undervalued”. Building on this theme see attached article in The Times, 04/02, by Anatole Kaletsky, “We need a new capitalism to take on China” (http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article7014090.ece).

Another high volume Asian session with cu to the fore in a tight range, talk of Chinese buying at these lower levels. Interestingly London took it off the highs and spent the pre market locked in a tight range around US$ 6600. The LME stocks saw declines dominated by al (28 k warrants were cancelled in Baltimore as we get the usual movement into dead stock ahead of the mid month replenishment) and cu with a rise in ni (into Rott and cancelled up). Dow Jones reports Russian rolled steel consumption fell 22% in ’09. On the demand front Airbus (they expect new orders of between 250 / 300 planes against 1,458 in ’07) and Boeing expect the orders for new aircrafts to remain depressed out to 2112. On the cu front the steep price fall will impact on provisional pricing if it continues.

In Asia, interestingly even the strong economies are seeing slow final demand Australian Dec retail sales fell 0.7% (Nov +1.5%) the hike in official rates were blamed while Dec building approvals rose 2.2% (10.4%). Q4 NZ unemployment rose to 7.3% (Q3 6.5%). After the down grading of Greece investors attention has turned to some of the other PIIGS (like wild dogs on the Africa veldt sensing a weak member of the herd), Spain and Portugal and Eastern countries like Hungary as doubts about government finance spread. On the data front Jan UK new car registrations stood at 145,479 up 29.8% yoy (Dec 38.9%) with the scrappage scheme accounting for 20%. The Dec German factory orders declined 2.3% (+2.7%) yoy +8.4% (+4.5%). The BoE left rates unchanged (0.5%) and QE in place as the ECB 1%.

The US weekly jobless claims 480 k (472 k). The Q4 preliminary non farm productivity jumped 6.2% (Q3 8.1%) as unit labour costs fell 4.4% (Q3 -1.5%). At 15:00 Dec factory orders rose 1 % (1.1%) a better than expected result that steadied markets under selling pressure. In Canada the Jan Ivey PMI bounced back 50.8 – just (48.4). As the afternoon session wore on the selling pressure kept building and the cry went “ABANDON SHIP!”

The DJI has recovered most of last week’s loss as the talk of monetary tightening slackened in the press weakening the US$ and building a recovery in metals, oil and other commodities. We expect this will be the pattern any move by China on monetary policy to tighten will send the markets into retreat and they recovery when it goes quiet. Hence our view that the two driving fundamentals will be China and interest rates. Combining the two, a 10 year Chinese bond auction went off at lower yield than forecast. The markets are now revving up for US employment data at the end of this week and Jan Chinese data mid next week with a prediction today from a Beijing based economist that imports could have leapt 100% yoy  (Jan ’09 -43%), exports they expect will be up 30% yoy. This article from the NYT is worth a read by Thomas Friedman “When Economics Meets Politics”, it highlights how more political issues could delay / derail economic recovery, http://www.nytimes.com/2010/02/03/opinion/03friedman.html.

The metals got a boost in Asia as the US$ weakened and the volumes picked up as short covering met some CTA selling. First Wed so option declaration day upon us with no one expecting fireworks after the price falls of late. The LME stocks dominated by a large al fall (mostly cancelled warrants moving out of Europe and US – the former suspect being used the latter hidden in a cheaper location) taking the total to 4,600,000 tonnes and likely to continue into third Wed. The general decline in stocks of the couple of days has seen traders push prices rapidly higher. Chilean miner Antofagasta reported ’09 cu output down 7.4% at 442.5 kt (with expansion and new mine it could reach 700 ktpa by ’11). The cash costs rose 10.3% to US$ 0.963 c/lb (US$ 2123 / tonne) not sure if this is with or without by product credits (suspect the latter).

In Australia the Jan AIG service index declined to 47.4 (50.0). In Europe the Jan UK Nationwide consumer confidence index improved to 73 (70). A mixed set of Jan service PMI data Italy 50.9 (53.9); France 56.3 (57.0); Germany 52.2 (51.2); Euroland 52.5 (52.3) and UK 54.5 (56.8) – they are all in expansion but the pace has slowed. The Euroland composite PMI (services & manufacturing) 53.7 (54.2). The Dec Euroland retail sales came in unchanged below an expected rise (Nov -0.5%), yoy -1.6% (-2.0%), as we keep saying when is the final demand coming.

Overnight the weekly ABC consumer sentiment index dipped to -49 (-48) and Jan vehicle sales at an annual rate of 10.82 million units (11.23) below expectations. The weekly MBA mortgage index rose 21% on steady rates but worries they might rise (-10.9%) refinancing up 26.3% and purchase index 10.3%. The a preview of Jan employment, the Challenger job cuts fell 70.4% yoy (-72.9%) and ADP private employment fell 22 k less than expected (-84 k). The US$ rebounded and metals fell. At 15:00 the Jan non manufacturing PMI was 50.5 under anticipations (interestingly revised down to 49.8 from 50.1). Had the situation after this where DJI was rising with the US$ and metals under pressure as oil and gold are steady. Then the weekly DoE crude oil inventories were a mixed lot keeping oil firm. The revenge of the bears came in the afternoon as a “bull trap” was sprung with not often seen vengeance as cu was left technically in tatter with a classic outside day closing on its low in massive volume.

The strong performance Mon on the good manufacturing PMI data was supported by the JP Morgan global manufacturing PMI rising to 56.1 (Dec 55.0). The performances have been very good (UK the fastest pace in 14 years, US highest since ‘04) which most probably highlights the amount of production destruction in manufacturing during this downturn, only the strong have survived. The metals went out on their highs as US equities rose after the US 2011 budget was handed down. In Asia the up move petered out as metals came off and equities were mixed. We are in a period of macro uncertainty that after last week’s fall will keep investors guessing. See attached an interesting table from a US source of commodity prices.

A quiet start to London trading with metals trapped in narrow ranges before breaking higher after stocks. The LME stocks saw cu (out of Korea) and al (mostly Europe) lead the falls while zn rose (into US & Johore) with no real changes in the cancelled warrants. In Chile the environmental authority approved the plan to expand the mine processing capacity of Collahuasi cu (460 ktpa) by 20% to 170 kt / day. Throughout the pre market a weaker US$ and buying momentum boosted prices in light volume sucking in technical buyers and stop losses. At the Indaba in Cape Town a Barclays Capital analyst said Chinese cu imports will fall by 1 million tonnes this year with rising demand from other countries countering the decline.

In Asia, the Australian Reserve Bank left rates unchanged at 3.75% against a general perception of a rise. The country’s Dec business confidence slipped to 8 (19) and business conditions remained unchanged at 10. In Japan wages slumped in Dec 6.1% yoy (Nov -2.4%). In Europe Dec German retail sales rose 0.8% (-1.7%) and yoy unchanged at -2.5%. The Jan UK construction PMI was 48.6 (47.1) still below 50. The Dec Euroland PPI rose 0.1% (+0.2%) yoy -2.9% (-4.4%).

The only US data is the Dec NAR pending home sales index rose 1% at 96.6 (-16%) and yoy 10.9% (18.9%). After the data the metals followed the equities and fx markets around. Treasury Sec Geithner and Obama advisor Paul Volcker appeared before the Senate Banking Committee with nothing earth shattering.

What a difference a month makes with the rise in Jan Chinese manufacturing PMI to 57.4 (Dec 56.1), a reason for investors to continue selling metals. This was backed up by strong numbers elsewhere India 57.6 (55.6) Russia over the line at 50.8, in Europe Italy 51.7 (50.8); France 55.4 (54.7); Germany 53.7 (53.4); Euroland 52.4 (52.0) and UK 56.7 (54.6) this is a rate not seen in 16 years can this really be correct? Brazil 57.8 (55.8). In the afternoon the US came in at a strong 58.4 (55.9). The last ten days has seen a significant mood change as investors dump hard asset strategies as ominous signs mount that authorities could tighten monetary policy sooner than anticipated signalling the low interest rate rally of the past year could be over. The jury is still out but this week’s Jan economic data seems to mounting up as a make or break moment.

The data saw metal prices steady at best in London trading. The LME stocks saw cu keep rising with ni. The interesting one is pb where cancelled warrants have rocked in the last week to 10% of total stock on warrant with them occurring mostly in the deepest rustbelt locations of the US (today Detroit 4350) so suspect an investor is playing games and creating dead stock. Citigroup reported that China’s Chalco expects the country’s al demand to grow 23% yoy in ’10 to 17 million tonnes, in a price range of US$ 2200 to 2600. It is reported from Canada that Xstrata has reached a tentative wage agreement with its unions at the Sudbury ni operations.

In Japan Jan vehicle sales rose 36.8% to 238 k units (Dec +36.5%) with their scrappage scheme extended to Spt ’10 which is for car over 13 years old exchanged for new ones.

In the US Mr Bernanke has been reappointed Chairman of the Federal Reserve after the politicians made their point. The Dec personal income rose 0.4% (+0.4%) and personal spending up 0.2% (+0.5%). Metals higher as the DJI opens higher ahead of more data. The Dec construction spending declined 1.2% (-0.6%). Later the government unveiled its 2011 budget which should project a record deficit of US$ 1.6 trillion. In US time metals seemed to benefit from new month asset allocation buying and squeezing a few shorts out.