Against the Grain

The financial market investment instruments tends to focus on the most transparent area of the metals, the LME price however increasingly the price will be driven by developments in the more opaque areas of concentrates and scrap, (see article from Time Magazine “Rouge in Reverse”). The financial climate over the past 12 months has allowed the existing metal supply to be accumulated in the strong hands of the Chinese, international traders and banks and unless we see scares as with the unexpected Chinese rate move in Jan, prices of LME materials is set to move higher irrespective of underlying fundamentals. Last week we mentioned high frequency trading and estimates that such firms trade 80%+ of equities, futures 65%, options 58%, bonds 35% and currencies 25%, the recent correlation of all markets to foreign exchange and sovereign debt shows how automated trading has grow away from the main movers.

We have not seen this for a while, for the third day in a row Asia refused to accept the Western euphoria in commodities driving the prices lower. The DJI giving back early gains and some reality in Europe where it seems Germany will not ride to Greece’s rescue (partly because under EU rules it is illegal but when has that stopped the political elite) took the gloss off the € gains. So for the time being the macro events will toss the metals around. In Asia equities sold off as a Chinese bank predicted a slower growth in new lending. As soon as metals hit London the US$ was the driving force. In the present situation the LME stocks were supportive with falls in cu (mostly Europe and cancelled warrants), al (Europe & US) and ni (Rott). On warrants someone told us y/day that if you cancelled al warrants in Baltimore you would have to wait over 120 days to get them out because the warehouse only needs to move 800 tonnes per day and cancelled there is 95 kt. It is reported Q2 Japanese al premium around US$ 124 / tonne over LME cash price or 5% lower than Q1. The IAI reports Jan Chinese daily average primary al output was 41.7 kt with total monthly production at 1.292 mill tonnes (Dec 42.9 kt and 1.33 mt respectively). The worm turned in the pm and metal prices retreated accordingly as the US$ recovered.

The focus Fri will be on Premier Wen Jiabo address to the Chinese National Peoples’ Congress. An official today said China’s official military budget would rise 7.5% this year half last year and the first single digit increase since ’89. With economic clout moving East maybe the troubles inside the EU are not the main driver but China. In Japan Q4 capital spending declined subsided to 17.3% (Q3 -24.8%) The good flow of economic news in the UK continued with Feb car sales up 26.4% yoy (Jan 29.8%). In France Q4 unemployment rose to 10% (Q3 9.5%). Data thin on the ground the BoE left rates unchanged at 0.5% and followed by ECB doing the same 1%.

The Fed Beige Book indicated the economy continued to grow but only at a modest pace. The weekly jobless claims 469 k (498 k). The Q4 US non farm productivity rose to 6.9% (+6.2%) and unit labour costs fell to -5.9% (-4.4%) that is a 1.7% fall for ’09 the biggest drop since 1959. In Canada the Feb Ivey PMI was 51.9 (50.8). At 15:00 Jan factory orders rose 1.7% (Dec revised to 1.5% from 1%) and pending home sales fell 7.6% (+0.8%) and yoy up 8.8% (+9.2%).