Against the Grain

The Fed FOMC agreed by 9 to 1 to leave rates unchanged (0.25%) it sees economic activity has continuing to strengthen and the labour market improve. Though substantial resource slack continues to restrain cost pressures with inflation likely to be subdued for some time. The one dissenting vote believed continuing to express an expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

Overnight news that Europe was groping towards ANOTHER Greek solution saw the usual trend - US$ eased, equities up and commodities recovered, as we said the strength of the rebound will tell how much faith the market has in the solution. We are entering the month end / start of month investment shuffle this time made even murkier by the LME closed Mon and European events. The LME stocks dominated by delivery of zn into NO with ni out of Rott into Busan. Despite a pre market of strong € and better equities cu struggled while others did a little better in light volume. We cannot remember when the metals ignored such a significant US equity rally, with the US$ steady and oil up. It seems to have caught the market out what we would point out is short rates are clicking up with 1 year LIBOR moving over 1%, first time since Dec ‘08.

When looking over this week the Greek problem has seen the € weaken but put it in context it began the week at 1.334 and is this morning 1.321. The Greek economy is about 8% of the EU economy, Portugal 1% and Spain 8%, so we are looking at problems in a small part of the whole. In the UK Nationwide Apr house prices rose 1% (Mch +1%) yoy 10.5% (9%). Strong data flow from Europe strengthened the € - Apr German unemployment declined 68 k far more than expected taking unemployment to 7.8% (Mch 8%). Apr Euroland economic confidence rose to 100.6 (97.9) better than expected, business climate +0.23 (-0.2), industrial confidence -7 (-10), services confidence 5 (1) but that final demand area not so good consumer confidence -15 (-15). Looks like we are in for another weekend announcement, as newswires say Greece will conclude talks with the EU and IMF in the next few days.

In the US the weekly jobless claims 448 k (459 k), recently Asia has reacted more to this number of late than the US. The Mch Chicago Fed national activity index -0.07 (-0.64) confirming what the FOMC said above. After this data the metals continued to struggle despite a weaker US$ and higher equities. Tomorrow we get US advance Q1 GDP. The article in the following link from CBS moneywatch.com is worth a read “Why Employment Might Not Fully Recover Until 2013” by Mark Thoma;  (http://moneywatch.bnet.com/economic-news/blog/maximum-utility/the-long-road-to-recovery-2/120/).

Nothing highlights better the short term nature of the financial markets than to follow the Greek financial saga this week. Over the weekend the EU and IMF said they will meet Greece’s request for short term finance and the € strengthens, equities rise and metals rally. Then y/day the Greek credit rating is downgraded to junk and the gains are wiped out. What next, well we a series EU / IMF huddles then another statement resulting in a stampede of markets pushing the € higher, equities up and metals higher. The size of the rally will indicate the conviction of the market. So far they prefer to believe a rating agency that failed to spot the sub prime crisis ahead of government and supra national officials, what does that tell you! As a friend said bet Goldman Sachs could fix the problem. Towards the end of day markets recovered as talk of a Merkel statement then sank away again as S&P Ratings downgraded Spain a notch.

Overnight the metals saw good Select volume but little price change, as Asian equities played catch up other commodities and currencies were little changed. Routine LME stock data. Heard this morning if you are big enough you can lock in tonnage on a five month LME warehouse deal at US 0.20 cents / day as opposed to what the warehouses convinced the LME they should get US$ 0.38 cents / tonne / day. London trading saw very good volume, by 9.15 al 8 k lots, cu 5 k lots and zn 3.5 k lots with prices under pressure 2121, 7403 and 2301 respectively, who said commodities are non correlated? However feel the need is to watch currencies and equities as suspect they will react first to the ebb and flow of any runner with Greek news. By 13:30 the markets were feeling better as the € recovered along with equities. With little US data the markets were left to their own devises and looked like a construction site waiting for the concrete truck that was stuck in traffic then after a comment or two, if you can imagine it traders become the ball in a super fast pinball machine.

The Mch Japanese retail trade rose 0.8% against an expected fall (Feb +0.9%) yoy 4.7% (4.2%) with larger retail sales down 5% (-4%). In Europe Apr Italian business confidence rose to 85.5 (84.1) however minds were on other things. This sums the situation up well in the NYT - “It’s like Lehman Brothers and Bear Stearns,” said Philip Lane, a professor of international economics at Trinity College in Ireland, referring to the Wall Street failures that propelled the financial crisis of 2008. “It is not so much the fundamentals as it is the unwillingness of the market to fund you”. The ECB and IMF leaders went before the German parliament to brief them on the US$ 60 billion Greek loan package.

Overnight the US weekly ABC consumer sentiment index improved to -49 (-50), it did not share the enthusiasm of monthly data released y/day. The only data was the weekly MBA mortgage applications -2.9% (+13.6%), people buying houses to beat the tax credit deadline stopped the rot and expect next week’s data to see a big rise reflecting the fall in bond yields.

The Fed FOMC decision is at 19:15 BST, probably no change in the rate (we believe official rates are are unsustainably and inappropriately low and central banks will act to rectify this situation, we have a presentation on it, call us if you would like us to come and talk about it) and emphasis on the press release wording, the officials must love writing them and smiling as they predict the market reaction to them.

Late selloff dumped metals as S&P Ratings downgraded Greek debt to junk and cut Portugal’s credit rating.

After US equities ended little changed there was divergence in Asia with Japan higher and Shanghai continuing to decline settling at its lowest level since Oct ’09. Investors remain cautious about a trend of growing economic tightening in the region led by China and India. Y/day’s feel good Greek bail out news quickly fizzled as Germany (with regional elections Sun) remain reluctant to bail them out. The BBC pointed out the completely different approach the IMF has taken towards Greece compared to the heavy handed way they waded into developing countries in trouble such as the Asian Tigers in ’97, African and Latin American states in financial trouble, the hint seemed to be them and us. If you have a moment read this interesting article from the NYT Apr 27 “We Have Met the Enemy and He Is Power Point”, (http://www.nytimes.com/2010/04/27/world/27powerpoint.html?hpw).

The metals seemed to have the harshest reaction in Asia registering bigger falls than other assets. London began on a steady note with a weaker US$ encouraging buyers. The LME stocks were supportive dominated by continuing falls in al only pb bucked the trend with a small rise. Big declines continue in ni and sn. Dow Jones reports ScotiaMocatta has pulled a physical copper invest IPO which offered investors direct exposure to the metal. Reuters reports Chinese nickel pig iron output hit an all time 17 kt in Mch as the price encouraged new capacity with further gains to come. A slight strengthening of the US$ saw the metals drift lower in the pre market.

South Korea reported Q1 GDP rising 1.8% (Q4 0.2%). Quite a few confidence numbers around. In Australia the Apr NAB business confidence was 17 (Mch 18), Japans small business confidence up to 46.8 (45.8). in Europe the May German GfK consumer confidence survey improved to 3.8 (3.4), Apr French consumer confidence dipped to -37 (-34) and Italian consumer confidence 107.9 (106.3).

The US data was dominated by the rather dated Feb S&P / Case-Shiller home price index 144.03 (145.27), the composite 20 city index declined 0.9% (+0.32%), yoy rose 0.6% (-0.7%). This took the edge off the US$ allowing metals to recover ahead of the DJI open. More up to date came at 15:00 with the Apr Conference Board consumer confidence jumped to 57.5 (52.3), this could be key to any Fed rate decision. Up to now final demand has lagged in the recovery, only last week the weekly ABC consumer sentiment survey slumped so it will be interesting to compare it tomorrow. We believe if the Fed saw a trend in demand recovery then their mantra would change to “short rates should rise”. The strength in industry was confirmed by a massive jump in Apr Richmond Fed manufacturing index to 30.0 (6.0). The US$ eased, DJI off early lows and the metals rebounded. Then after 16:00 the scene changed completely, the US$ strengthened and DJI swallow dived sending the metals into free fall, cu falling from over 7700 to 7500 in under an hour, on heavy volume. Only gold could stand against the deluge of selling as investors see it as almost the only safe haven.

Another weekend and another Greek bail out, yet the tub continues to take on water almost faster than politicians and officials can use “smoke and mirrors” to plug the holes. At the World Bank / IMF meeting in Washington the country shareholders approved a US$ 5.1 billion capital increase that saw China become the third largest shareholder behind the US and Japan.

The metals heard “bail out” and bolted higher in Asian trading helped by the locals again being far more impressed with the Fri US data that the US themselves. Now we are set fair for end of month book squaring and new month investment with the LME on holiday day 1, we expect these markets will have a strong fortnight barring unforeseen circumstance and expect new ’10 high on most if not all – if not then does this with stocks hit at a change in market perceptions? We are trying to get a better understanding on LME stocks where the momentum in declines is gathered pace, it is just whether the metal is being used or stored. What is clear the past year has seen the advantage swing massively to the producers leaving consumers to rue missed opportunities. The metals chose to “dollar dance”.

The data cupboard was bare today in Asia and Europe and the US had the Dallas Fed Apr manufacturing activity survey jumped 21.1% (7.2%). On the broader investment front a sign commodities have entered the mainstream investment market as reports increase that bond investors (by far the largest sector) are relaxed about inflation with Barclay’s forecasting in a report that inflation in advanced economies will hold steady around 1.5% though 2010 and low slightly into 2011. This is pushing rates lower and keeping US 10 year bonds below 4%. The hedge against this bet is to hold a basket of commodities just in case with gold the obvious choice.

The Fed FOMC begins a two day meeting Tues, will the recent spate of strong data see a rate move? Don’t rule it out.

The Greeks called for EU and IMF financial aid strengthening the € ahead of the weekend G20 finance ministers meeting in Washington at the time of the World Bank IMF meeting. What out for major announcements at the press conference Sunday.

Asian trading reacted to a recovery in US equities and a stronger US$, the cancelled each other out and things went nowhere. This week has seen the base metals stuck in quite tight ranges as they look for something to follow. The Shanghai weekly stocks were mixed, cu rise 2012 tonnes to 187,907; al dipped 250 tonnes at 425,322 and zn up 4963 tonnes at 256,334. We cannot remember a daily LME stock report that has seen such large moves in all the metals, not sure what it means yet but suspect it could have something to do with the rolling over of finance deals and recent warehouse ownership changes. The al cancelled warrants jumped 28 kt in Rott and US. The overall weekly moves were less than today’s moves below, cu fell 2 kt; al rose 6.5 kt; zn off 4 kt; pb down 550 tonnes, ni dropped 4 kt and sn moved 1895 tonnes out. The strong German data boosted the € and metals recovered.

The Japanese Feb all industry activity index fell 2.3% (Jan +3.4%). The Apr German Ifo business climate rose 100.4 (98.1), current up 99.3 (94.5) and expectations dipped 100.4 (102). The Apr French business survey of overall demand slipped 8 (14). The Mch French consumer spending rose 1.2% (-1.4%) yoy 2.5% (1.3%). The UK Q1 GDP advance data rose 0.2 % (Q4 0.4%) yoy -0.3% (-3.1%).

The Feb Canadian retail sales rose 0.5% (+0.7%). In the US Mch durable goods fell 1.3% (+1.1%) and ex transportation rose 2.8% (+1.7%). Then Mch new home sales jumped 26.9% to 411 k units (-4.1% at 324 k) driven by tax credits worth US$ 8000 per house that expires at the end of Apr.

A mixed week cu off 9, al down 114, zn off 12, pb up 56, ni rose 220, sn dipped 66, gold up US$ 23 / oz, oil rose US$ .5 / bbl, DJI at time of writing up 145 points, US 10 year bonds yield increased 0.11%, US$ / € up 0.008 and Shanghai equities down 135 points over 4%.

Very quiet in Asia as neither US equities or dollar moved leaving metal traders without a running rabbit. The ICSG reported the world refined cu market surplus at 122 kt compared to 159 kt in Jan ’09 at the bottom of the GFC debacle. It appears we have for the first time since Jan last year we have not seen a third Wed cascade of al in LME warehouses only 12 kt, suggesting an end to the financing deals entered into last year. All the other metals saw LME material flowing out led again by ni from Rott and Sing. The metals slotted into slavishly following the € in a tight trading range with light volume. The Chinese research group Antaike expects the country’s demand to rise 8% to 6.05 million tonnes while China’s own production could increase 10% to 4.55 million tonnes resulting in imports declining by a quarter to 2.4 million tonnes. Just as the premarket closed the € lost ground against the US$ taking it to test 1.33 and knocking the metals around with cu testing 7700.

More good European data lifted a struggling €, Apr French business confidence improved to 97 (Mch 93). The Apr advanced  Euroland PMI saw manufacturing 57.5 (Mch 56.6), service 55.5 (54.1) and composite 57.3 (55.9). The Mch UK retail sales rose 0.2% less than expected (Feb revised to 2% from +1.6%) yoy 4% (revised to 5% from 5.4%). Unless final demand build consistently business will see inventories build too much. The IMF revised its 2010 projected world growth to 4.2% (Jan 3.9%) but warned it would be a multi speed recovery led by China (10%) and India (8.8%) while in advanced countries the US (3.1%) is off to better start than Europe (1%) or Japan (1.9%). The emerging and developing economies are seen growing at 6.3%. The Apr preliminary Euroland consumer confidence improved to -15.2 (-17)

The Canadian Mch leading indicators rose 1% (Feb +0.9%). In the US the weekly initial jobless claims fell to 456k (480 k), recently the Asian market has reacted far more to this number than the US. The Mch PPI rose 0.7% (-0.6%) yoy 6% (4.4%), ex food and energy up 0.1% (+0.1%) yoy 0.9% (1%). At 15:00 Mch existing home sales rose 6.8% at 5.25 million units (-0.8% at 5.01 mill units). The afternoon saw the metals try to hold the line as the DJI weakened and US$ picked up ground.

The equities were higher and US$ steady, what more do you need to know, metals edged higher in quiet conditions. The major financial news is an IMF proposal for the upcoming G20 financial ministers meeting this weekend that outline Financial Stability Contribution (a flat levy to cover another crisis) and Financial Activities Tax (based on profits and bonus payments). They would be levied on a broad range of financial institutions, banks, insurers, hedge funds and others. This is just the start of a long political battle.

In Asian trading equities were higher after strong Apple results and US$ steady, what more do you need to know, metals edged higher in quiet conditions. The US SEC is on the warpath, it is reported BHPBilliton has found evidence of possible breaches of anti corruption laws over termination of exploration projects (not China). The Chinese General Administration  of Customs reported Mch cu imports rising 53% from Feb to 337 kt that is up 13% yoy and imports for Q1 rose 0.8% to 755 kt (take the stats you like), while cu scrap was 11% in Mch and 34% for Q1 reflecting the demand for the cheapest alternative. Nothing in the LME stocks with ni dominating the withdrawals. The IAI reports al output at a record 3.44 million tonnes.

The Australian Feb Westpac leading index rose 0.5% (Jan +0.4%) to an 18 month high, while the Feb Japanese leading index improved to 98.5 (97.9). There is anecdotal evidence in the UK that car stocks are building now the scrappage scheme has ended while first time home buying fell to its lowest level in two decades. The Mch UK jobless claims fell 32.9 k to 4.8% of the workforce, this contrasted with unemployment rising to 8% in the three months to Feb and standing at 2.5 million the highest rate since ’96.

Overnight the weekly ABC consumer sentiment index fell further to -50 (-47), close to it all time low of -54, is this outrider or are consumers that worried. The weekly MBA mortgage applications rose 13.6% (-9.6%) as the dip in rates sparked purchase and refinance interest. Then another day in the US dedicated to oil data.

News from Asia focused on efforts by the power houses there to begin, as someone said to us, “tapping on the growth brakes”. The Reserve Bank of India raised rates by 0.25% to 3.75% and the bank cash ratio reserve by a similar amount to 6%. In China the authorities ordered developers not to take deposits for sales of uncompleted apartments without proper approval from them and barred the charging of “abnormally high prices”. After falling nearly 150 points or 4.5% y/day the Shanghai declined further, off 22 points. For commodities the question is will the recovery in advanced economies take up any slack in Asian demand.

A recovery in the US equities and a mixed markets in Asia saw the metals edge higher overnight in light Select volumes. With a steady US$ and stronger European equities metals moved ahead in light early trading. Its proximity to China saw Mch Japanese cu wire cable shipments rose 13% yoy to 60 kt though shipments for the year were 662 kt, the lowest since 1976. The al LME stock inflow is as regular as clockwork with the initial flow into Detroit, all the others saw outflows led by ni. On the cancelled warrant front, they have risen to 10% of sn, remain around 6% of al and 5% in ni. The Lundin Mining Portuguese Neves Corvo cu mine (86 kt in ’08) has a strike coming early May. The European inflation and economic sentiment data saw the € strengthen taking the metals with it. From Thurs the LCH has indicated it will increase the initial margins of ni, cu and zn.

Overnight the Japanese Feb tertiary industry index dipped 0.2% (Jan +2.5%). In Europe the Mch German PPI rose 0.7% (0%) yoy -1.5% (-2.9%). The UK Mch CPI rose 0.6% (+0.4%) yoy 3.4% (3%) and the Retail PI up 0.7% (+0.6%) yoy 4.4% (3.7%), this is becoming bad news and breached limit which requires the BoE to explain why, slow growth and high inflation the latter mostly a result of a weak currency. The Apr German ZEW economic sentiment survey jumped to 53 (44.5) and Euroland ZEW survey to 46 (37.9), these saw the € strengthen.

The Bank of Canada left rates unchanged (0.25%), saying they will raise rates soon. Very little US data with the focus on the Goldman Sachs quarterly report that did not disappoint. Sanity seems to have prevailed after the kneejerk reaction to Fri SEC news. What has become rather silly is the market moves generated by news that will take sometimes years to grind through the legal system. In afternoon trading pb and zn held their gains best.