Against the Grain

The world is at “currency war”, well tussles, as this comment came from the Brazilian Finance Minister, it highlights the overall change in the world economic order. The minister accused nations of seeking to cheapen their exchange rates to boost exports, what is known as a “beggar thy neighbour” policy, the broader concept is to transfer your economic ills onto someone else. Reports say that US$ 4 trillion trade on the currency markets each day making it the premier financial market by volume and trades freely almost 24 / 7. The froth of this ocean is the effect on commodity prices, mostly prices in US$, they swing with the greenback. Perhaps no more so in the last two years than recently. We continue to hear very little encouraging from the physical metals by way of demand. However investors are convinced the US Fed will resume quantitative easing (QE2) and we expect the US$ will weaken till that action is taken. Looking back at the European PIIGS crisis in May the € did not recover till the market was convinced the EU and ECB had given them a “copper bottom” indication that they would not let a country fail.

In Asia metals gained in light volume as the Spt China HSBC SME manufacturing PMI rose to 52.9 (Aug 51.9) with the official PMI issued Oct 1. In Japan the Q3 Tankan large manufacturing index rose to 8 (Q2 1) with the outlook slipping to -1 (3), the non manufacturing index rose to 2 (-5) as its outlook improved to -2 (-4), worryingly for the government the yen strengthened and is rising to the level where the intervened last week. London prices tracked higher with cu breaking through US$ 8000 as the US$ / € bounced above 1.360. An Indian court y/day ordered Sterlite close its Tuticorin smelter (400 ktpa) on environmental grounds. Japan’s Sumitomo Corp has acquired a 20% stake in a new al smelter (initial capacity 120 ktpa) to be completed by the year end in Sarawak, Malaysia using power from a near completed hydro electricity plant. After popping over US$ 8000 and 1.36 respectively cu moved in sync with US$ almost tick for tick ahead of the US open. In European time Bloomberg reports the Chinese government is to speed up the introduction of a trial property tax in some cities. We heard they are also banning the purchase of third properties but how they do that we are not sure. With minor US data the US$ staying bid and so did the metals, the beat goes on.

In Australia Aug new home sales fell 2.6% (Jul -7.1%). After the poor Aug French consumer sales y/day, Spt consumer confidence improved to -35 (-39). Spt Italian business confidence was 98.4 (99.3). The Spt Euroland business climate 0.77 (0.72), consumer confidence unchanged -11, economic confidence103.2 (102.3), industrial confidence -2 (-3) and service confidence 8 (7). There is no US data of note, overnight the weekly ABC consumer sentiment index was -45 from previous -46 and the weekly MBA mortgage applications fell 0.8% (-1.4%).

The markets seem to have traded themselves to a standstill ahead of a view at September’s economic performance which begins to appear at the end of the week. With no lead from the US, Asia was again becalmed, it seems the US$ holds the key to all markets. Its weakening over the past month has been the catalyst for a broad commodity rally as financial investors after pushing bond prices to the envelope edge look to diversify portfolios. This has been supported by an equity rally in Spt on anticipation of a US Fed QE2 possibility. To sustain all this action does the market need a strong US recovery or do they secretly prefer a continued struggle?

The metal charge has eased but we doubt dissipated yet, it all depends on the US$. From China we are hearing in various provinces, counties are cutting electricity to industries unilaterally for two months (residential supplies are off for two thirds of the day). Apparently this as a result of a pledge by the PM Wen Jiabao during the Copenhagen Climate Conference to reduce the county’s energy dependence by 20%. A Reuters article says in Anping county, Hebei province traffic lights have been turned off and power to hospitals, schools and residents disrupted for almost 10 days. The Baltic shipping index certainly reflects the drop in import demand. The LME stocks saw cu and al fall again while ni rose as Rott seems to get Norilsk summer shipments. Things then settled in to wait for the US. Metals are nearing an “any news” rally vehicle or so correlated to the US$ they have lost their own identity for now. At 14:00 a better Case-Shiller housing data sent the US$ down breaking €1.35 and the move boosted other markets before things slipped back. Then at 15:00 the data released was worse than expected and (you guessed it) the US$ again tested € 1.35 and the metals rallied back again. This time gold broke conclusively through US$ 1300. Towards the close there was talk of an earthquake  in Mexico though it seems the real financial shaker is the US$.

On the data front the Oct German GfK consumer confidence survey rose to 4.9 (Spt 4.3) while provisional Spt CPI declined 0.2% (0.1%) yoy 1.3% (1.0%). In France Aug consumer spending fell 1.6% (Jul -1.4%) yoy 1.2% (-1.9%). The Spt Italian consumer confidence rose to 107.2 (104.1). The final UK Q2 GDP was 1.2% unchanged as the CBI reported Spt sales jumped to 49 (35).  In the US the Jul Case-Shiller home price index was 148.91(147.97) with the 20 city index -0.13% (0.24%) yoy 3.18% (4.21%). At 15:00 the Spt Conference Board consumer confidence 48.5 (53.2) and Spt Richmond Fed manufacturing index minus 2 (11), both poor.

China emerged back into the world economy accepting the base metals levels they found waiting for them.

The LME stocks saw falls in all metals except ni. The IAI Aug western world unwrought aluminum stocks rose to 1.325 million tonnes compared with a revised (Jul 1.269 mt and Aug ’09 at 1.233 mt). The activity levels in London time was light as markets waited for the US to lead. Against the recent trend the US gave no lead either as trading petered out.

The Aug Chinese leading index slipped to 101.9 (Jul 102.1) as industrial profits rose 55% ytd yoy ( Jul 84.6%). In the US some minor Fed manufacturing data ahead of the deluge in Spt data ahead. The Aug Chicago Fed national activity index -0.53 (Jul -0.11) and Spt Dallas Fed manufacturing activity -17.7 (-13.5).

Since Jul the resilience of the base metals has been outstanding against the back drop of a general slowing of the global economy, no threat of rampant inflation and as yet no discernible pick up in physical demand. For instance we hear from China there is no shortages of copper. Other commodities have fallen by the wayside most notably oil. While varying shortages of agricultural products are against a background of good stocks and their advantage of being seasonal annual production in the lap of the gods. Therefore we are forced to look at the financial players for a reason for the metal outperformance. The run in the metals is very similar to the action we have seen in some precious metals before the launch of physical ETF product. At the moment we know of two entities looking at the concept however the technicalities seem to have been far more complicated than other products in precious metals and oil. Interestingly with a mature oil ETF the underlying price is trading true to fundamentals.

Another China free Asian session. The LME stocks dominated by an ongoing fall in al and rising nickel, on the week cu fell 4 kt; al off 24 kt; zn down 500 tonnes ; pb dipped 900 tonnes; ni rose 1182 tonnes and sn up 40 tonnes. The metals lapped up the weaker US$ powering themselves higher while gold, oil and equities failed to keep up. The durable goods order figure put a spark under the US equities that saw the DJI jump 150 points on the open just adding momentum to an already intoxicated metals. After a blistering second half of the week with China away all eyes swing East for Mon opening.

The Spt German Ifo business climate index was 106.8 (Aug 106.7) with the growth at the current time 109.7 (108.2) and caution further out, expectations 103.9 (105.2). Jul Italian retail sales were flat (Jne 0.3%) yoy up 1.7% (0.7%). In the US Aug durable goods fell 1.4% (Jul 0.4%) ex transportation rose 2% (-3.7%). Finally at 15:00 Aug new home sales flat at 288 k against an expected rise (Jul revised to -7.7% from -12.4% at 288 k).

China might be on holiday but their Premier Wen Jiabao has been busy in NY trying to sooth US legislators demands for sanctions to be taken against his country for currency manipulation. Two lines of defence are being taken, firstly pointing out that when the US picked on Japan for the same reason in the 80’s and they appreciated the yen it did nothing to help the US or its trade balance. Secondly, he pointed out a 20% appreciation in the renminbi (analysts see it undervalued by that amount) would cause serve job losses and trigger social instability and business collapse. This highlights how marginal a lot of its export orientated manufacturing business is although closing competition in other countries. At a meeting he pointed out that an iPod that sells at US$ 299 in the US saw China in the manufacturing link receive US$ 6 per unit. Meanwhile China and Japan are in a diplomatic face off over the arrest of a Chinese trawler captain, the latest move saw China halt shipments of rare earths to Japan.

Metals held their gains and more in subdued Asian trading as the € moved back above 1.34, China and Japan were closed. The LME stocks saw al fall again and it appears the metal has avoided a mind month inflow. With the new warehouse ownership structure remains to be seen how the warehouse system changes. Despite a stronger US$ and weaker equities al led the metals higher with the best volume in a low turnover session. As soon as the US opened the metals followed the mood in the equities looking for a break higher. Metals led by al continue to outperform as cu breached 7900.

The advanced Spt European PMI data was disappointing with all lower than Aug except French manufacturing. The Spt French business confidence was unchanged at 98. The Irish Q2 GDP fell 1.2% (Q1 +2.2%). The US weekly jobless claims 465 k (453 k). At 15:00 Aug existing home sales increased 7.6% to 4.13 million units (Jul -27.2% at 3.83 mill units) and leading indicators rose 0.3% (0.1%).

The FOMC, worried about the slowing recovery in the US economy and a threat of deflation decided to leave official rates unchanged (0.25%) and reiterated their intention to provide whatever assistance is required to support an economic recovery. The market assumed this meant extending the support to further quantitative easing (QE2) – that is one. Why will QE2 be needed? Because the economy is slipping with a threat of another recession (generally perceived to be a 25% chance), that is the plus one. However because the financial markets see this as keeping interest rates low and adding more cash into the system for them to play with they ignore the growth outlook. It does not concern them, they know the Fed will buy their bonds off them at high prices and creating a put option under any risks they take. Hence one plus one equals one (risk on).

The Chinese holiday deprived the metals of arbitrage oxygen resulting in cu trading less than 400 lots on Select in Asia. Prices moved higher in line with a weaker US$. It is looks increasingly likely we are entering another period similar to H1 ’08, with the booster rocket of extremely low interest rates. Investors are rushing to be long commodities despite a slowing physical consumption outlook (the exception so far being oil). From what we hear this move is likely to snowball, hedge funds and technicals are long, institutions are moving in and if prices go much further producer hedges will be squeezed out, in these conditions caution is the watch word because as we saw in ’08 if something makes investors change direction then “mind the gap”. The LME stocks saw a rise in cu, zn and ni but interestingly for third Wed cash date no al. We hear the Bahrain al conference was dominated by who will be first with a physical ETF launch and the new LME warehouse matrix rather than the market itself. The metals seemed caught in the headlights (the € appreciated 1.5% and cu less than 0.5%) ahead of the US open however when they came in the way was up as cu rose over 1% in heavy volume as the € steadied. The US equities lagged the general euphoria and the key to the next leg up (they cannot make up their mind), as the VIX rises. On the day the € and metals outperformed while equities, oil and gold lagged.

A light flow of data, in Europe the Jul Euroland industrial new orders fell 2.4% (Jne 2.4%) and Spt preliminary consumer confidence was steady at -11. Overnight the weekly ABC consumer sentiment index slipped to -46 from -43. The weekly MBA mortgage applications fell 1.4% (-8.9%). Finally Jul house price index fell 5% (-0.3%). In Canada Aug leading indicators rose 0.5% (0.4%), Jul retail sales disappointed down 0.1% (flat) ex autos -0.4% (-0.6%) with Jne revised lower.

Despite a raging US equity market Mon, US bond yields declined as well. The strength in equities appears to have more to do with the their relationship with the cost of money and corporate bonds than the general economic outlook. Perhaps explaining why the base metal correlation with US equities fractured. However we doubt they are completely broken. Throughout the day the spectre of the Fed FOMC meeting hung over things.

After ignoring the US equity markets metal prices continued to ebb lower in Asian time as China winds down ahead of a holiday season from Wed that  includes Oct 1 National Day – so expect a jump in Spt / Oct retail, house and car sales, as the country’s economic strategy changes to domestic demand. The market was unmoved by confirmation Aug Chinese imports of refined cu rose 18.9% to 267 kt (Jul 225 kt) yoy down 10.2%. The metals steadied in London then moved higher after LME stocks showed further good general declines and the € kicked above US$ 1.31. At the Bahrain al conference the CEO of Qatalum predicted the closure of Chinese high cost production in the southeast will be replaced by low cost hydro powered capacity in the northwest leaving the country’s output still on a growth path. Bloomberg says in China a tailing dam at a trial sn mine of Zijin Mining in Guangdong has collapsed after torrential rains. The ICSG estimated the cu in H1 this year was in deficit by 281 kt (H1 ’09 125 kt deficit). The refined cu output was 9.421 million tonnes and consumption 9.702 million tonnes. As the morning session wore on metals slid back to unchanged ahead of US open. The housing data below saw cu quickly jump US$ 30 then given back before the equities opened. With the Fed hanging over the proceedings the metals for a second day showed more weakness than the currencies or equities.

The Jul Japanese leading index was 100 (Jne 98.2) and coincident 103 (101.8). Across the Pond, Aug Canada CPI fell 0.1% (+0.5%) yoy 1.7% (1.8%) then US Aug housing starts jumped 10.5% to 598 k units (Jul revised to 0.4% from 1.7% at 541 k) and building permits rose 1.7% to 569 k units (559 k).

The base metals opened the week as they left off last week far and away the strongest financial asset sector, cu began up US$ 80 / tonne, pb US$ 27 / tonne while oil rose US$ 0.10 / bbl with a hurricane building in the Atlantic, gold up US$ 3 / oz as China and Japan are in a growing diplomatic scrap and equities are steady. Plainly investors believe producers will not be able to supply global demand going forward. By the close metals had given back the gains, gold had held, oil rallied (hurricane approaching US) and equities rocketed.  In The Times (of London) over the weekend a report said that since the end of Jul the cost of hiring a Very Large Crude Carrier (VLCC) has fall 88% from US$ 75,000 / day to US$ 8500. The cost of a Capesize bulk materials carrier fell from US$ 60,000 / day to US$ 12,000 and recovered to US$ 30,000. The report goes on to say owners are slow steaming vessels and laying them up to ease over supply. The weekend election in Sweden threw up another minority coalition.

The metals advance in Asia was seen as a reaction to a weaker US$ and expectation the Fed will leave rates unchanged with maybe the chance of more quantitative easing. Third Wed trading  in London and early support from the € strengthening above 1.31. The LME stocks were routine with a focus on Wed data which will reflect the cash settlement. On the cancelled warrant front 98 kt of al was cancelled in Detroit, if under one warehouse it will take 65 days to move. The action boosted al above 2220 in good volume. The IAI shows metal is still pouring out of the smelters Aug total production was 2.061 million tonnes (Jul 2.056 million tonnes and Jul ’09 1.955 million tonnes). With the al conference in Dubai talk is rising again of an imminent physical metal ETC product, we remain cautious as warehouse charges remain the stumbling block. However, like the precious metals it is a great bullish support. After that the market levelled off as it watch the US$ this strengthened into the US open. The US equities opened higher steadying the metals ship.

The Spt UK Rightmove house price index fell 1.1% (Aug -1.7%) yoy up 2.6% (4.3%). In the US the Spt NAHB housing market index failed to bounce unchanged at 13. After the close on Tues the US Fed Reserve ends a one day meeting with a press announcement. A typical day US$ strengthens leading the metals down then the DJI goes up and they follow it ( have a feeling DJI will go up today on expectations the Fed will increase quantitative easing and then again tomorrow when they do not). The independent National Bureau of Economic Research today said the US recession ended in Jne ’09 and was the longest since WW 2, we believe that for some sectors the downturn has not ended yet.

Overnight some non mainstream economic data highlights the massive shift in the global economy. The US Census Bureau said the number of people in poverty rose by nearly 4 million between ’08 / ’09 to 43.6 million or 1 in 7 of the population as Aug housing defaults reached another record, up 25% yoy to 95 k units or 1 in 381 houses. Reports from China hint at the housing market breaking higher, the leading property developer reported Aug sales revenue rose 149% yoy. Apparently Spt is the start of the traditional Golden Spt – Silver October house sales period. The volume and price increases are tied to moderate rise in supply and pent up demand. To put this in metal context the Spt Aurubis Copper Mail gives a breakdown of ’09 cu demand in millions of tonnes, Nth America 1.7 mt; Sth America 0.8 mt; Europe 3.1 mt; Africa 0.3 mt; Russia 0.4 mt; Pacific 0.2 mt and Asia 10.8 mt (6.5 mt China or 35% global demand). No wonder US and Europeans are rushing the “safe haven” of gold. Interestingly oil has been the exception, a product Chinese demand doesn’t dominate, yet. In the present atmosphere we expect a phase to come back into use that has never really gone away, ”super cycle”.

The metals have plodded slowly higher all week following Chinese data last Sat, driven by a weaker US$ and stronger US equities. Mixed weekly Shanghai stocks cu up 200 tonnes at 98,225; al rose 4400 tonnes to 494,782 and zn off 1646 tonnes at 236,113. The LME stocks all fell except sn, on the week cu down 7 kt; al off 12 kt (third Wed next week so a jump could come); zn down 1150 tonnes; pb rose 750 tonnes; ni up 252 tonnes; sn off 345 tonnes. Metals ran quickly higher in London with cu breaking 7800 by 09:30. The ILZSG reports in the year to Jul zn is in a 151 kt surplus and pb 51 kt. After that it was a straight currency play ahead of the US equities. With US$ gaining a little strength and equity steady at 16:00 the metals were running on the spot (cu 7720).

On the whole the data this week (including the Chinese numbers)  have been neutral confirming a moderate global economic recovery, high point (Asia) and low (G7). The Aug German PPI was flat (Jul 0.5%) yoy 3.2% (3.7%). The Jul Euroland construction output fell 3.1% (Jne 1.8%) yoy -7.5% (1.9%) The US Aug CPI rose 0.3% (0.3%) yoy 1.1% (1.2%) ex food and energy flat (0.1%) yoy unchanged at 0.9%. Finally, the provisional Spt Uni of Michigan consumer confidence fell to 66.6 against an expected gain(Aug 68.9), current 78.4 (78.3) and expectations (outlook for 6 months) 59.1 (62.9).

On the week a sagging US$ bounced metals higher led by a charge in sn 1750, cu 225, al 70, zn 30, pb 40, ni 825, gold up US$ 28 / oz, oil down US$ 2.3 / bbl, DJI at time of writing up 159, US 10 year bond yields down 0.06%; US$ / € off 3.2 cents, Shanghai equities off 65 points and VIX unchanged.