Against the Grain

The markets remain captivated with the forthcoming Fed FOMC meeting penning markets in tight, volatile ranges. The London opening Mon found cu over US$ 200 higher than the Fri close of 8325, after a G20 finance ministers meeting came up with nothing and as this was digested during the week today we begin US$ 50 lower than that level.

The afternoon saw Q3 advanced GDP released at 2% (Q2 1.7%) and core personal consumption expenditure 0.8% (1%).

In Asia metals drifted as the US and regional equities slid as Oct Japanese manufacturing PMI 47.2 (49.5) settling into contraction and Sept industrial production fell 1.9% (-0.5% yoy 11.1% (15.1%) while Sept South Korean industrial production rose 3.9% yoy (Aug 16.9%), highlighting what we have been seeing for some time, that not all Asia is booming some are weighted down by strong currencies and terrific Chinese competition.

The Sept Japanese unemployment 5.0% (5.1%) and yoy vehicle production 11.4% (20.8%). Oct China business conditions survey was 65.0 (69.5).

In Europe Sept German retail sales slumped 2.3% (Aug -0.4%) where is the final demand in the strongest EU economy? The Oct Euroland unemployment was 10.1% (10.1%).

Over the Pond, Canadian Aug GDP 0.3% (Jul -0.1%). Then the start of the monthly Oct data flow, the Chicago PMI 60.6 (60.4) and final Uni of Michigan consumer sentiment 67.7% (67.9%)

We cannot remember a meeting that has dominated the world the financial markets for so long as the forthcoming Fed Reserve FOMC meeting Nov 2 / 3. It has driven the US$ lower and commodities higher for weeks. However as it draws nearer there is a growing sense of anxiety entering the psychic, there is a certainty that they will agree to quantitative easing but exactly how much? The US economic data has been slightly better overall of late and annoyingly for traders central bankers tend not to leak or pre release decisions like politicians. So this week we saw traders storm the barricades Mon after the G20 finance ministers meeting failed to show any leadership on the current economic problems. This quickly petered out as they realised there was a more important meeting on the horizon. We expect markets to remain extremely nervous with a upward bias into the Fed decision around 18:15 GMT Wed, Nov 3.

The DJI recovered some of its losses in late trading as US bond yields rose. In Asia the Boj as expected the metals marked time with cu gaining some ground with the ongoing threat of a strike at the Anglo operated Collahuasi cu mine (535 kt) in Chile.

The Oct Euroland business climate was 0.98 (0.77); consumer confidence 104.1 (103.2); industrial confidence 0 (-2) and service confidence 8 (8). The only US data is weekly jobless claims 434k (455k [452k]).

The G20 Finance Ministers meeting in Seoul came and went and the caution in the market Fri was thrown off today as soon as Asia opened. The status quo remains with hopes on the Fed FOMC meeting Nov 3 to cure everything. The finance ministers vowed to avoid weakening currencies to lift exports and left it to next month’s G20 head of states meeting to further pressure China to appreciate their currency. Like all recent meeting and deadlines everyone wants China to act but no one wants to risk their wrath when they tell them. The big news is in the changes at the IMF, which saw a 6% shift in IMF quotas to Asia from Europe with two seats on the Executive Board shifting to China (now the third most important member) and India. The US Treasury Secretary said after the G20 China will continue to strengthen their currency, we think it would be more believable if the Chinese minister had said it, did  the cat get his tongue?

The metals (and nearly all other commodities) bolted for higher ground after the meeting as the US$ weakened and investors rushed for hard assets. Another week and another physical metal ETF is floated, on Oct 22 JPMorgan lodged with the SEC a listing of a Physical Copper Trust sponsored by their Commodity ETF Services LLC, sales will begin as soon as possible after the registration document becomes effective (http://www.sec.gov/Archives/edgar/data/1503754/000119312510234452/ds1.htm). The next part of this saga is who flops over the line first. We heard a new term in the world of computer driven algorithmic trading systems, “vomit” – it refers to when a system takes on too many positions putting its internal risk / hedging system out of kilter causing it to unwind positions. Apparently these are the cause of very sharp and volatile counter directional actions. The LME stocks were routine as the US$ dominated activity. London morning trading saw the metals becalmed ahead of the US, to be honest nothing has changed since Fri. The initial US action was very muted with markets higher without enthusiasm, which sums it up. Nothing has really changed and we still have 7 trading days to the FOMC.

Speaking appearances by the US Fed Governors are certainly outweighing economic data these days (Bernanke and three others today). The Aug Euroland industrial new orders jumped 5.3% (-1.8%) yoy 24.4% (11.7%). In the US Spt existing home sales rose 10 % to 4.53 million units (7.3% at 4.1 million units). The Oct Dallas Fed manufacturing activity index rose to 2.6 (-17.7) and Spt Chicago Fed national activity index -0.58 (-0.49).

G20 finance ministers and central bankers meet in Korea over the next two days and there is really only one thing on the agenda currencies but there is little they can do till the Fed FOMC meets in 12 days time. However we suspect US Treasury Secretary will be sitting in the meeting with one quote on his mind. Back in the 70’s the then US Treasury Secretary John Connally (a Democrat in Nixon’s Republican Administration) said to a delegation of Europeans worried about exchange rate fluctuations that the US$ “is our currency but your problem”. That we suspect is the unstated US policy today.

The metals held in and rose in Asian trading led by pb and zn. Their recent outperformance capped by y/days Chinese smelter news (the Chinese research group Antaike said the shutdown taken in the context of China’s total production the impact is not big) is put down to catching up with other metals so the unwinding of short zn / pb, long al trades and a large bank borrowing. The ICSG reports the world cu market was 50 kt in deficit in Jul. Reports of position squaring in the currency market ahead of the G20 meeting saw the US$ strengthen and turn the metals lower however news could turn things around on a pin head! The weekly Shanghai stocks saw cu rise 2765 tonnes to 106,275; al fell 2922 tonnes to 485,716 and zn increase (a Hastings) 1066 tonnes to 283,472. The LME stocks were mixed and on the week cu fell 2 kt; al rose 7 kt; zn down 1 kt; pb increased 75 tonnes; ni up 1614 tonnes and sn rose 115 tonnes. During the LME Week the FT produced an article calling for regulators to ban industrial metal ETF’s, James Mackintosh “Caution on base metals ETFs urged”, (http://www.ft.com/cms/s/0/910b30e6-d72f-11df-9cd5-00144feabdc0.html).

The Germany economy rolls on Oct Ifo business climate rose to 107.6 (Spt 106.8), current reading 110.2 (109.7) and expectations 105.1 (103.9). Aug Italian retail sales were flat (Jul 0.1%) yoy 0.3% (1.7%). Over the Pond, Canadian Aug retail sales rose 0.4% (-0.2%) and Spt CPI rose 0.2% (-0.1% yoy 1.9% (1.7%). There you have it; little final demand or inflation.

The Fed FOMC in 13 days and damn it, central banks do not seem to leak like government.

The Fed Beige Book had a glimmer of hope seeing the economy expanding modestly however employment prospects remain poor. This gloom was largely unmentioned in reports as the Chinese data washed over it. China Q3 GDP rose 9.6% yoy (Q2 10.3%), Q3 GDP year to date rose 10.6% (11.1%). This was accompanied by Spt data, retail sales rose 18.8% yoy (18.4%) no surprise with holidays, we heard during LME Week that there are door to door car salesmen, including finance, insurance etc. Ytd retail sales rose 18.3% (18.2%); fixed urban asset investments ytd rose 24.5% yoy (Aug 24.8%); CPI 3.6% yoy (3.5%); PPI unchanged at 4.3% yoy and industrial production 13.3% yoy (13.9%) and ytd 16.3% yoy (16.6%). So the market gaze returns to the Fed FOMC meeting and the size of QE. To put it in perspective the GDP equates to quarter on quarter growth of 2.3%, the first qoq increase in growth since Q2 ’09.

The metals marked time in Asia as a steady US$ and the Chinese economy slowing slightly as expected keep prices trapped in a range, as are other markets such as oil and currencies. The € rose in early London and metals followed led by the very strong pb / zn group. Reuters reported the Shenzhen Zhongjin the third largest zn producer has been ordered to suspend output from a smelter after another environmental incident (zn / pb capacity 200 kt / 100 kt respectively). This comes at a time China reported record production of the metals. A fund researcher in the US estimates that since Aug 1 Americans have invested US$ 19 billion in overseas stock funds up from US$ 4 billion per month in the summer. It appears opportunities for consumers to buy and respite for producers, traders and stockists from margin calls are very short and sharp. The LME stocks are back into the recent routine, al leading declines. By mid day strong US corporate reporting cushioned the metals from a stronger US$. Towards the end a stronger US$ and equities off their highs finally dragged the metals back.

The Aug Japanese all industry activity index fell 0.4% (1.1%). The Oct French business confidence index rose to 102 (Spt 99) as the provisional French Oct manufacturing PMI was 55.2 (Spt 56.0) and services 55.3 (58.8); Germany manufacturing 56.6 (55.1) and services 56.6 (54.9) and Euroland manufacturing 54.1 (53.7), service 53.2 (54.1) and composite 53.4 (54.1). Germany revised ’10 GDP to 3.4% (1.4% in Apr) and then 1.8% in 2011. The Spt UK retail sales fell 0.2% against an expected rise (revised to -0.7% from 0.4%) yoy 0.5% (0.8%), final demand failing. The preliminary Euroland consumer confidence unchanged at -11. In the US the weekly jobless claims 452 k (revised to 475 k from 462 k), at 15:00 the Spt leading indicators rose 0.3% (0.1%) and the Oct Philadelphia Fed index up to 1 (-0.7). Spt Canadian leading indicators fell 0.1% (0.6%).

Fed FOMC in 14 days, after the London close we get the Fed Beige Book, the review of the state of the US economy compiled by the regional Fed offices for the committee members at the meeting.

On reflection the meetings that stood out for us during LME Week, where those with real Chinese domestic cu knowledge. They pointed out that different market players have their own agenda, miners want to hold as little inventory as possible by quarter end; and so on for smelters, traders and financial investors the area they feel is unrepresentative they are very cautious of analysts as they are driven by the LME price.

Furthermore they say analysts tend to stop at the cu cathode point, thinking once melted it is used. In ’09 the government ordered smelters to keep production going compensating them for doing so. Down the chain wholesalers are still receiving subsidies for purchasing white goods so many just filled warehouses with them which remain unsold and will increase whilst the subsidies are in place. Until shifted that stock remains a hidden / unrecorded overhand on demand.

As they said every level of business is out to optimise the opportunities and incentives the government offers in the system. (Our take is because the economy is tightly regulated, the system of incentive and edicts means it clunks more than purrs). They say policy has changed away from growth to emissions control, so the rolling power restrictions. The same provisional officials who pushed new projects are now tasked with cutting emissions and failure to do so will see them removed or shunted sideways.

Plants without the correct national and provisional permits are closed and / or targeted for power cuts. The general view is Chinese domestic cu sourcing of concentrate and scrap is increasing and  2011 economic growth will be below Western estimates.

The metals were steady in Asia, interestingly following the rate hike the Chinese Renminbi weakened overnight. The NYT reports that China has quietly expanded its block on rare earth ships to cover US and Europe on top of Japan (later denied by Chinese officials). The LME stocks saw third Wed inflow esp. al (into Detroit), ni and sn. Barclays reports commodity investments passed US$ 300 billion in Q3. The Brazilian miner Vale will bring on stream a new 400,000 tonne ore carrier called a Chinamax next year with 36 on order. They do not like being down for long, first the US$ then combined with equities drove metals that were reluctant at first the move up. One thing today the cu Select volume is only just over half the volume generated in y/day’s sell off. No one wanted to be short.

Little data today ahead of tomorrow’s deluge of Chinese Q3 GDP and Spt data. The Aug Australian Westpac leading index dipped 0.1% (Jul 0.3%) and Japan leading index 99.5 (99.1). The Spt German PPI rose 0.3% (0%) and yoy 3.9% (3.2%). Overnight the weekly US ABC consumer sentiment index was -46 from -45, then weekly MBA mortgage applications fell 10.5% as yields rose (+14.6%).

Markets continue to languish in limbo ahead of well telegraphed developments. Here for your diary is what is in store; G20 Finance Ministers meet in Korea Oct 21-23; US midterm elections Nov2; US Fed FOMC meeting Nov 2-3; then the G20 Seoul summit Nov 11-12. What are the chances of a new co ordinate economic direction coming out of all this – in the present atmosphere slim but maybe they want to spring a surprise (in politics these day’s everything leaks especially when multiplied by 20). Today was a mega talk fest, continuing after the London close, the ECB President spoke on the economy at 13:30; the Governor of the BoE speaking on the economy at 19:30 and the Fed Chairman speaking on the economy at 21:00 as well as, five other Fed officials having spoken on the economy and various other things. Again doubt we will get a cohesive message. Stop press, note below the PBoC rate rise. Finally, today is the 23^rd anniversary of the storm and crash of ’87, now that was an event!

In Asia metals were stable to firmer on little news, although US equities slipped after Apple results failed to meet expectations. On the cu front spot TC / RC have collapsed from US$ 5 a fortnight ago to as much as US$ 80 trapping traders in uncomfortable positions, annual negotiations are underway. Firming in early London trading the metals took heart from the German data and stronger € before suddenly taking fright around 10:30, the reason became clear as the PBoC raised rates for the first time since 2007, with one year lending rates up to 5.56% (5.31%). With the US$ locked in a range the metals are nervous as they regurgitate old news. The LME stocks saw an unusual rise in al but it is the day after third Wed so let’s see if we get more in. Interesting article on Alcoa in Time Magazine Europe edition Oct 25, “Recasting Alcoa” (www.time.com). It seems pb / zn cannot bear to be parted with prices trading around each other. Around 12:00 as the € tested 1.390 metals selloff gathered pace as cu tested 8350. After the US opened the US$ strengthened and things got worse for commodities.

The Oct German ZEW economic expectations sentiment survey fell as expected to -7.2 (Spt -4.3) with the current reading jumping to 72.6 (59.9). A friend of ours in the bond market was in Germany last weekend and reported back he “should get out more often” as the contrasted the optimism there with the gloom and doom that pervades the atmosphere in UK / US. The Euroland ZEW sentiment survey was 1.8 better than expected (Spt 4.4). The Oct UK CBI business optimism dipped 2 (Spt 10) and total orders -28 (-17). The Bank of Canada left rates unchanged at 1%. In the US Spt housing starts rose 0.3% to 610 k units and better than expected (Aug 10.5% at 598 k units) and building permits fell 5.6% at 539 k units worse than anticipated (1.8% at 571 k units).

The wait for the Fed goes on, however there seems to be a slight decline in the confidence of what effect the action will have, aka profit taking, in line with buying the rumour and selling the fact. On Fri the US delayed a report expected this Fri into whether China is a currency manipulator or not after the Renminbi rose 2.5% recently and there is a G20 summit in Korea in Nov. To placate those who wanted the report, ahead of the US midterm elections Nov 2, the US Administration has signalled an investigation into Chinese subsidies to its clean energy industries.

In Asia the metals retreated from Fri close which itself had seen the bullish momentum falter. However traders are extremely nervous and the slightest move in the US$ could, as we have seen, quickly have buyers stampeding in and when they move all is swept before them. These changes usually come when US data is released. In Australia BHPBilliton and Rio Tinto have finally admitted the world regulatory authorities will not allow a joint venture of their Western Australian iron ore businesses go ahead on competition worries. The LME stock moves were insignificant but added support as they were all down. The headline IP data took the edge off the US$ with the predictable metal response. Game over. Citigroup results helped equities.

On the data front Spt Australian service index rose to 54.8 (51.9) and new vehicle sales rose 0.9% (0.2%). The Aug Japanese tertiary industry index dipped 0.2% (1.6%). In the UK Rightmove said its Oct house price index rose 3.1% (Spt -1.1% yoy 2.9% (2.6%). The in the US Oct NAHB housing market index rose to 16 (13), Spt industrial production fell 0.2% (0.2%) and capacity utilisation 74.7% (74.8%).