Against the Grain

Traders ditching the US$ (back at € 1.29) as the IMF declared its intention to raise US$ 500 billion to help indebted nations. The markets see this as a significant step towards solving the present global financial crisis, we doubt it and think the markets are grasping at straws and pinning too much hope on the abilities of post war institutions. However, the market is right so do not stand in its way as the news gave metals a strong start in Asian trading continuing the strong Jan gains.

It seems the metals will be driven by bond tenders, central bank policy and supra national money raising. The LME stocks again held little of significance, for a change al the smallest movement. Apologies our ni stock total has been out this week now back on track. Showing how hard it is to get global cu production at full strength as mines return to work it is reported that since Jan 2 the Philippines cu smelter PASAR 78% owned by Glencore has been closed after a fire (215 ktpa).  Good French and Spanish short dated bond tenders helped the € to hold its gains, we said last week metal traders will need to take a crash course in credit markets. The dip in the US$ has seen US 10 year bond yields back up close to 2%.

The data saw Dec Australian unemployment unchanged at 5.2%, with total jobs falling 29.3 k as full time jobs increased and part time declined seeing the participation rate at 65.2% (Nov 65.5%). Then to the US with weekly jobless claims slumped to 352 k from previous 402 k; Dec CPI was flat (Nov 0%) yoy 3% (3.4%) while ex food and energy rose 0.1% (0.2%) yoy unchanged at 2.2%; Dec housing starts were 657 k at down 4.1% (Nov 9.3% at 685 k) and building permits off 0.1% to 679 k (5.7% at 681 k) and finally the Philadelphia Fed index disappointed 7.3 (6.8).

The markets lack a real bone to chew on at present as most things are old news, China slowing; European fiscal woes; US election the list goes on. While recent economic data has been supportive there will need to be a quick development of a growth trend to overcome these issues. This morning it was reported the World Bank has warned developing nations to prepare contingency plans for another economic shock as bad or worse than 2008 / 09, it sees the Eurozone contracting by 0.3% in 2012 and revised their forecast of growth this year in the high income and developing nations to 1.4% and 5.4% respectively from the Jne ’10 estimates of 2.7% and 6.2%. Meanwhile its sister institution the International Monetary Fund is said to be on the verge of raising US$ 500 billion to boost its ability to help hard pressed nations especially in Europe. The approaching Year of the Dragon will side line China for a week as the World Economic Forum takes place at Davos, Switzerland. The German Chancellor Angela Merkel giving the opening address and expectations are for an upbeat but inconclusive gathering, though the hot air generated should keep a few balloons in the air a bit longer. See attach The Times edition Jan 17 article by Jason Manolopoulos “Greece: just like the old broken version”, not a pretty picture.

In the metals with the unresolved problems above are a dark cloud over economic growth and with public and private metal stocks piling up one gets the feeling the longs are getting to the end of their Jan “power play” – new fund position taking (like equities looking for returns) and reallocation of index weightings. From what we can gather end user buying has been quite poor. Someone pointed out to us a recent fall in the Baltic Dry Freight Index so we were staggered to see on a bigger picture since Jne ’08 it has tumbled 91%, no wonder physical traders say business is subdued. The LME stocks were more subdued today with zn the leader up 4 kt with material into Malaysia. A weakening US$ added support to the metals. The Q4 Rio Tinto results show through their part ownership but not operator, what a torrid times the world’s two largest cu mines (Escondida and Grasberg) had last year. The company’s Q4 cu output fell 26% yoy with full year output down 23% at 519 kt, a long running strikes dragged on. Better US data saw the US$ fall and commodities and equities advance.

On the data front, Dec house prices in China posted their worst performance in a year with only 2 cities out of 70 posting gains, 52 out of 70 cities posted a secondly monthly fall. The Peoples Bank of China has allowed the top five banks to increase Q1 lending by 5% but restricted loans to local governments. Dec foreign direct investment declined 12.73% (Nov -9.8%) to US$ 12.2 billion while full year FDI rose 9.72% to a new record. The UK Dec unemployment rose to 8.4% (Nov 8.3%). In the US Dec PPI fell 0.1% (Nov 0.3%) yoy 4.8% (5.7%) while ex food and energy rose 0.3% (0.1%) yoy 3% (2.9%). A major impact of US inflation and giving it a competitive edge is the collapse in energy costs as an abundant new supply of shale natural gas has driven electricity prices are down more than 50% since 2008 and 10% in Q4 ’11 at a time when electricity prices are rising in energy importing competitors. Dec industrial production was up 0.4% (Nov -0.3%) with capacity utilisation at 78.1% (77.8%). The Jan US NAHB housing market index was improved to 25 (Dec 21).

On the day Bloomberg reported China’s urban population has overtaken its rural populous the Q4 GDP came in at a better than expected 8.9% yoy (Q3 9.1%), slowing but not shuddering to a halt but still getting analysts excited about monetary easing which boosted markets. In other data Dec retail sales rose to 18.1% (Nov 17.3%) and industrial production 12.8% (12.4%), that does not look to us as if easing is needed. In Europe, S&P downgraded the European Financial Stability Facility rating a notch from AAA but the markets did not seem to mind, reminders that Europe’s finances are now in tatters is no longer news. There will have to be worse news now to scare investors.

The Chinese data boosted equities, metals and drove down the US$. The LME stocks dominated by the al jumping over 5 million tonnes with material locked up into Vlissingen and zn rising 17 k, again unlikely to see a factory gate for many months. The rising stocks did not dent the demand for metals as the prices out in good gains, no surprise in the present market environment. The better Chinese, European and US economic data added boosting support. In China refined cu output in 2011 rose 14.2% to 5.179 million tonnes.

On the data front UK Dec CPI rose 0.4% (Nov 0.2%) as yoy it was 4.2% (4.8%) and Retail PI was up 0.4% (0.2%) again yoy down to 4.8% (5.2%). More big falls are expected in Jan as the tax rising in Jan ’11 fall out of the equation. The Dec Euroland CPI was up 0.3% (0.1%) yoy 2.7% (3%). The Jan German ZEW economic sentiment index improved to -21.6 (Dec -53.8) and Euroland 32.5 (-54.1) again is the worst over or investors have decided it could be. Similar in the US, the Jan NY Fed Empire State manufacturing index improved to 13.48 (8.19).

It came Fri after the markets closed and to the surprise of nobody, S&P disrobed most Eurozone countries of their existing credit ratings (however, we believe worse is to come), the exception was of course Germany while France and Austria lost their high flying AAA rating.

While Asian equities suffered on the opening Mon the metals again showed great resolve eking out small gains, as the ratings moved seemed to be priced into the €. The metals strength we expect comes from Chinese activity ahead of the New Year; fund reallocation and general investor mood to be long physical commodities. The US CFTC showed investors increased their long positions by 7.2% to the biggest position since Nov despite a commodity indices posting a general loss over last week as grains led the declines.  LME stocks saw a good fall in al and some cu. The afternoon lacked direction with the US on holiday for Martin Luther King Day. It is almost as if Europe is awaiting the US verdict on the credit downgrades. The metals led by cu were the best performers on the day, as the French sold short dated Treasury bills into the market.

The Nov Japanese machine orders rose 12.5% yoy (Oct 1.5%) and markets looked ahead to Chinese Q 4 GDP and other data ahead of the Chinese New Year next Mon, Jan 23. Skeleton details below with the statistician away.

The markets are quiet at the moment which makes you wonder if we are in the eye of a storm or generally calmer waters. The currency action shows signs of being in the former while metals (reference to y/days comments) more the latter. In Q4 Chinese foreign reserves fell, for the first quarter since 1998, to US$ 3.181 trillion (Q3 US$ 3.201 trillion) while Reuters reports global auto sales grew last year at their slowest pace in 10 years.

The metals held y/days big gains but then lost traction as the € lost ground. The LME stocks showed little change. Reuters reports that from their enquiries most large Chinese al producers have no plans to cut production in Q1. In the pm session the stronger US$ held back the metals but did not melt them down.

A quiet day on the data front, in the UK Dec input PPI fell 0.6% (Nov 0.3%) a big fall yoy 8.7% (13.6%) and PPI output dipped 0.2% (0.2%) yoy 4.8% (5.4%). In the US the Nov trade deficit disappointed moving out 10% to US$ 48.8 billion (Oct US$ 43.5 bill) as the preliminary Jan Uni of Michigan consumer confidence showed customers are in fine fettle 74.0 (Dec 69.9).