Against the Grain

Do you ever get the feeling the markets are swimming against the tide? Just when they begin to get some momentum another thing crops up to make the going tougher. This morning it was the S&P decision to downgrade Spanish debt rating to BBB+ from A and tack on a negative outlook, on the day the country’s Q1 unemployment level reached 24.4%. On the political front May 6 is a big date for Europe, first Greece goes to the polls, the two leading parties once rivals are now in a pro bailout coalition. In the past they have accounted for 80% of the votes between them now they have sunk to 45% of the vote as new anti bailout parties are on the rise. Also, the French Presidential election which could see a Socialist president who wants to renegotiate the EU austerity plan the Irish have a referendum on May 31. Then May 7 Vladimir resumes the reigns of presidential power in Russia. After a quiet Asia this put the markets on the defensive in Europe. Most traders looked for the tide to turn with the US Q1 advanced GDP however it came in at 2.2% below expectations of 2.7% (Q4 3%). A saving grace was Q1consumer spending that rose 2.9% (Q4 2.1%), this is 70% of US final consumption. If you want a great summary of why investors are battling such a strong tide read Mohamed El-Erian, the CEO of PIMCO, article “The Strategic Vacuum” on the Foreign Policy magazine website (www.foreignpolicy.com).

The metals got to Europe a touch lower on a stronger US$ and recovered as it slipped. The LME stocks saw some good declines led by al globally; cu out of US locations and pb from Malaysia. The bank Standard Chartered speculated that Chinese cu stocks in bonded warehouses are now around the million tonne area. The US opened with Q1 GDP above which while disappointing from a growth perspective weakened the US$ that good from a short term metal trading point of view. So the bulls continued to swim on against the tide.

A gush of Mch numbers from Japan with the yoy reflecting the effect of the Mch 12, 2011 tsunami, unemployment was unchanged at 4.5%; CPI 0.5% yoy (Feb 0.3%); retail trade fell 1.2% (2%) yoy up 10.3% (3.5%); industrial production rose 1% (-1.6%) yoy up 13.9% (1.5%); vehicle production rose 143.7% yoy (19.7%) and housing starts yoy 5.0% (7.5%). The Apr UK GfK consumer confidence survey was unchanged at -31with the May German GfK consumer confidence was 5.6 (Apr 5.8). French Mch consumer spending fell 2.9% (Feb rose 2.9%) yoy down 2% (0.2%). The final Apr Uni of Michigan consumer sentiment number was 76.4 (Mch 76.2).

The Federal Reserve left monetary policy unchanged after its FOMC meeting as they believe the economy is improving, but not enough to warrant a change in its stimulative policy stance. However economists at the Fed changed their estimate of the US unemployment rate by the end of the year to between 7.8% and 8% by the end of the year, currently 8.2%. Overall economic growth, they target to be between 2.4% and 2.9% from 1.7% in 2011. So while not a eureka moment for the bulls it did strengthen their case and the markets reacted accordingly.

The reaction in the metals was a marginally better performance in Asian trading. In China the authorities are looking to close 700,000 tonnes of cu smelting capacity in 2012 in an effort to reduce pollution in industrial areas. In the past this old capacity is quickly replaced (if not already) by more efficient modern capacity. A Reuters commentary pointed out today that traders maybe should not get too hung up on slowing cu demand in China but focus on the lack of available units elsewhere as warehousing tricks lock away supply. The INSG has cut its 2012 ni surplus estimate to 50 kt from its previous guesstimate of 70,000 tonnes. LME stocks fell across the board led by al while cancellations were in Chicago and concerned 9 kt of zn. Better US equities and a weaker US$ overrode the negative jobless claims.

The news gets no better in Europe the Apr Euroland business climate indicator declined to -0.52 (Mch -0.28); consumer confidence -19.9 (-19.8); economic confidence slid 92.8 (94.4); industrial confidence slipped to -9 (-7.2) and service confidence shaken -2.4 (-0.3). Apr German CPI …% (0.3%) yoy …% (2.1%). In the US weekly jobless claims disappointed again 388 k (389 k); Mch pending home sales rose 4.1 % (Feb 0.5%) yoy 10.8% (14.9%) with the Mch Chicago Fed national activity index at -0.29 (Feb -0.9).

As we have said before to attempt to get a glimpse into China one needs to read a cross section of articles and newspaper especially the English Chinese press. While catching up on reading we came across the attached The Times article by Bill Emmott ex editor of The Economist and author “Rivals: How the Power Struggle between China, India and Japan will Shape our Next Decade”, he chides us China sceptics. Another was the FT article Apr 24 by Daniel Bell “Real meaning of rot at the top of China” where he discusses the Confucian value of “performance legitimacy” and the Party move from communism to nationalism but more importantly the meritocracy leaderships commitment to confusion values and hence moral legitimacy (www.ft.com) . That is why we wonder what the average person thinks of leaders in a meritocracy amassing fortunes.

The US Fed FOMC meeting end today with expectations that rates will remain unchanged (0.25%) and hopes for QE3, the latter would be the catalyst for a solid rally so we expect traders to position themselves accordingly ahead of the 18:15 GMT release. The metals along with other financial markets were very steady in Asian trading. LME stocks saw al and ni rise the most. Copper continues to show cancellations another 9k today, total cancelled now total 42%. In lead the cancelled warrants are growing daily with another 10k today - is that a prercursor of the next back game - Pb nearby shorts had better be aware

There are concerns that Chile is not moving ahead with expanding generating capacity with the need expected to rise 47% in the next eight years. The country is already experiencing power cuts and unless the situation is resolved it could slow future cu mining developments. Better corporate earnings offset the poor US numbers as markets waited for the Fed. A US 5 year Treasury note auction went off at 0.887%.

The news is not good from the UK as advanced Q1 GDP came in at -0.2% (Q4 -0.3%) technically taking this economy into recession, yoy GDP at 0% (Q4 0.5%). In the US Mch durable goods orders fell 4.2% (Feb revised to 1.9% from  2.2%) while ex transportation orders off 1.1% (1.9%). The ratings agency S&P downgraded Indian debt outlook to negative from stable.

We noted on newswire reports that the disgraced Chinese Communist Party boss Bo Xilai and his family are worth around US$ 150 million, which begs the question how can this be in as so called egalitarian communist state like China? In the West the disparity between the very rich and the also ran’s is seeing politicians use the electoral system to threaten the rich, the socialist contender in France is a prime example. However, what happen in a state without the safety valve of an electoral system when the leaders riches exceed the imagination of the masses. You cannot tell us that Mr Xilai is the only member of the hierarchy who has amassed such trapping of capitalist opulence. Back in the world of safety valves some tectonics in Europe seem destined to collide as the German doctrine of austerity at the heart of the present European Commission’s economic policy comes up against the politicians in countries that are not so down and out that they can say enough is enough like The Netherlands.

The metals put in a recovery overnight in part because of the stubbornness of the € that has keep its level around 1.32 to the US$. Only 10 days ago it had melted below €1.30, this time the political shocks have been ridden well. The stability of the € and technical support for cu push things higher. The US Fed FOMC begin a two day meeting which could keep things subdued with perhaps a slight upward bias as investor continue the QE3 vigil. The focus in LME stocks turned to cancellations in zn and pb of 12 kt and 9 kt respectively, in the more traditional bolt holes of Malaysia for zn and Barcelona for pb (Chelsea will be hoping it is hidden in the boots of the Barca players tonight!). In the US Obama is speaking out about oil manipulation as the price rise impact becomes a major political issue, some will say he could have broadened it to other commodities. Metals are not the only commodity under pressure as China slows, Thailand has announced measures to boost the rubber price as Chinese demand slows. In US time the markets moved higher as the US$ weakened, on one newswire consecutive headlines read US consumer confidence falls; US equities rise? If you want to read up on space mining http://www.bbc.co.uk/news/science-environment-17827347 .

The Q1 Australian CPI came in at 0.1% (Q4 0%) as yoy 1.6% (3.1%). In France Apr consumer confidence was 88 (Mch 87). Over the Pond Canadian Feb retail sales slipped 0.2% (Jan revised to 0.2% from 0.5%) and across the border the Feb S&P Case Shiller 20 city home price index was -0.15% (Jan -0.15%) yoy -3.5% (-3.8%). The Mch new home sales were all over the place falling 7.1% to 328 k units (Feb revised to +7.3% from -1.6% at 353 k) while the Apr Conference Board consumer confidence was 69.2 (69.5) and Richmond Fed manufacturing index jumped to 14 (7.0).

A political wave this weekend knocked the bulls of their feet yet again after just getting back onto their feet last week. It was those pesky politicians in Europe, in The Netherlands the coalition government has resigned after they could not get agreement on an austerity package that would meet EU requirements so elections loom. While round 1 of the French Presidential election left the incumbent Sarkozy to fight it out with the main Socialist challenger Hollande. The challenger got 28% of the vote Sarkozy 27% however the right wing National Front party captured 17% of the votes, their highest margin ever. Now the two contenders head to a shootout in three weeks. The Icelandic PM during the 2008 financial crisis was found guilty of negligence on one of four charges but will face no punishment. In Washington last week the World Bank / IMF meeting ended with the only concrete measure being an increase in IMF reserves to US$ 430 billion, with the US refusing to participate – do you get the feeling they did not want to throw good money after bad?

Any jitters the European political scene had caused were increased with the HSBC preliminary Apr Chinese manufacturing PMI failing to get out of contraction at 49.1 (Mch 48.3). With cu giving back most of its last week’s gains in Asia things turned bleaker as the preliminary April European PMI appeared showing contraction is the norm, French manufacturing was 47.3 (Mch 46.7) and services 46.4 (50.1); in Germany 46.3 (48.4) and 52.6 (52.1) respectively and Euroland 46.0 (47.7); 47.4 (49.2) and composite 47.4 (49.1).Little wonder cu was gearing up to test US$ 8000 and the others likewise testing support.

The LME stocks saw cu and al down most. Most interesting was a cancellation of 44 kt of cu from a global spectrum of 6 locations took the total cancelled to 40% of total stock. A broker contact pointed out the dominant position holder who is squeezing the market (the cash to 3’s back remains around US$ 80) has no reason to relinquish the hold unless new material comes onto warrant – one theory is that it was the dominant position holder behind the cancellation. By cancelling stocks they reduce their dominant position holding. to a level where they are not forced to lend under LME guidelines whilst still controlling the metal and effectively the squeeze. The US CFTC net long investor position in the index of 18 commodity show investors accelerating the jettisoning of long positions, down 11% in the past week. In Zambia Glencore has approval to recommence production at their Mopani cu smelter after environmental problems had shut it in Mch. The World Steel Association saw global steel production hit a record 132 million tonnes in Mch. From Indonesia it is reported the government minister responsible for the change in legislation that will increases the processing of ore in the country (mentioned in a report last week) died in a climbing accident at the weekend. The CESCO week ended in Chile with reality painting a not so rosy picture while most wanting to believe in hope and the Chinese. The Times newspaper in the UK over the weekend, both Sat and Sun editions trumpeted moves by a star studded caste of TV moguls and IT billionaires to launch Planetary Resources a start up venture with the aim of sending robots to dock with asteroids and extract metals like iron, nickel, cobalt and the pgm group in as little as five years (www.thetimes.co.uk ) and some may even get LME registration in the future. Just think the date is 2017 Norilsk cathodes in Sing US$ 750 while Asteroid 356 cathodes are US$ 450 per tonne. What looks like being one of the biggest mining bonanza is heading for London, unfortunately the profits will go to lawyers not miners, call it legal exploration. The feud between RUSAL owners has a new strand after the group extended its deal to sell their 8.75% shareholder, Glencore 1.4 million tonnes of al per year for 14 years at a near record premium over the LME cash price. Up to now the material has been delivered to warehouses in Vlissingen and stored there. The critical shareholders say the deal turns the company into a Glencore production unit. Think how much money Russia could earn if only its law profession was reputable. As the US came in cu tested US$ 8000 and with no data the markets is left jumping at European shadows. .

The Feb Japanese leading index was 96.3 (Jan 96.6). The Apr French business confidence 95 (98).

The Third Wed trading has seen traders caught in a squeeze with the cash to 3’s cu spread blowing out to over US$ 100 back as a large position holder throws his weight around. This looks set to be growing trend as the trader / bank – warehouse conglomerates seem to have positioned themselves for the long haul financing after a year of getting set. The IMF bi annual economic review sees a more optimistic outlook with growth up to 3.5% in 2012 from Nov prediction of 3.3%. This came the day after the Indian central bank cut rates 0.5% to 8%. In China Mch houses prices fell in 37 of the 70 cities monitored, in Wenzhou prices fell 9% yoy then Beijing and Shanghai down 0.8%.

Having improved y/day prices stagnated in early London trading with slight overnight gains given back. The LME stocks were little changed except al down 9 kt. The metal focus is on CESCO Week in Chile as the great and good of cu meet, this has seen a barrage of predictions, Jiangxi Copper see the high inventories in China as temporary. Miners are predicting better production and ore grades while German cu refiner Aurubis sees product sales falling 5 to 15% this year. Indonesia is to proceed with plans to ban exports of unprocessed metal ores including bauxite. The ban will come in gradually with companies like Freeport Copper and Newmont exempt till 2014. We watch the Mon BBC programme on Glencore, we highlighted and were very disappointed, a badly researched programme like this should not be allowed, mining is hard enough without these distractions. The metals consultancy group Thomson Reuters GFMS, a consultancy firm predicts the average 2012 cu price will average US$ 8475 with the market in a deficit of less than 250 kt and in balance 2013. US equities usually have a good run during the quarterly reporting season, mainly because analysts down grade expectations so that when they come in the market is pleased. This time the results have been more hit and miss like today’s poor IBM and Intel results cutting y/days gains. In this atmosphere the metals found the going tough.

The main data was y/day with Mch US housing starts down 5.8% to 654 k units (Feb -2.8% at 694 k units); building permits rose 4.5% to 747 k units (4.8% at 715 k units); industrial production was unchanged again; manufacturing production fell 0.2% (0.8%) and capacity utilisation slipped to 78.6% (78.7%). Today UK unemployment was 8.4% (8.3%).

In the last dispatch before travelling for a couple of days we noted that whenever markets fall heavily in the first session of a week then tend to bounce back as things progress and so it looked this week till another blow snuffed out the rally. Chinese Q1 GDP rose 8.1% yoy less than anticipated (Q4 8.9%), just heightening the economic worries about the global juggernaut at a time when the resolve of the Communist Party leadership is being challenged as well over the princeling Bo Xilai, his running of Chongqing City, his business dealings, his wife’s activities and then on through intrigue to murder as a one party state washes its laundry in public. If you are a poor peasant farmer in the back blocks of the country you must wonder how your egalitarian leaders can accumulate such wealth and trappings of power. Well they do not wonder they know, power corrupts. Then Asia continued to dominate the news a North Korea had a go at launching a space machine that ended in failure but then again they are not as sophisticated at acquiring developed country technologies as their bigger neighbour.

The Chinese GDP and other Mch data below set the tone for trading in Asia and then London. We get the impression that traders are wishing for the China outlook to be a glass half full story in the hope its holds the markets together and pushes them higher. The LME stocks saw a good fall in al while zn is consolidating its stockpile above 900 kt. The more we talk to people the more we see a picture building of a world suffering from a glut of metal supply over present demand expectations. The market has not fully focused on this situation because powerful banks and traders have salted the excess away on financing deals that are growing inexorably larger and history shows the results of such financials follies, usually after the event. Take zn the new Glenstrata will be the world’s largest producer at 16% of global output, add to that its LME warehouse affiliate and the off take agreement with other producers and you have a group controlling let’s say conservatively closing in on a third of the global market. The Mch Chinese cu production rose 8.5% to 510 kt. In a Reuters report Ivanhoe Mining involved with Rio Tinto in developing the Oyu Tolgai cu mine in Mongolia reported development costs have blown out to US$ 13.2 billion from US$ 9.15 billion highlighting the costs of bringing large remote mining projects on line. The US provided little respite for the bulls and it is looking increasingly likely they will have to wait another day, especially as the US$ strengthened and cu tested US$ 8000. Equities sagged despite some better US Q1 corporate earnings from Alcoa and banks.

The other Mch yoy data from China; urban fixed asset investment rose 20.9% (Feb 21.5%); industrial production was up 11.9% (21.3%0 and retail sales grew at 15.2% (18.1%). In Europe the Mch German CPI rose 0.4% (Feb 0.4%) yoy unchanged at 2.1%. The UK PPI input 1.9% (2.1%) yoy 5.8% (7.8%) and PPI output 0.6% (0.5%) yoy 3.6% (4.1%). Then Mch US CPI rose 0.3% (Feb 0.4%) yoy 2.7% (2.9%) with CPI less food and energy up 0.2% (0.3%). The Apr preliminary Uni of Michigan consumer confidence was 75.7(76.2). Worrying for the US was the third weekly rise in jobless claims to 380 k (367 k).