Friday August 19th 2016

Summer Session

Friday August 19^th  2016

Overview

Week 33 has been a very quiet week in terms of economic data and market moves with the Vix index (volatility index) sitting at its 2016 lows. What is worth notice though was the FOMC minutes release on Wednesday and the Oil market coming back again the 50 dollar mark (Brent) continuing the rebound put in place last week. Other than that waiting for the big volumes to kick in again US equities are still on the highs and Gold is yet very supported despite a bit of profit taking.

The FOMC minutes on Wednesday revealed a how split the federal open market committee is about the timing of the interest rate hike. This lack of conviction was taken by the market as a dovish signal since puts a possible move on rates during the September meeting basically off the table. Traders also know that November meeting is off as well just because it is literally 6 days before the presidential elections and FED would never be that bold. So now expectations shifted on December 2016/January2017 depending on the monthly economic data releases and the global outlook (Brexit, China, Europe). On the back of that we saw Dollar weakness across the board with the EUR/USD coming back up the 1.13 handle. Technically speaking if it manages to close the week above the 1.1315/20 level, we could see a push forward to the 1.1375/1.1411 level. Be aware that on August 26^th FED Chair Janet Yellen is expected to comment on monetary policy at the Jackson Hole meeting (an economic policy symposium). It will be surely closely monitored by market participants to check if the September meeting is really off the table as market think or FED may surprise as Mr. Vice Chairman William Dudley suggested in the minutes.

Brent Oil price this week climbed above 50$ for the first time since July and recovering after the sharp sell-off we saw just 2 weeks ago. The rally started last Thursday after Saudi Arabia’s energy minister said the country would work with other oil producers to stabilize prices at a meeting in Algeria next month. Further, Russian Energy Minister Alexander Novak said on Monday his country is opening up to an agreement with other major oil producers to cap output "if necessary" to achieve market stability. Despite these comments though the supply side remains ample and well above the real demand. In August Saudi Arabia increased its own production by 280k bpd (with respect of May 2016) to a total of 10,55M bpd. So the most likely scenario for now is that prices will remain sideways for a while consolidating between the 40/45$ and 50/55$ range.

Metals

Moving to the base metals we saw prices holding up pretty well shrugging off last week’s China bad economic data and being supported by a weaker dollar. As I said volatility was low for the whole week with tight price ranges. Fundamentally speaking we had on Wednesday the confirmation from WBMS that all base metals were in deficit during the first 6 months of the year.

The World Bureau of Metal Statistic reported that: aluminium market deficit expanded to 479,000 tonnes in January-June from a deficit of 331,000 recorded for the whole of last year. Aluminium demand in the first five months of this year at 28.73 million tonnes was down 113,000 tonnes on the first five months of 2016. Production fell 1.2%. The copper market was undersupplied by 197,000 tonnes. World copper mine production was 10 million tonnes in the first six months of the year, up 5.9% from the same period last year. Global refined copper production in January-June rose 3.4% to 11.6 million tonnes, with a significant increase recorded in China - up 250,000 tonnes - and Chile - up 28,000 tonnes. Global copper consumption was 11.8 million tonnes in the same six months. Chinese apparent consumption during the period rose by 522,000 tonnes to 5.852 million tonnes, accounting for just under half of global demand. The deficit in the lead market was 46,000 tonnes - it saw a deficit of 4,000 tonnes for the whole of 2015. The nickel market deficit expanded to 80,800 tonnes in January-June. In the whole of 2015, WBMS pegged the surplus at 45,200 tonnes. Refined nickel production and demand totalled 874,000 tonnes and 955,000 tonnes respectively. Mine production during the same period was 956,700 tonnes, 100,400 tonnes below the comparable 2015 total. The tin market was undersupplied by 7,200 tonnes in January-June. Global reported refined tin production, excluding re-processed LME metal, rose 12,800 tonnes year-on-year in the first six months of the year. Global tin demand in January-June was 188,600 tonnes, an increase of 4.7%. The zinc market was in deficit of 32,000 tonnes. In the first six months, global refined zinc production and consumption fell by 4.6 percent and 1.4 percent year-on-year respectively. World zinc demand was 92,000 tonnes lower year-on-year in January-June, with Chinese apparent demand at 3.260 million tonnes - more than 48 percent of the global total.

Well, definitely copper comes as surprise especially considering it has been the worse performer since the beginning of the year. Maybe there is something we are missing here (i.e. “dark stocks”). Zinc also surprised me considering its ytd 50% increase in price I was expecting a much higher deficit. Nevertheless on Monday all zinc and lead mines in Huayuan County a major mining zone in south China, were ordered to halt production till June next year for safety inspections; so that may be another reason of support for LME prices. The rest of the complex looks roughly more balanced with respect to their current LME prices even though Nickel could probably be still too low. Let now switch to the technical side:

Well Aluminium behaved smoothly so far as it touched a new 2016 high at 1709$ for then slump back to 1660$ in less than a trading day. First level now would be around 1645/55$ and if we break through 1640$ we could see a come back to the 1590/1600$ level where it would be necessary to try a long side trade.  

The copper market did not do much at all this week but it held the 4750$ level probably also because of the WBMS report. Nevertheless it failed also the tentative to break above again the 4850$ remaining trapped in this 100$ price range. Difficult to say now even though it looks like it may attempt to a push higher next week: a good sell would be around 4930/50$ whereas a good buy could be around the 4630$.

Lead managed its way up but encountered good resistance at the 1900$ mark.  The technical canal is still in place and shows good support at around 1700/1725$ and a good resistance around the 1950/1975$ mark.

Nickel as expected corrected until the 10200$; here we stopped for now even though without great strength. A period of consolidation around this level without breaking it could lead to a new push higher, scenario I tend to agree with. If it had to go lower the 9500/9700$ level should definitely stop the downside. This would be the perfect entry for buyers but the risk is to lose the trade. Sellers have the first resistance at 10450/500$ with the next one being at 11000$.

Zinc is again very high and again the Monday sell-off at 2200$ was a precious gift. Yesterday we went back to 2309$ where it did stop and was pushed back to 2280$. Previous high was at 2314,5$ maybe a double top? Difficult to say as it looks really strong but yet showing some signs of fatigue. In any case the 2320$ is a though resistance and after that we have the 2400$. For buyers any drop in price of more than 50/60$ proved to be good buy so far. 

As per zinc, Tin gave a great buy opportunity on Monday when it came down to 17960$ even though was a very quick move. Levels are the same as last week to buy we have first the 18100$ then we have the 17500$ mark which is definitely a buy. As a sell opportunity the 18800/19000$ looks like a very good level on the weekly chart.

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