Friday 8th July 2016

NON FARM PAYROLLS

Friday July 08^th  2016

Overview

It has been a relatively quiet week and almost everyone seemed to have forgotten already about the Brexit; not the GBP/USD though as it made new fresh lows at 1.2797 (31-year low) and it is still trading below the 1.30 handle. The U.K. currency this week overtook the Argentine peso as the biggest loser versus the dollar among 31 major peers in 2016 as investors continued to digest the fallout from the June 23 referendum decision to leave the European Union. Traders are pricing in a likely move from the Bank of England and are definitely not liking the political confusion with Boris Johnson and Nigel Farage (the two “brexiteers”) to abandon the sinking ship.

In Europe the main focus after the Brexit was on the banking system which already face difficulties in a low rate environment as net interest on margins is shrinking. Further, we have the NPL (non-performing loans) issue. Large institutions across the euro area hold a combined total of nearly 950 billion euros ($1.05 trillion) of NPLs, which is equivalent to about 9 percent of GDP. The loans reduce profitability, consume capital, and tie-up resources. Italy, in particular, is estimated to hold around 360 billion euros of soured loans which could became a real issue for the euro area banking system if not handled in the right way. Only slow progress have been made so far.

Elsewhere, US equities recovered substantially all the post-brexit losses and after today’s strong Job report (+287K vs Exp. 170K) the S&P 500 managed to get back above the 2100 points and the Dow Jones above the 18000 points. Among services providers, retailers boosted payrolls by almost 30,000, while employment in health care climbed 58,400. In leisure and hospitality, payrolls jumped 59,000 in June. Governments added 22,000 workers, the most in almost a year. Wages, though, improved modestly, with average hourly earnings climbing 0.1 percent from a month earlier. The year-over-year increase was 2.6 percent, less than the 2.7 percent median forecast. Still difficult to get inflation back on track.

Market data

This week we only had the Caixin services PMI out of China at 52.7 vs exp. 52.3 which is still showing an increase also with respect to the previous one at 51.2. Reuters also reports a note out today from the PBoC: China's central bank reaffirmed that it will maintain reasonable growth in bank credit and social financing as the economy still faces downward pressure. Some Chinese provinces and municipalities "have relatively big reliance on real estate and infrastructure investment”.

U.K. consumer confidence plunged the most in 21 years, the latest sign that Britons’ vote to leave the European Union is harming the nation’s outlook. That’s the biggest slide since December 1994 when increases in tax, interest rates and job insecurity weighed on spending. The core index slid to minus 9 in a special post-referendum survey conducted from June 30 to July 5, from minus 1 earlier in June. While confidence among respondents who said they voted to remain in the EU dropped to minus 13, the decline was tempered by a lesser slide of minus 5 among those who said they opted to leave.

U.S. crude late Thursday dipped below $45 for the first time since May 11 as prices lost about 5%. The detonator for the losses was a fall of only 2.2 million barrels in U.S crude stocks last week. American Petroleum Institute data Wednesday showed a drawdown of 6.7 million barrels. Concerns about demand for oil and a glut of refined products continue to overhang the market. Today we are seeing a modest recovery due to the good US job report but gains are likely to be capped by a stronger US dollar.

In Europe we had some good PMI services numbers for June: Spanish PMI 56.0 vs exp. 55.3, French PMI 49.9 vs exp. 49.9, Italian PMI was 51.9 vs exp. 50.2 and the German PMI 54.4 vs exp. 54.1.

Metals

The metals complex managed to hold up pretty well. Some profit taking occurred after Monday’s highs especially on Nickel but overall complex looks rather healthy so far. The only one who is missing the party is Copper as no sign of tightness in supply and another large wave of LME stocks sank the price below $4700.

Aluminium prices are apparently holding up due to heavy rains and flooding in parts of China. This is resulted in transport delays for some metals producers, with the impact most pronounced for aluminium due to the already-tight domestic spot market. Aluminium stocks are already low in the market and a delay in shipments by just two or three days will exacerbate the supply tightness," a Shanghai-based aluminium analyst said. As a matter of fact not even a 5% drop in oil prices on Thursday night managed to lower the price which is now trading at 1670$ 3M. Interesting will be to see market reaction at the 1686$ level. New highs are needed or the risk of a reversal may be imminent.

Copper touched its high at 4960$ before being crushed by around a 30K LME stocks increase during the week. It has to be said that, within the complex, has always been the most supported one and prices are still well above productions costs. At the moment it looks like is headed towards the 4550$ level and many analysts agree on the view that Copper has not just yet hit the bottom. Not much happening on Lead. After a sharp rise around 1880$ is now consolidating around the 1800$ handle waiting for a new catalyst. Nickel is probably the star of the week touching an eight-month high at 10410$ on Monday (up +13% this year). It is all about the Philippines; though it also must be said that the $8000 level was probably oversold and that LME stocks are slowly declining. The Philippines has ordered the suspension of operations at two nickel ore mines for environmental violations and halted the issuance of exploration permits as a nationwide crackdown led by a new mining minister begins. The mining minister, Regina Lopez, a staunch environmentalist, separately said there would be a ban on fresh mining exploration in the country for a month while a review of all existing mines was underway. So far Nickel prices are evidently supported and despite the huge volatility swings they manage always to find their way up.

Not much going on Zinc which is consolidating and probably preparing the next move to the up-side. No real change in LME stocks, no change in fundamentals which are still positive. Tin managed to do it and broke above the 17500$ level which capped the upside potential for almost 3 months. As often happens in this cases prices reacted quite violently with a strong upside push to new fresh highs at 18150$. Fundamentals are still very positive with good Chinese imports and slow Indonesian exports.

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