Friday June 10th 2016

Global rally

Friday June 10^th 2016

Overview

In essence, this week investors’ sentiment reflected last Friday’s big market moving US data (U.S. job report showed America added just 38,000 jobs in May, the worst reading since 2010). As US rate hike expectations shifted to September (49% chance) we assisted to a global rally. We saw some good bids coming into the Commodities market benefitting from a sensibly weaker dollar as well as Emerging markets stocks and bonds. Gold went bid along with US-Tresuries and European bonds. The US dollar weakened against all the major currencies: Euro, Yen, NZD, CAD, AUD.

By Wednesday this week, the Standard & Poor’s 500 Index reached a 10-month high and non-investment-grade bonds extended this year’s advance to more than 9%. China, which contributes the most to global economic growth along with the U.S., has played its part to buoy the sentiment. The economy has stabilized following a new dose of credit expansion from earlier this year. In the euro-zone, the European Central Bank entered new territory in its effort to stimulate the flagging economy, buying the debt of some of the continent’s biggest companies for the first time.

Goldman Sach warn about the consequences of this concerted gains as investors will find more difficult to protect themselves in a market selloff. Higher correlations between regional markets make it difficult to hide out in foreign stocks.

Market data

In terms of market data we had a fairly light week. Definitely worth to highlight are the China Trade balance and CPI, Crude Oil inventories and some positive European data. The latest data out of China suggest some sort of stabilization in the world’s second-largest economy. The prolonged slowdown may be bottoming out but most analysts do not expect a quick recovery. China’s PBOC in a note during the week did stick to its projections: <<Compared with our published forecasts in December last year, we maintain our baseline projection of 2016 real GDP growth at 6.8 percent.>> Nevertheless what concerns investors remains the high level of corporate and public debt.

U.S. crude futures broke through $51 on Wednesday in a third straight session of gains after Chinese data gave hopes to higher demand and weekly supply data later in the session that showed U.S. crude inventories fell at a faster pace than expected (-3,2M vs exp -2,7M).

In Europe is worth to mention the Spanish Ind. Production +2.7% vs exp. +2.1%, French Ind. Production +1.2% vs exp. +0.4% and Italian Ind. Production +0.5% vs exp. +0.2%.

Metal

Moving to our beloved base metals the major development this week was the complete decorrelation of Copper from the rest of the complex. As a matter of fact Ali, Lead, Nickel, Tin and Zinc took an upswing after the China trade balance data and somehow managed to consolidate, Copper was hammered. Ali is being well supported by higher energy prices and the recent data on exports out of China helped the upward movement. China’s unwrought aluminium and aluminium product exports rose only 4 percent MoM to 420,000 tonnes in May which takes exports down in the first 5 months of the year of -7.9%. Lead is not doing much and is definitely not following Zinc. Fundamentals yet not brilliant seems though more bullish than bearish: Auto sales around the world are definitely healthy so far, market was only in a small surplus during the first quarter and LME+SHFE stocks are relatively low. Chinese imports of Lead concentrates fell 19% in the first 4 months of the year suggesting that production cuts and mine closures are affecting concentrate availability. Further, output of refined lead in China fell 5.8% in the first quarter of 2016. Nickel held the wall at 8330$ and given the small recovery in iron ore and steel rebar prices managed to get himself on the 9000$ level. LME stocks are slowly falling but probably we need to see some further improvement in the steel market in order to get this market really going. Anyway base building is evident which usually is a good sign of recovery. At this stage Tin is a bit more complicated to judge. Chinese concentrate imports were up on may whereas imports of refined tin were down suggesting an higher Chinese production. Global demand rose 2.6% YoY and LME stocks fell to 6575 tonnes almost 1000 tonnes from last week highs. News highs (over 17500$) are needed to confirm the uptrend. Zinc we know it is the super-star having already performed as much as +43% from its January lows at around 1450$. For many analysts it will stay strong for the next 2 years if the fundamental picture does not deteriorate. Yet to highlight the spread with Lead that got even wider at 345$.

Coming to Copper the Chinese data showed a MoM fell of -3.7% in imports of refined Copper which is still +22% YoY though. Others data out of China showed a stabilization in the economy but it is true that imports of concentrates are very high (+34% YoY). What is more this week we saw almost 60,000 tonnes of Copper coming into LME warehouses in Asia due to the incentives of $50-65 by some warehouse companies. Nevertheless given the higher Oil prices and the general renewed appetite for the commodities market (Bloomberg Commodities Index) I tend to think it is oversold. It may well be starting to build a base and reaming range bound for a while. In this case crucial will be the 4430$ level first and the 4318$ next. We shall see.

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