Friday October 28th 2016

WEEK 43

Friday October 28^th  2016

Overview

We saw a relative quiet week especially on equities and oil market. Only today we did get some interesting data that is worth to highlight. US GDP: in a report, the Bureau of Economic Analysis said that GDP increased to a seasonally adjusted annual rate of 2.9% in the three month period from July to September, from the 1.4% expansion registered in the second quarter of 2016. That was its largest expansion since the third quarter of 2014. Analysts had expected GDP growth to increase to only 2.5%. However, real consumer spending increased by only 2.1% in the third quarter, missing expectations for a 2.6% advance, and much lower than the prior quarter’s 4.3% jump. German Inflation: it rose more than expected in October, reaching its highest level in two years, preliminary data showed on Friday, a welcome sign for the European Central Bank that its monetary policy is gradually eliminating the threat of deflation in Europe's biggest economy. Europe can also smile at Spain which posted another great GDP number at 3.2% vs exp. 3.1% (year on year) and a very good inflation number +0.7% vs exp. +0.3% (year on year). On the other hand today we still saw France struggling as GDP shrieked again at only +0.2% vs exp. 0.3% (Quarter on quarter). Least but not last we saw also the UK GDP at +2.3% vs exp. 2.1% which for many is a triumph against the Brexit sceptics forgetting that they are simply not out yet.

Today we saw the EUR/USD appreciating against the dollar despite the good US GDP data. Traders focused more on EU data and we are now trading at 1,0940 after a multi months low touched this week at 1,0850. On the down side first good support is at 1,0800, so if you managed to buy anything below 1,090 could be worth to hold on with stop loss below there (1,08). Un the up side is a bit trickier as first resistance is at 1,0950 and then we have the 1,1030. I would sell only on a short term basis not medium period. On this currency we are heading into a crucial week as we will have Non-Farm payrolls (US job report) next Friday and the US presidential elections right after (Nov. the 8^th). It is reasonable to think that someone is taking some shorts position out before re-positioning after the data. I still think US dollar is too high and despite is difficult to pick the right timing I see the Euro to come back around 1,12/1,3 on the 1Q 2017.

The oil market looks stuck at the moment and maybe victim of profit taking waiting for the OPEC to actually implement the production freeze. Today OPEC officials began talks in Vienna aimed at working out details of their oil supply-cut agreement, which they concede is looking more complicated by the day. The deal faces potential setbacks from Iraq's call for it to be exempt and from countries including Iran, Libya and Nigeria whose output has been hit by sanctions or conflict and want to raise supply. Very much will depend on that and if intentions are serious we could see the oil market at 55/60$. From here we would have to keep in mind though that US Shale production will increase again. If OPEC fails than we could well come back around the 40$ level.

Metals

Not much of a fundamental change in base metals as we haven’t seen any Chinese data this week but we saw some good declining in both Aluminium and Copper LME stocks. Ali is at 2.2 million tonnes, headline LME inventories are now hovering around lows last seen in 2008, while on-warrant inventories – stocks that have not been ordered for withdrawal – last month fell to 1.25 million tonnes, also at an eight-year low and 74% below a peak in 2011. This the headline and what the market operators trade on but it is worth to highlight also that Citi estimates that global aluminium inventories – including producer, consumer, exchange and private stocks – stand at about 15 million tonnes. Estimates range from 10 million to 17 million tonnes, the bank’s commodities analyst David Wilson told Metal Bulletin. On Copper we saw around 20’000 tonnes flowing out the LME stocks only this week and other 15’000 tonnes out of the SHFE approved warehouses which marks the second straight week of decline.

Next week we will entering into the LME week and options declaration meaning that, price wise, given the lack of volumes it could be either dead quiet or really funky. Much will depend also from the Chinese Manufacturing data out on Monday night which again will give a better sense of where the Chinese economy is heading. We shall see.

Trading ideas

Let’s now switch to the technical side of the market with some trading ideas for next week:

Let’s keep in mind that aside from copper which is yet a bit uncertain in 2016 we are all in positive territory on the base metals. Here the net change from 31/12/2015 since 25/10/2016: Cu +0.47%; Al +10%, Ni +16%; Zn +47%; Pb +15%; Sn +39%. With that in mind we need to be aware that we may see some profit taking but yet we are on positive trend (everything else unchanged).

Aluminium: Ali did not come down perfectly at target (1590/1600$) but stopped around 1615$ (3M) making a steep U-turn up above 1700$. If we close above here and we probably will, next week we could well continue and the road is open for the 1740/1755$ (first good level) and then we could go as far as 1800$. We broke through a very long and solid downward trend-line and therefore I am expecting some more upward movement at least in the short term. Buyer should be already long with the first target being 1750$; for sellers the resistances are the one mentioned above.

The copper surprised and did actually held the 4620$ level and bears had to quickly short cover. First good sell now is the 4880$ and above here we can go pretty quickly to 5000$. Buyers now need to wait the 4770$ level or just go with the flow hoping for a further upside breakout. Given the fundamentals it should not go very much further than 5000$ so may be good to wait a bit more and then start selling.

Lead is not doing much but given the relative strength of the Zinc and more in general of the base metal complex is holding up pretty well. Anything above 2120$ should be a good sell and below 1950$ should be a good buy for now.  

Nickel is sideway for now. Even if the complex is strong it is playing its own game and probably waiting for some further developments on the Philippine side. Still think is better to play it on the long side, so anything below 10’000 should be a good buy for now. Sellers could play the range and sell from 10800 to 11’000$. 

Zinc: after one week of rest the bulls are back in control and we are back at 2400$, again at the key level. Still think is a bit risky to buy here but if so necessary is to be disciplined with the stop loss and profit targets need to be reasonable. Sellers could try again a short at 2420$ being careful of a squeeze on the upside.

Tin, again and again, confirms the “buy the dip” strategy week after week. Obviously the more we go up the riskier it gets but for now there are no signs  for a market drop. We could go as high as 21’300$ before getting a pullback. Careful selling it.

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