Thursday May 05th 2016

Back to Reality

Thursday May 05th 2016


After last week rally in the commodities complex fueled by a “change in sentiment” it looks like that we are already got back to reality even though mood remains still slightly bullish. The profit taking did start when Reuters reported the April OPEC oil output which came out near record highs. Supply from the Organization of the Petroleum Exporting Countries rose to 32.64 million barrels per day (bpd) this month, from 32.47 million bpd in March (output freeze talks are for a cap to 30 million bdp). Iran saw the sharpest increase in production in April after Western sanctions were lifted in January. Tehran, which wants to recover the market share it lost, has refused to limit its supply until it reaches pre-sanctions output. What is more, latest data from China (Manufacturing PMIs; 49.4 vs exp. 49.8; Services 51.8 vs exp. 52.6) came out weaker than expected showing contraction is still in place and raising again worries about its growth. As a result from oil to metals we pulled off last week highs with funds now enjoying some profit taking and re-evaluating the scenario.


Looking at the forex market EUR/USD shrugged off Draghi’s words and continued to hedged higher even after a slightly hawkish FOMC (27/04). As a matter of fact sentiment turned definitely bullish with the Euro printing fresh 2016 new highs at 1.1616 on Tuesday morning. News wires do not report any particular comments to explain such a move higher. Trading desks focused on the recent good streak of EU data (PMIs and GDPs) and relatively weak US numbers but we are now already trading back around 1.1400. On Friday we will look at the US Non-farm payrolls for April which is expected to come out at +206K. Aside from the headline also important will be the “hourly average earnings data” which is closely monitored by the FED as an inflation measure. April and May non-farm payrolls will be last two numbers before the June FOMC meeting where potentially we could have the first 2016 FED’s rate hike.


Coming to the base metals a weaker dollar did not manage to support prices and we saw some good corrections with respect to last week’s highs. The more vulnerable is Copper which is trading around 4800$/mt (down roughly 5% from last week peak) and hit by some negative supply’s news: Perù’s copper production did climb 46% in March to 188,052 tonnes from 129,076 tonnes a year earlier, the country's Energy and Mines Ministry (MEM). Copper production in Chile increased 3% in March from a year earlier, the world's biggest producing country of the metal climbed to 488,759 tonnes in March. The love affair with Aluminium is also starting to wane and market already dropped around 60$ in the first three trading days of the week without any particular news catalyst; Al is trading around 1614$ at the moment. Rest of the non-ferrous was instead rather stable even though was punished by the weak Chinese economic data. Nickel held its ground and is firmly trading within 9100-9500$ range without any big change in fundamentals. Zinc and Lead made a decent correction but nothing to worry about so far as buying activity (especially for Zinc) still looks strong. In particular, Zinc mine production(2015) suffered only a slight decrease of 70K tonnes but the year ended with various mines shut-down accounting a record loss of about 900K tonnes a year. The closings have been poorly compensated by the opening of new plants in 2015,representing only a capacity of about 128K tonnes. Tin won’t move from its recent highs and trades firmly around 17300$/ton without any major change in fundamentals. As bottom line reality did snap back in with economic data from China and we assisted to decent corrections, nevertheless complex looks still rather strong. Commodity funds netted more cash in the first quarter of this year than any other type of hedge fund, with the $4 billion of inflows into the group being the largest for any quarter in more than six years, according to a Wall Street Journal report. We shall see.


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