Commodity Currencies

Keeping an eye on the currencies of big commodity producing nations not only provides us insight into demand for commodities but the health of emerging markets as well.

Canadian dollar

Canadian Dollar (CAD) was turned back at the 38.2% retracement of the 2012 decline (part of the 2011 bear market). With the break of the bear flag last week it appears the bear market rally is over.

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Australian Dollar

Australian Dollar (AUD) has been like watching paint dry since April. As long as support at 0.92 remains intact we have to assume the bear market rally is too. But with the break down in the CAD the Aussie is probably on borrowed time.

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The secular bear cycle in commodities is due to end near the end of this year.

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What to expect from Base Metals this week ?

Shanghai Metals Market expects base metals to follow divergent trends this week, but optimistic expectations surrounding upcoming economic releases should favor some prices trending up.

China Impact

China’s State Council issued guidance on reform of the household registration (“hukou”) system July 30. The proffered guidance indicates that household registration restrictions will be abolished in towns and smaller cities first. The government also indicated that it would loosen residence registration requirements in mid-sized cities “in an orderly manner”, while a points system will be established to control the number of migrants moving to cities with populations over 5 million.

Reform of the household registration system is expected to boost infrastructure construction, as well as consumption of medical care, education, cars, home appliances, and housing in general. That, plus increased investment opportunities, should bolster demand for metals. Analysts estimate reform of the household registration system to contribute 5% to GDP growth over the next six years.

US Impact

The US Federal Reserve agreed to cut bond purchases another USD 10 billion/month after its two-day policy meeting for July, but offered no clearer indication as to when it might raise rates. Although the Fed acted calmly after US Q2 growth proved brighter than expected, it did express greater optimism over the labor market and inflation. This upbeat assessment may help bolster the market.

Source: Shanghai Metals Market

MCX-aluminium (₹122.5): BUY

The aluminium futures contract traded on the Multi Commodity Exchange (MCX) has been going through a strong uptrend since May. The contract has risen some 21 per cent from its low of ₹101.25/kg recorded in May. A fall in global production coupled with an increase in demand for the metal has helped this commodity to vault higher.

On the global front, the spot price of aluminium on the London Metal Exchange has surged 15 per cent from its May low of $1,714 a tonne to $2,013. The outlook is bullish with strong support at $1,850.

A rally to $2,100 in the short-term and $2,200 or may be even higher levels in the medium-term looks likely now. The MCX-aluminium which moves in tandem with the global price is also expected to rise. This offers a good buying opportunity in MCX-aluminium for traders.

Short-term view: The short-term trend in the MCX-aluminium futures contract is up. The price action between July 22 and July 30 suggests a formation of a bull flag pattern within the overall uptrend.

The sharp rise on Monday signals the beginning of a new leg of up move in the contract. Immediate supports for the contract are at ₹122 and ₹120.5. While the contract trades above these support levels, there is no immediate downside threat.

Traders with a short-term perspective can initiate fresh long position at current levels. Stop-loss can be kept at ₹120 for the target of ₹128.

The 21-day moving average at ₹119 is a key short-term support for the contract. The outlook will turn bearish only if the contract records a strong close below this level. The ensuing target in such a scenario will be ₹117.

Medium-term view: The medium-term outlook is bullish for the MCX-aluminium futures contract.

The strong down-trend that was in place since August 2013 has got reversed decisively.

Additionally the contract has breached an important trend-line resistance at ₹122 this week. A strong weekly close above this level this week could reinforce the bullish momentum.

Key medium-term support for the contract is at ₹114.

A rally to ₹132 looks likely in a medium-term time frame. The outlook will turn bearish if the contract declines below ₹114.

In such a scenario the contract can decline to test ₹102.

hindubusinessline

DeMark Says "Sell China, The Trend Is About To End"

We noted last week the coincidental surge in China's currency and stock market (bettering US equities for 2014) after they quietly unveiled QE-lite, but, as Bloomberg reports, Tom DeMark says "selling into strength is now recommended," with losses expected over the next six months. This follows his prediction from June that China's Shanghai Composite was due for a recovery, presaging a 16% rise. With last night's hint of China's credit impulse fading and CNY now recoupled with its fixing, perhaps he is right that the short-term catalysts for gains are exhausted. As DeMark concludes, "the trend is your friend until the trend is about to end."

A reminder of the driver of China's recent strength...

As Bloomberg reports,

The Shanghai Composite Index will probably end its world-beating rally within days and fall about 10 percent, said Tom DeMark, the developer of market-timing indicators who predicted the gauge’s peak last year.

...poised to erase those gains and drop below this year’s intraday low of 1,974.38.

“Selling into strength now is recommended,” wrote DeMark, the founder of DeMark Analytics LLC in Scottsdale, Arizona, who has spent more than 40 years developing indicators to identify market turning points. “The trend is your friend until the trend is about to end.”

DeMark has had a good year in China...

DeMark’s prediction in February 2013 that the Shanghai Composite would retreat came a day before the index began an almost 20 percent tumble from a nine-month high of 2,434.48.

His prediction on June 21, 2013 that the stock gauge was poised for a recovery presaged a 16 percent advance from its closing low on June 27 through mid-September.

“It is always best to announce a top/bottom before it might occur so one is able to sell strength or buy weakness,” DeMark wrote.

*  *  *

Perhaps the market senses the hangover from China's huge credit impulse is coming...

Novelis anticipates to double the production within 2018

Company states that, it is to increase its production in North America from about 50,000 tons of automotive aluminum in 2013 to 260,000 tons in 2014. By 2015 the production will be increased up to 365,000 tons. The reason behind the increase in production is because; Novelis is now the distributor of Ford automotive models including the Ford-150 pick up truck.

Tom Boney, the General Manager of North American branch of Novelis says that even though the demand is very much rugged, the company is increasing the production to its full capacity.

Novelis is now at last facet of expansion worth 500 million dollars at its aluminum plant in Oswego, New York. Novelis has announced their project to recycle the scrapped aluminum Ford Motor Co.’s stamping and scrapping plant as it will help to regain the 40% of aluminum being lost in the process of scrapping and other manufacturing processes. 

 Both Novelis and Alcoa; the leading rivals of Novelis, have made investments in their respective North American Branch in order to supply for the production of to be launched Ford-150 pickup truck.

As the automotive producers are about to cut down the weight of vehicles in order to reach their estimated CAFÉ targets, Novelis hopes that 70% of pickups will have aluminum bodies, and 80 % of hoods and 45% of doors will be made of aluminum. 

Australian miner Western Areas sees strong bids coming for its nickel

Australia's no. 3 nickel miner, Western Areas , said on Monday a ban by Indonesia of nickel ore exports was helping stoke strong interest in a tender it is planning for future concentrate sales.

With the ban starting to pinch world supply, metals refining companies and trading houses were scrambling to secure high-purity nickel concentrate for blending with lower grade material to produce metal fetching price premiums, said Western Areas's Executive Director David Southam.

Nickel sells for about $18,380 per tonne compared with $13,900 immediately before the ban went into effect on Jan. 12.

A 13,000-tonnes-per-year supply contract Western Areas holds with Chinese metals refiner Jinchuan Group expires at the end of 2014.

Nickel is being driven, say analysts, on bets that China is running short of the metal used to make stainless steel because of Indonesia's ban. Until the ban, aimed at spurring a value-added processing industry, Indonesia accounted for 15-20 percent of world supply.

However, nickel inventories are recently hitting record highs as hidden stocks leave China following a fraud probe at Qingdao's port, showing supplies are plentiful despite a halt to shipments from Indonesia, which could squash further supply-side price increases. 

Still, Southam said the company was already fielding expressions of interest from a range of potential buyers and also expects to see hefty competition emerging from nickel smelters, commodity traders, other nickel producers, including Jinchuan, and stainless steel companies.

Speaking on the sidelines of the Diggers and Dealers mining forum, Southam said Western Areas was producing a high-magnesium-bearing nickel concentrate commanding 90 percent or more of the London Metal Exchange refined metal price.

He declined to name those showing interest in buying the concentrate.

BHP Billiton , which already buys 12,000 tonnes of nickel in concentrate from Western Areas to feed into its Australian smelter, is seen as a logical contender for the additional material, following the closure of one of its own mines last year due to earthquake damage.

Southam said there were signs the ban was working in Indonesia's favor, with some Chinese nickel pig iron producers already relocating to Indonesia to construct plants.

"As that happens, it is less likely that Indonesia would do away with its ban," Southam said. "All indications so far are that the ban is going to hold."

Other Australian miners are also benefiting. Sirius Resources NL is in late-stage negotiations with a trio of major nickel smelters to supply up to 26,000 tonnes of nickel concentrate annually. 

Sirius stock has risen more than six-fold in the two years since it discovered the Nova nickel deposit in west Australia, partly on expectations the concentrate would command a premium from smelting companies when output begins in late 2016.

Source: Reuters

HSBC/Markit Services PMI for July: 50.0 (prior was 53.1)

China data:

HSBC/Markit Services PMI for July, 50.0

• prior was 53.1
• Services PMI is at the lowest since the survey began in 2005

And the HSBC/Markit Composite PMI for July. 51.6

• prior was 52.4

Key points from Markit/HSBC:

• New order growth accelerates at manufacturers, while new work rises fractionally at service providers
• Input price inflation quickens to eight-month high at the composite level
• First expansion of composite employment since March

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

• “The headline HSBC China Services PMI came in at 50.0 in July, the lowest reading since the series began in November 2005.
• Both the new business and outstanding business indices declined from their levels in June.
• The weakness in the headline number likely reflects the impact of the ongoing property slowdown in many cities as property related activity, such as agencies and residential services, see less business.
• Meanwhile, the employment and business sentiment indices remain stable.
• In the coming months, we think the service sector may get some support from the recovery in investment.
• But today’s data points to the need of continued policy support to offset the drag from the property correction and consolidate the economic recovery.”
  

Zinc prices to average around $2,500 per mt over 12 months: Goldman Sachs

According to latest research note published by Goldman Sachs (GS)- the investment banking major, zinc prices are likely to average around $2,500 per mt over the next 12 months. However, in immediate near-term, the prices are likely to remain under pressure. Although it maintains overall bullish view on the metal, the prices are most likely to cool off after the recent 13% rally since late-June ’14.

According to Roger Yuan, analyst at GS, the fundamentals of the metal still look bullish as large mines-Australia’s Century and Ireland’s Lisheen are expected to be depleted by mid-2015. The closure of the mines is likely to cut supplies by 450,000 mt/year and 160,000 mt/year respectively. This will further tighten supply of zinc into global market. Over a period of 12 months, zinc prices are expected to average around $2,500 per mt. The research notes states that any short term dip in prices should be used a strong buying opportunity.

The metal prices had a stellar run since late-July. The zinc prices have soared nearly 13% since then. These points to a near-term downside pressure on prices. The recent rally was mainly on the back of better US and Chinese macro economic data. Going forward, Chinese imports are likely to reduce, which in turn may bring down the zinc prices.

The spot price of Zinc at LMEselect had quoted at $2,355 per mt as on last Friday.

INFOGRAPHIC: Swiss bank accounts . India is Rumored to have $ 1.5 Trillion Black Money.

Swiss bank accounts have long been a place for the wealthy to store their cash in order to evade hefty taxes. As of late, however, the American government has been cracking down on tax evaders and those that aid them.

American tax authorities created an amnesty program for Swiss banks that were willing to cooperate in bringing American tax evaders to justice, in exchange for less severe fines. In total, 106 banks signed up for the program. This all stems from a criminal investigation of twelve Swiss banks, headed by US tax authorities.

In order to be in the good graces of Uncle Sam, some of these banks have even threatened to freeze the accounts of their American clientele, unless they can prove that they are fully tax-compliant. Other Swiss banks have taken a softer approach. If a client has or had an undeclared account and has avoided getting caught, the bank will aid them in paying fines if they confess to the American government. It sounds good, but the amount they are offering is only $5,000. It is likely that Uncle Sam will want a lot more than just a few thousand dollars.

Original infographic from: TimothySykes.com

Weekly Economic Data for the week 02-Aug-14 to 08-Aug-14

Expected impact on price:	This indicator shows the effect of the anticipation of data on the prices of related country’s major indices. We have categorized it as below: Very Good Good Neutral Bad Very Bad
Actual:	Refers to the actual/latest figures after its release.

Data for the week 02-Aug-14 to 08-Aug-14

Date	Time (IST)	Country	Data	Exp.	Prior	Exp. chg today	Avg. chg of last 1 year	Exp. Impact on Price
05-Aug-2014	07-15 AM	China	HSBC China Services PMI	--	53.1		1.41	Neutral
05-Aug-2014	10-00 AM	Australia	RBA Cash Rate Target	2.5%	2.5%	0.00%	0.05	Neutral
05-Aug-2014	10-30 AM	India	HSBC India Services PMI	--	54.4			Neutral
05-Aug-2014	10-30 AM	India	HSBC India Composite PMI		53.8			Neutral
05-Aug-2014	11-00 AM	India	RBI Cash Reserve Ratio	4.0%	4.0%	0.00%	0.03	Neutral
05-Aug-2014	11-00 AM	India	RBI Repurchase Rate	8%	8%	0.00%	0.16	Neutral
05-Aug-2014	11-00 AM	India	RBI Reverse Repo Rate	7%	7%	0.00%	0.16	Neutral
06-Aug-2014	02-00 PM	United Kingdom	Industrial Production (MoM)	0.6%	-0.7%	1.30%	1.75	Neutral
06-Aug-2014	06-00 PM	United States	Trade Balance	-44.9B	-44.4B	-0.50%	3.21	Neutral
06-Aug-2014	08-00 PM	United States	EIA Crude Oil Stocks change	--	-3.697		3.45	Neutral
07-Aug-2014	11-30 AM	Germany	Industrial Production s.a. (MoM)	0.12%	-0.18%	0.30%	2.36	Neutral
07-Aug-2014	04-30 PM	United Kingdom	Bank of England Bank Rate	0.5%	0.5%	0.00	0.00	Neutral
07-Aug-2014	05-15 PM	European Monetary Union	ECB Main Refinancing Rate	0.15%	0.15%	0.00		Neutral
07-Aug-2014	08-00 PM	United States	EIA Natural Gas Storage change	--	88		33.60	Neutral
08-Aug-2014	--	China	Imports (YoY)	0.3%	0.55%	-0.25%	6.92	Neutral
08-Aug-2014	--	China	Exports (YoY)	75.0%	72.0%	3.00%	5.65	Neutral
08-Aug-2014	--	China	Trade Balance	26.00B	31.56B	-5.56	13.34	Neutral
08-Aug-2014	--	Japan	BOJ 2014 Monetary Base Target	--	¥270T		0.00	Neutral

Dynamic Levels

BofA Warns Euro Bank Stocks Are Rolling Over, "Negative For All Risk Assets"

Despite the recent significant weakness in the broader European and US equity indices, European bank stocks are only just beginning to resume their larger downtrend (as the hopes of a Draghi put remained firm until the last few days of BES debacle). As such, BofA's Macenil Curry believes, they are likely to be the catalyst for the next leg of "risk off" and in that environment EURUSD should continue to suffer.

Via BofAML,

Chart of the week: European bank stocks are rolling over

European bank stocks are resuming their downtrend. The 6 month topping formation (Head and Shoulders Top) points to further downside in the sessions and weeks ahead.

Downside targets seen to 130.52/126.83 (approximately 8%/11% lower from current levels) before renewed basing.

Stay bearish EURUSD

While intra-day and daily charts say that €/$ risks a further corrective squeeze higher, bounces must be sold.

The combination of vulnerable European bank stocks and poor price action say that €/$ should continue lower to 1.3104 and below.

Doubts creeping in over stellar zinc price run

While the aluminium price was the strongest price performer among industrial metals in July, zinc again enjoyed a stellar month, rising almost 8% over June.

The price of zinc rose to a near-three year high of $2,416 a tonne last week as the base metal continues to benefit from expected supply cuts due to the scheduled closures of Australia's Century, Namibia's Skorpion and the Lisheen mine in Ireland.

Lisheen and Black Mountain, both controlled by London-listed Vedanta, also suffered production disruptions this year, further boosting the price of the base metal.

While zinc inventories have pulled back some 30% this year warehouse stocks remain relatively high at more than 655,000 tonnes compare to the long-run average of around 500,000 tonnes since 1990.

Last week levels also ticked up for the first time in months, which saw the metal fall back below $2,400 a tonne.

Another factor clouding the supply issue is the use of commodities as collateral for trade credit in China – responsible for 40% of base metal demand. Beijing is clamping down on the practice as it tries to curb its shadow banking system and after a scandal involving such deals at a major port.

While zinc is not as widely used in financing deals as copper, some 250,000 tonnes of zinc is currently being held in Chinese bonded warehouses according to research house Capital Economics.

The latest data from the International Lead and Zinc Study Group also show that mine supply continued to increase in the first four months of this year, growing by 6.8%. Nevertheless, Australia's government commodities researcher, BREE, estimates global deficits of 190,000 tonnes in 2014 and 116,000 tonnes in 2015, as no new major mines are due to be commissioned to replace the lost output.
"People are asking questions about whether zinc has any further upside. We have been saying that the price has escaped the fundamentals. It's overextended and it's got a correction due," analyst Vivienne Lloyd at Macquarie in London told Reuters on Thursday.

On the demand side the forecast also remains positive.

China has been able to lift manufacturing activity in the country to a 27-month high with targeted stimulus measures while Europe, which buys 20% of global zinc supply, along with Japan is expected to boost demand particularly in the automotive sector and for use in value-added steel products galvanised with zinc.

Sister metal lead gained 4% in July, but has not benefited to the extent of zinc this year, despite the fact that zinc mine closures in 2015 will also negatively affect lead supply.

Why China Wants Control Of The South China Sea

A stunning $5.3 trillion in goods cross South China Sea every year, 190 trillion cubic feet of gas reserves sit below the ocean floor - enough to replace China's natural gas imports for over a century - so it is hardly surprising that the world's largest importer of oil wants control of such a critical region.

As Bloomberg illustrates in these 10 incredible graphics, everyone has a claim on the same territory andtensions are rising. “The Chinese believe they have the right to be a great power,” said Richard Bitzinger, a senior fellow at the S. Rajaratnam School of International Studies in Singapore. “What we are seeing is a hardening of China’s stance about its place in the world.”

What's at stake...

The Claims...

The Chaos...

As Bloomberg concludes,

The ambitions of China’s leaders don’t stop at the nine-dash line.

“China’s ultimate long-term goal is to obtain parity with U.S. naval capacity in the Pacific,” said Willy Wo-Lap Lam, adjunct professor at the Centre for China Studies at the Chinese University of Hong Kong. “This is a long-term proposition. At this stage the Chinese understand they don’t have the capacity to take on the U.S. head-on.”

“China is testing the limits of America’s alliance relationships in Asia,” said Storey. “By pushing and probing and essentially showing that the U.S. isn’t willing to respond to these provocations, it is undermining those alliances and hence ultimately U.S. credibility and U.S. power over the long term.”

There are two schools of thought on the eventual outcome of China’s ascendancy, according to Rory Medcalf, director of the International Security Program at the Lowy Institute for International Policy in Sydney.

One argues that dominance of the South China Sea is an inevitable outcome of China’s economic and military expansion. The other says that China will have to curb its ambitions or risk provoking a conflict, even war, which could draw in the U.S.

It’s not possible to judge which scenario ends up proving right, said Medcalf. “The story is only beginning.”

zerohedge.com

Gold Prices 1971 - 2014 in 3 Waves

The Big Picture

Ignore the hype regarding gold, bonds, booms and busts, hope and chains, "shock and awe," stock market crashes, "money honey" commentary, and ignore the politicians. Don't obsess over High-Frequency-Trading and market manipulation. Instead, focus on the big picture as shown in the following chart of monthly gold, which has been divided into 3 phases since 1971.

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Phase 1: Gold rallied from about $42 in 1971 to over $800 in 1980, thanks to massive money printing, debts, deficits, wars, and a loss of confidence in the US dollar.

Phase 2: Gold prices crashed subsequent to the bubble of 1979-80, and then drifted lower for about 20 years. It double bottomed in 1999 and 2001.

Phase 3: Gold rallied off the 2001 low of about $255 to over $1,900 in August 2011. Since then it has corrected to under $1,200, and double bottomed in June and December 2013. Current price is about $1,300.

How Will Gold Prices Change in the next 3 - 5 Years?

Option 1: Gold prices will continue rising, erratically of course, within the green "megaphone" pattern shown above. In my opinion this option is the most likely unless we descend into a global deflationary depression and/or nuclear winter, which the politicians and bankers will do "whatever it takes" to avoid.

or

Option 2: Gold prices continue falling much like they did subsequent to the 1980 bubble high. I consider this option unlikely.

What Else Supports Option 1 - Higher Prices?

1. The rally into 2011 does not resemble the parabolic bubble blow-off into 1980. The drop in prices since 2011 looks like a correction, not a post-bubble crash. Gold was not in a bubble in 2011.
2. Interest rates today are practically zero, but in the 1980 crash era US rates were at all-time highs. Economic conditions are quite different.
3. Monetary policy today is extremely loose, but in 1980 era it was, relatively speaking, tight.
4. The stock market in 1980 had been declining or flat for over a decade, while the stock market of today has enjoyed over 5 years of practically continuous rally.
5. In 1980 confidence in the US dollar and the financial system was fragile, while today it seems (perhaps undeservedly) much stronger.
6. Technical indicators (see graph below) suggest that long-term gold prices have been bottoming during the past year. Note the other examples of "over-sold" conditions in gold prices.

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What Else Supports Option 2 - Lower Prices?

1. Various self-serving forecasts from investment and bullion banks suggest lower prices - at least until they have sufficiently loaded up on future contracts and can massively profit from the rally ahead. I remain skeptical of such prognostications.
2. The price chart shows that gold has been falling since 2011. Some people believe it will continue falling for another 10 - 20 years. However, with ever increasing debt, bond monetization, food and energy inflation, massive Chinese and Russian purchases, and increasing political instability, lower prices appear to be an unlikely outcome.
3. The Fed and most other western central banks would like stable or lower gold prices, so their unbacked debt based paper currencies appear less weak. Maybe they can manufacture another decline in the gold prices such as during April - June 2013, but that also seems unlikely.

Conclusions

This is not 1979 or 1980 when political and economic conditions were drastically different.Perhaps a better analogy would be about 50 years ago (1964) when the Vietnam War was escalating, US citizens were angry and marching in the streets, a gallon of gasoline cost 25 cents, coffee in a restaurant cost ten cents, and a decent middle-class wage was $2.50 per hour. The subsequent 20 years were life-changing and financially difficult for many people. Consumer prices increased drastically, the purchasing power of savings was destroyed, and people lost confidence in government and the US dollar.

Gold prices will rally much higher in the next 5 years. Jim Sinclair's initial target of $3,500 seems very likely by 2016 - 2019. If the powers-that-be choose hyperinflation to deal with their massive debts, then much higher prices are "in play."

There are many other options. For example, if you don't trust or like gold, a bank will pay you 1% interest each and every year if you invest in a Certificate of Deposit.

By: GE Christenson