‘We may be at the start of a commodity uptrend’

When companies do well, they buy natural resources, says the Global Head of Commodities at S&P Dow Jones Indices

Jodie Gunzberg is responsible for managing S&P’s commodity indices, including the bellwether S&P GSCI, regarded as the leading measure of commodity price movements globally. In an interaction withThe Hindu BusinessLine, she talks about why, after a six year lull, commodities may be back in action.

What has been the trend in global commodity markets in the last few years?

In the past few years, supply has outweighed demand, especially from 2008. When the global financial crisis hit, demand dropped off, so supply slowed to let the excess inventories draw down.

During this time, commodity performance was relatively weak. Finally, in 2013, commodities started to see shortages again. That continued through the second quarter of 2014 and performance made a comeback. However, since July, a combination of perfect weather for grains and fewer oil supply disruptions have built up inventories in several major commodities.

Precious metals have been down on decent retail sales in the US, but may strengthen, depending on Russia-Ukraine tensions. Also, gold, after having dropped significantly in the last one month, seems attractive to China for the mid-autumn festival and to India ahead of the Dhanteras and Diwali festivals in addition to the wedding season. Industrial metals is the only sector that has held strong, mainly from supply constraints and strategic stockpiles. Overall, the strengthening dollar has been a headwind for commodities, though much will depend on weather and supply disruptions, especially for commodities with sensitive inventories.

Do you think commodities will under-perform stock markets in the next one year?

This depends on a number of influences. If inflation materialises, interest rates rise and shortages persist, it is likely commodities will do relatively well. It also depends on where the commodity/equity cycle is and when the turning point may happen.

We have now seen six years straight of equity out-performance. As companies have raised capital, they may buy more natural resources to make their output grow further. This may increase demand for commodities and may be the beginning of the mid-cycle. Equities have historically led the cycle.

The economic revival in the US and Europe should help commodity prices revive, isn’t that so?

Stronger demand may help commodity prices, but again, there are other factors such as the strength of the dollar. Supply shocks also matter and when inventories are low, that may not only spike commodity prices but also drive down correlations down between commodities and other asset classes.

Will oil prices continue to fall?

Many factors may determine the future price of oil. Currently, oil is sensitive to slowing Chinese demand growth and euro zone manufacturing growth that may be further diminished by sanctions against Russia. Also, concerns have eased over supply disruptions from Libya and Iraq.

After rallying in the first few months of 2014, gold is now moving down. Where will prices go from here?

Gold historically acts like a combination of a commodity and a currency. Gold has suffered from the economic revival, strong stock market and stronger dollar.

Last time gold dropped as much in a year (in 1981) as it did in 2013, it took 25 years to recover.

What should a commodity investor watch out for?

There are two major opportunities to capture returns in commodities — cyclical opportunities and systematic opportunities. Trend-following systems can capture cyclical opportunities because only price can respond to supply and demand balance.

This is because commodities, in the short run, cannot be drilled and mined, causing relatively slow cycles of inventory building.

So when there is a supply/usage imbalance in a commodity market, its price trend may be persistent, which may be captured by trend-following programmes.

However, currently commodities are hovering at near equilibrium. Short-term disruptions can swing the pendulum quickly, leading to opportunities to bet on mean-reversion.

It is debatable whether the shortages that appeared in 2013 and the first half of 2014 are gone for good.  The inventory build-up may be temporary based on weather and geopolitics.

However, one must keep focus on longer-term factors such as the strength of the dollar, which is historically inverse to commodity prices, rising inflation, rising interest rates and demand forces coming from China and other parts of the world.

US Stock Market 7 Year Cycle of Boom and Bust

Large numbers of people believe that an economic crash is coming next year based stock crash images-1 on a 7-year cycle of economic crashes that goes all the way back to the Great Depression. Such a premise is very controversial – some of you will love it, and some of you will think that it is utter rubbish – so I just present the bare bone facts below for you decide for yourself if it is something to seriously consider protecting yourself from in 2015.

As can be seen below economic crashes of one kind or another occur approximately every 7 years going all the way back to the Great Depression.

• 2008 :Lehman Brothers collapsed, the stock market crashed and we were plunged into the worst recession that we have experienced as a nation since the Great Depression.

• 2001: The dotcom bubble burst, there was a year of recession for the U.S. economy, big trouble for stocks and that little event known as “9/11″ happened that year.

• 1994: Yields on 30-year Treasuries jumped some 200 basis points in the first nine months of the year, hammering investors and financial firms, not to mention thrusting Mexico into crisis and bankrupting Orange County.

• 1987:The stock market plummeted 25% on “Black Monday” on September 27th of that year – the greatest one day stock market crash in U.S. history up until that time (surpassed by the massive stock market crash of September 29, 2008).

• 1980:In 1980, the S&L crisis was blooming and everyone was talking about the “stagflation” that we were experiencing under Jimmy Carter. The Federal Reserve raised interest rates dramatically to combat inflation, and this helped precipitate the very deep recession that we experienced early in Ronald Reagan’s first term.

• 1973 was the year of the Arab oil embargo, super long lines at the gas pumps, and a recession which ended up stretching all the way until 1975.

• 1931 Those that have studied these things say that the pattern keeps going back all the way to the Great Depression pointing out correctly point that the stock market crash which began the Great Depression was in 1929, but actually the worst year for the stock market during the Great Depression was in 1931 – and 1931 fits perfectly into the cycle.

Conclusion

As you can see from the above we have this pattern of economic crashes occurring approximately every 7 years so what should we make of all of this?

I am sure that some of you will dismiss this as pure coincidence and speculation, others will find it utterly fascinating, but one thing is for sure – people are going to be talking about this seven year cycle all over the Internet.

The Best And Worst Performing Assets In September, Q3 And 2014 YTD

When it comes to asset returns, September, and the entire third quarter for that matter, belonged to Asia.

Technically, it belonged to Asian central banks, because while the rest of the world generated weak returns in the past month, the two best performing asset classes were the Nikkei (+5.4%) and the Shanghai Composite (+6.8%), both of which soared on speculation that the local central banks would promptly conduct even more monetary easing. This was most obvious in the Nikkei where while in local currency terms the market is soaring, as is the one in Argentina and Venezuela, denominated in USD, the Nikkei is still down in 2014, performing worse than gold.

In USD terms however, those long the Nikkei have lost in purchasing power everything they have gained in capital appreciation.

On the other side, however, the biggest losers so far at least are clear: Corn, Silver, and Wheat. In terms of fiat-denominated assets, the Russian stock market is the worst performing in 2014, with Greece breathing down its next.

Some more color from DB:

September turned out to be a fairly weak month for most asset classes even if equities and fixed income are still generally in positive territory for the year. Indeed screening our usual monthly performance review charts, the Nikkei (+5.4%) and the Shanghai Composite (+6.8%) were the only standout performers in September. Japanese equities benefitted from a weaker JPY with the Dollar enjoying its best quarterly performance since Q2 2008. The strength.

Staying on equities, the S&P 500 was down over 1% in September despite a landmark 2,000 crossing during the month. Across DM equities, the S&P 500 (+8.3%) is still a relative outperformer against Stoxx 600 (+7.6%) and the FTSE 100 (+1.2%). Turning to EM, the MSCI EM index was down -7.4% during the month. Greece and Bovespa were the other key underperformers in equities. The former was impacted by renewed political uncertainties around Greece’s aid package plans whilst the latter saw a completed unwind of its outperformance in August as election polls suggested diminished hopes of leadership change in the country. Elsewhere the Heng Seng was down 6.9% in September to post its worst month since May 2012 as sell flows  intensified on the back of the pro-democracy protests at the end of the month.

Fixed income didn’t quite benefit from the broader risk off with Treasuries and Bunds down -0.6% and -0.2% on the month. Credit markets also had a bad month from a total return standpoint with HY underperforming IG across the board. Following a brief reprieve in August, US HY actually lost more in September (-2.6%) than it did in July (-1.7%) and went on to post its worst quarter since Q3 2011 when the USA was stripped off  its AAA rating and European Sovereign were struggling. September was second worst month for EM bonds this year largely led by weakness in Latam whilst Asia outperformed on a relative basis. YTD Asian bonds have outperformed Latam and EEMEA bonds by around 400bps and 800bps respectively.

And visually, September:

Third Quarter

2014 YTD:

WTI Crude Slips Below $90 declines 9.9 percent this year.

West Texas Intermediate oil fell below $90 for the first time in 17 months amid signs that supplies from Russia, Saudi Arabia and the U.S. are outstripping demand. Brent, Europe’s benchmark, headed for a bear market.

WTI futures dropped as much as 2.8 percent to $88.20 a barrel in New York, bringing the decline to 9.9 percent this year. Declines in WTI below $90 would slow U.S. production, Goldman Sachs Group Inc. said yesterday. The nation’s output will rise next year to the highest since 1970, the Energy Information Administration forecast Sept. 9.

The shale boom has turned the U.S. into the world’s largest producer of liquid petroleum, reducing its appetite for imports just as global demand growth slows. Saudi Arabia, the world’s largest oil exporter, yesterday cut its official selling price for crude to Asia to the lowest since 2008. Russian data showed the country’s output rose to a near post-Soviet era record. Kurdistan’s oil production over the next 15 months may increase by more than Chinese demand growth over the period.

“We have more than enough supply out there and demand is not catching up,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “U.S. production is just incredible. Fundamentally we are just producing so much oil.”

WTI for November delivery traded at $88.73 a barrel at 12:03 p.m. in London. It’s below $90 for the first time since April 24, 2013. Futures declined 13 percent in the three months to Sept. 30, the worst quarterly performance in more than two years.

Average retail gasoline prices in the U.S. fell to $3.328 a gallon yesterday, the lowest since February, according to data from the Automobile Association.

Saudi Stance

Brent for November settlement tumbled as much as $2.61, or 2.8 percent, to $91.55 a barrel on the London-based ICE Futures Europe exchange, the lowest since June 28, 2012. It’s down 20 percent since closing at $115.06 a barrel on June 19. The grade’s premium to WTI was at $3.32 a barrel, little changed from yesterday.

U.S. crude oil production rose to the highest level since 1986 last month, while OPEC output climbed to the highest in a year. The International Energy Agency last month reduced its projections for demand growth this year and in 2015, citing a weakening economic outlook.

U.S. producers may halt rigs and low production if WTI “keeps falling below $90,” Jeff Currie, Goldman Sachs’s head of commodities research, said in an interview in London yesterday.

Saudi Cuts

Saudi Arabia reduced the price for Arab Light to Asia by $1 a barrel to a discount of $1.05 to the average of Oman and Dubai crude, the lowest since December 2008. Official selling prices, or OSPs, are regional adjustments Aramco makes to price formulas to compete against oil from other countries.

The price reduction followed a cut of 408,000 barrels a day in Saudi production in August to 9.6 million a day, according to data the country submitted to the Organization of Petroleum Exporting Countries. The kingdom will maintain output at that level until the end of the year, a person familiar with its policy said Sept. 26.

“The real story seems to me to be that the Saudis want to protect their market share and not act as an OPEC swing producer, as they have done sometimes in the past,” Christopher Bellew, senior broker at Jefferies International Ltd. said by e-mail. “The excess supply of oil in the market is pressuring prices downwards again. It would be a mistake to try to call the bottom of the market.”

Kurdish Oil

Kurdistan will pump 1 million barrels a day by the end of next year compared with about 320,000 barrels a day now, Sherko Jawdat, head of the natural resources committee in the Kurdish region’s parliament said in an interview. The increase of 680,000 barrels would be more than China’s 2015 demand growth, which the International Energy Agency says will be 320,000 barrels a day.

Eight of the 10 most-traded WTI options yesterday were puts, which give investors the right to sell oil at a designated price. The most actively traded were contracts to sell WTI at $80 a barrel, according to Nymex data compiled by Bloomberg.

U.S. oil consumption will decline to 18.92 million barrels a day this year from 18.96 million in 2013, the EIA said in the monthly Short-Term Energy Outlook. Demand averaged 19.4 million in the four weeks ended Sept. 19, the lowest since July 25, the Energy Department’s statistical arm said Sept. 24 in a separate weekly report.

Global Demand

Global demand growth slowed in the second quarter to the weakest since 2011, according to the Paris-based IEA. The adviser to 29 nations has cut its 2015 global consumption forecast by 300,000 barrels a day since July to 93.8 million a day.

“What’s pushing oil prices down is probably the steep decline in demand,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. “The weakness in the demand sector is causing a lot of people to sell oil.”

The EIA reduced its price forecasts for WTI in the monthly report. WTI will average $98.28 a barrel this year, down from last month’s projection of $100.45.

The share of total U.S. petroleum and other liquids consumption met by net imports fell to 32 percent in 2013 from 60 percent in 2005, according to the EIA. The rate will decline to 21 percent in 2015, which would be the lowest level since 1968.

Prices also slipped as OPEC output increased in September as Libyan output rebounded to the highest level in more than a year, according to a Bloomberg survey. Production from the 12-member group rose by 413,000 barrels a day to 30.935 million, the survey of oil companies, producers and analysts showed.

OPEC has yet to decide to cut its production target, the United Arab Emirates’ energy minister said on Sept. 23. All 12 members of the group must agree before any reduction in its official limit of 30 million barrels a day, the U.A.E.’s Suhail Al Mazrouei said, a week after OPEC’s secretary-general said it may lower the ceiling in 2015.

Revised market lot of F&O

NIFTY 50 25

CNXMDCAP 150 75

ASHOKLEY 11000 8000

AXISBANK 1250 500

GMRINFRA 10000 9000

HAVELLS 1250 1000

IFCI 9000 8000

NHPC 12000 10000

UNITECH 17000 9000

—————————————–
ADANIENT 1000 500

ADANIPORTS 2000 1000

ALBK 4000 2000

AMBUJACEM 2000 1000

ARVIND 2000 1000

AUROPHARMA 500 250

BANKBARODA 500 250

BHARATFORG 1000 250

BHARTIARTL 1000 500

BHEL 2000 1000

CENTURYTEX 1000 500

CIPLA 1000 500

COLPAL 250 125

CROMPGREAV 2000 1000

DABUR 2000 1000

DISHTV 8000 4000

DIVISLAB 250 125

FEDERALBNK 4000 2000

GAIL 1000 500

HCLTECH 250 125

HDFCBANK 500 250

HDIL 8000 4000

HINDPETRO 1000 500

IGL 1000 500

INDIACEM 4000 2000

IOB 8000 4000

IRB 4000 1000

KOTAKBANK 500 250

MOTHERSUMI 1000 500

ONGC 1000 500

ORIENTBANK 2000 1000

PFC 2000 1000

PNB 500 250

RANBAXY 1000 500

RELCAPITAL 1000 500

SIEMENS 500 250

SRTRANSFIN 500 250

SSLT 2000 1000

SUNPHARMA 500 250

SYNDIBANK 4000 2000

TATAMOTORS 1000 500

TATAMTRDVR 2000 1000

TATASTEEL 1000 500

TVSMOTOR 2000 1000

UNIONBANK 2000 1000

UPL 2000 1000

VOLTAS 2000 1000

YESBANK 1000 500

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UBL 250 500Revision of Market Lot of Derivative Contracts on Indices

NIFTY Present Market Lot 50 Revised Market lot 25
Nifty Midcap 50 Present Market Lot 150 Revised Market lot 75

All contracts in the above mentioned Indices shall have the new market lot with effect from October 31, 2014

DEPARTMENT : FUTURES & OPTIONS Download Ref No : NSE/FAOP/27733 Date : September 30, 2014
Circular Ref. No : 069/2014

*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*

DEPARTMENT : FUTURES & OPTIONS Download Ref No : NSE/FAOP/27734 Date : September 30, 2014
Circular Ref. No : 070/2014

INDIAVIX Present Market Lot 550 Revised Market lot 800
The revised lot size shall be applicable to contracts with expiry date October 28, 2014 and onwards

London Metal Exchange raises fees by a third

The London Metal Exchange is hiking transaction fees charged to members and users by an average of 34% for the first time since Hong Kong Exchanges & Clearing Ltd. acquired it for $2.2 billion in 2012.

The new tariff, to be charged in U.S. dollars, seeks to help fund investment in the exchange and it will come into effect on Jan. 1, Chief Executive Garry Jones said in a statement.

The move come as the LME's owner needs to invest in upgrading its system.

The LME, as was just three years ago, would not survive in today’s environment

“The LME, as was just three years ago, would not survive in today’s environment,” said at a press conference in London.

The company said the new fee structure simplifies and levels out the transaction fees across the LME user base.

Charles Li, the HKEx chief executive, said the fees hike would benefit members as higher exchange revenues fed through to better trading systems and a broader range of products.

“Ultimately everybody will make a lot more money out of their participation in LME,” Li said in the statement. “The fee increase is just a rebalancing of some of that economic interest between the exchange and the members.”

Nitty-Gritty

The exchange will charge its ring members 50 cents for one side of the contract in trading and clearing fees, up from 38 cents now, according to this table. Members who lack the right to trade on the floor will pay 90 cents, compared with 58 cents.

Short-dated client carry trades will continue to attract a discount in the new fee schedule, the LME said. Members’ clients will pay 50 cents for short-term carries compared with 38 cents now, while other trades will cost 90 cents compared with 65 cents now, according to the LME. Member-to-member give-up trades will cost 50 cents, down from 58 cents now.

September precious metal price meltdown

On Tuesday gold futures came under pressure again on the back of a rampant dollar which hit a four-year high against a basket of currencies of the major trading partners of the US.

In late afternoon trade on the Comex division of the New York Mercantile Exchange gold for December delivery was changing hands for $1,208 an ounce, down more than $10 an ounce or 0.8% compared to Monday's closing price.

Earlier in the day the price of the yellow metal hit $1,204, but found some support after the dollar pared its gains following disappointing data on home prices in the US released on Tuesday.

After closing 2013 at $1,205 the price of gold jumped out of the starting gate, rising consistently to reach a high of $1,380 in March.

But the subsequent retreat accelerated during the third quarter with a loss of 6.2% in September alone. September was the worst monthly performance since June 2013 when gold lost 28% over the course of the year.

Historically holding gold going into September reaps investors a more than 3% return.

The steady decline over the course month is contrary to usual trading patterns – historically holding gold going into September reaps investors a more than 3% return.

Both large investors and retail buyers seem to be abandoning the sector.

The third quarter is the sixth quarter in a row holdings in global exchange traded funds backed by physical gold have seen a reduction.

Overall gold bullion holdings are now at five year lows and a whopping 950 tonnes below the record 2,632 tonnes or 93 million ounces reached in December 2012.

On the futures market speculators have also turned decidedly bearish.

Copper was also in danger of falling through key support levels

Bullish bets on gold – net long positions held by large investors like hedge funds – fell by 20%, in the week to September 23 according to Commodity Futures Trading Commission data – the lowest point this year.

Silver futures also had a dismal day with December contracts falling to a day low of $16.85, down over 4% on the day and a more than 13% decline for the month. By late afternoon the metal had recovered somewhat to trade at $16.99, still the lowest since January 2010.

January platinum futures – the most active contract on the Nymex – briefly dropped through the $1,300 an ounce level.

The precious metal fell 8.8% in September, but sister metal palladium was the biggest loser – down nearly 15% in September. It is worst month in three years for palladium as it declined from 13-year highs at the end of August above $900 an ounce.

Copper was also in danger of falling through key support levels with December deliveries hitting a day low of just above $3.00 a pound, down nearly 5c on the day.