Russia Makes Friends: To Hold Military Drill With China; Strikes Multi-Billion Deals Bahrain And Iran. Eyeing Pipeline, Russia Forgives North Korean Debt

 The G-8 may be no more as the G-7 throws every possible case of harsh language known to man at the Kremlin, which obstinately refuses to back down, while re-escalating sanctions against a Russia which merely has done what the US does every single time its national interest abroad is threatened, but one thing is becoming ever clearer: while the west isolates Russia with ever stricter measures, Russia has decided to make some new friends.

Such as China:

China and Russia will hold a "maritime cooperation-2014" drill in East China Sea at end-May, Voice of Russia reports on its Chinese-language website yesterday.

China and Russia will conduct reconnaissance in the area within 3 days to prepare for the drill, the report says, citing an unidentified representative from Russian navy.

Earlier, the Russian military delegation of the Russian Navy, led by Viktor Karamazov Couchepi, arrived in Shanghai. Naval officials and representatives of the General Command of the Pacific Fleet met the Russian military delegation.

Such as Iran:

Iran and Russia are negotiating a power deal worth up to $10 billion in the face of increasing US financial alienation. The construction of new thermal and hydroelectric plants and a transmission network are in the works. Iran’s Energy Minister Hamid Chitchian met his Russian counterpart Aleksandr Novak in Tehran on Sunday in order to discuss the potential power deals, according to Iran’s Mehr news agency.

“[Expansion of] Iran-Russia relations are not only to the benefit of the two nations, but also are beneficial to entire region,” Iranian President, Hassan Rouhani, stated in a meeting with Novak in Tehran on Sunday, reported Iran’s FARS news agency.

Plans include the construction of hydroelectric and thermal generating plants and a new transmission network. The possibility of Russia exporting 500 megawatts of electricity to Iran is also on the cards, said Mehr.

The strengthening of economic ties between the two countries is of heightened significance given both economic sanctions on Iran, imposed with the aim of encouraging Iran to cut its uranium stockpiles, and new economic sanctions on Russian officials imposed on Monday.

On Sunday, Chitchian reportedly stressed “the need for further expansion of economic ties between Tehran and Moscow, particularly in the energy and commerce spheres,” stated Mehr.

Moscow has additionally been discussing the trade of 500,000 barrels a day of Iranian oil for Russian goods with Tehran. The protracted deal, first reported at the beginning of April could be worth as much as $20 billion, and has rattled Washington because it could bring Iran's crude exports above one million barrels a day - the threshold agreed upon in the nuclear deal between the P5+1 powers - US, Britain, France, China, Russia and Germany – and Iran.

such as Bahrain:

The governments of Bahrain and Russia have signed a deal to cooperate on investments, at a time when U.S. and European governments are imposing economic sanctions on Russia over the crisis in Ukraine.

Bahrain is a U.S. diplomatic ally in the Gulf, and its decision suggests Western sanctions may not deter other countries from continuing to expand business ties with Russia.

In a statement on Tuesday, the Russian Direct Investment Fund (RDIF) said it had signed a memorandum of understanding with Bahraini sovereign wealth fund Mumtalakat to identify and work together on investment opportunities in their countries. Mumtalakat chief executive Mahmood al-Kooheji will join the RDIF's international advisory board, helping to formulate its strategic direction, the statement added.

The Bahraini fund is one of the smaller sovereign funds in the Gulf, with $7.1 billion of assets as of last September. The RDIF is a $10 billion fund created by Russia's government to make equity investments, mainly in the Russian economy.

And Such as North Korea

Reuters reported that Russia’s Duma voted to write off roughly $10 billion worth of the debt that North Korea owes Moscow from the days of the Soviet Union. The vote ratified an agreement made in September 2012, after a meeting between then-President Dmitry Medvedev and then-North Korean leader Kim Jong-il in Siberia in the summer of 2011.

At the time the agreement was first announced, The Guardian reported, citing Russia’s Finance Minister Sergei Storchak, that Moscow would forgive “90% of the debt and reinvest $1bn as part of a debt-for-aid plan to develop energy, health care and educational projects in North Korea.” Russian experts hailed the agreement as a sign that North Korea’s leadership was looking to initiate market style reforms in the reclusive country.

The Reuters report from this weekend said the deal ratified by the Duma on Friday would leave North Korea with about $1.09 billion worth of debt to Russia. North Korea would pay off that amount in six-month installations over the next twenty years. It also summarized Storchak as saying that the money Pyongyang pays back would be reinvested into North Korea.

North Korea was a strong ally of the Soviet Union during the Cold War, and Russia has forgiven the debt incurred by other Soviet allies like Cuba. However, the decision to forgive Pyongyang’s Soviet-era debt is most likely geared toward trying to bolster Russia’s plans to build a gas pipeline from its Sakhalin Island fields to South Korea via the North. The pipeline, which would also be accompanied by a railway, would reportedly carry 10 billion cubic meters of gas to South Korea annually. The gas would come from Russia’s state-owned energy company, Gazprom.

Moscow has been pushing for the Korean gas pipeline and railway for years as part of its strategy to diversify its energy markets away from Europe and toward Asia. This general goal has gained new urgency in the wake of Russia’s clash with the West over the Ukraine and Crimea.

The plan got a boost from Seoul over the weekend when South Korea’s Unification Ministry announced on Sunday that it had approved a trip to Pyongyang by Choi Yeon-hye, the president and CEO of the Korea Railroad Corp. Choi will lead a South Korean delegation to the Organization for Co-Operation between Railways (OSJD) meeting in the North Korean capital scheduled for April 24-28. Chinese and Russian rail officials will also be at the meeting, according to South Korean media outlets.

 If nothing else, at least it shows just how seriously the rest of the world (away from those G-7 members who are as insolvent as the US of course) is taking US sanctions and threats of retaliation. Meanwhile, back in the US, rigged stocks hit intraday highs on what we would otherwise call BTFWWWIIID... if only there was a D.

All NATO Aircraft Deployments In Response To The Ukraine Crisis : The West Prepares

This does not exactly look like de-escalation to us...

Morgan Stanley: Gold price won't see $1,300 again

The gold price on Tuesday continued to hover below the $1,300 an ounce level, down more than $80 an ounce from 2014 highs reached mid-March.

US investment bank Morgan Stanley added to the negative sentiment, forecasting the gold price to average $1,250 this quarter, decline to an average $1,168 in the second half of 2014 and weaken further to $1,138 next year.

The commodity analysts at Morgan Stanley are quoted in Barron's blog that record demand from China "won't be enough to keep gold’s price above $1,200 per ounce in the coming year, much less help it rise".

The bank blames a slide in the value of the Chinese currency, the yuan, against the US dollar for weakening demand.

Signs of a drop-off in the world's top importer of gold are already visible:

Mainland China's net imports totaled 80.6 tonnes in March, a 27% drop compared to the 111.4 tonnes imported in February.

Compared to the same time last year the drop-off was even more stark – down 38% from the record 130 tonnes in March 2013.

Another indication that there are fewer buyers in China is the disappearance of premiums paid on the Shanghai Gold Exchange.

From premiums that topped out at $37 when gold was trading around $1,200 last year, during March traders on average offered gold at a small discount to the quoted London spot price.

Geopolitical tensions and worries about the US economy won't attract safe-haven buying like it did earlier in 2014

March was the first month since September 2012 that gold did not attract a premium.

Driven in part by a weakening yuan, discounts on gold widened to as much as $9 an ounce below when the price were headed towards $1,400 in March.

Apart from Asian demand issues, factors that have helped gold gain some 8% in value this year compared to a 28% fall in 2013 will also be fading in importance over the course of 2014.

Morgan Stanley argues geopolitical tensions and worries about the US and Chinese economy won't attract safe-haven buying of gold like it did early this year.

And tepid interest from futures traders and ETF investors will see the metal drift lower this year and next.

Global aluminium market to shift to deficit in 2014: HSBC

The Metals Quarterly Report for Q2 2014 released by HSBC forecasts the global aluminium market to turn into deficit from surplus during 2014. However, the firm believes that the market may remain balanced in 2015.

HSBC states that it has lowered its non-Chinese production forecasts for 2014 and 2015 to 640,000 mt and 940,000 mt respectively.

According to HSBC, the recent weak prices of aluminium have forced major facility shutdowns, which in turn may shift the market from surplus to deficit during this year. The global aluminium market may witness a global deficit of 144,000 mt in 2014. But the market may move back to 288,000 mt surplus by 2015.

The global surplus is likely to widen during 2016 and 2017,it added. This is mainly on the back of expectations that delayed projects in India and Russia may become online during 2016-’17. The bank anticipates new production to the tune of 4 million mt coming out of new smelters in these countries as well as in Russia, Canada and the Middle East.

The bank has also lowered its demand growth estimates for the five-year period from 2013-2017 down to 5.5% from 5.7%. The average aluminium price for 2014 may remain at $1,887 per mt. The prices may move above $2,000 per mt by the end of the year 2014.

Bengal hikes stamp duty on commodity contracts

The West Bengal Government has increased stamp duty on contract notes, a move that is likely to result in a fall in trading volumes at commodities exchanges.

According to recent notification , the State Government has imposed a stamp duty of 50 paise for every ₹5,000 in commodities traded.

Earlier, the stamp duty was 50 paise per contract, irrespective of the value of the contract.

The increase in stamp duty is likely to impact several commodity traders who are a part of these exchanges.

Low margin biz

Commodity traders generally operate on typically low margins, and depend mostly on high volumes to make money on trades.

A senior official at a commodity exchange, who did not wish to be identified, pointed out that an increase in stamp duty will logically lead to a decline in trade volumes as business will become unviable.

However, the trend is likely to be felt only over the coming months.

“Either these people will stop trading or they might move to some other state where the stamp duty is lower,” the official pointed out.

NSEL crisis

The increase in stamp duty is the latest in a series of incidents, including the introduction of the commodities transaction tax in 2013 and the payments crisis at the National Spot Exchange Ltd, that have resulted in a fall in trading volume at commodities exchanges .

Chinese Stimulus: Copper may benefit more than most metals

Morgan Stanley analysts said that they are surprised by copper’s under performance against the base metals complex so far this year, but suggest the red metal could benefit more than most metals if authorities in key consumer China move to stimulate the economy.

“Physical availability in the country is tightening, as inventories fall and SHFE (Shanghai Futures Exchange) structure enters its steepest backwardation since 2Q11,” said Morgan Stanley via Kitco News.

This trend is the result of power grid investment, which accounts for 47% of China’s copper demand, being up 13% year-on-year for the 2014 so far, pointing to the government’s goal of lifting investment 20% above the record spending in 2013.

“Scrap availability also remains tight, with March marking the 14th consecutive (year-on-year) decline in scrap imports. As copper’s under performance results from investor concerns over China, it could be the prime beneficiary if policymakers respond to worsening macro data, as we expect,” Morgan Stanley concluded.

China Holds the Keys to the Gold Market

Last year China's private-sector demand for gold reached a record level of 1,132 tonnes, and according to the World Gold Council (WGC), the Asian nation could easily dominate the gold market once again, as they predict demand growing 20 percent by 2017.

This updated projection from the WGC confirms what I've written about previously: China's love for the precious metal remains robust. We are witnessing this country transform into an economic powerhouse, and now, the world's largest gold market! I think it's important for investors to recognize the main drivers behind this tremendous growth.

1. A new middle class has more money to spend.

Despite all the grandiose numbers we see in China's gold market, the Asian nation hasn't always been the "golden goose" of the game. The WGC points out in its recent report, China's Gold Market: Progress and Prospects, that only in the last several years has China seen an emerging middle class supported by higher incomes. For example, Shenzhen is currently a city with over 10 million people, accounting for 70 percent of China's jewelry fabrication. Just 30 years ago however, it was only a small town of around 330,000 people, meaning consumer demand for gold at that time was minimal at best.

Over the last 10 years however, a new middle class has emerged and consumers have been enjoying their new wealth. As GDP began to rise, people started buying more gold jewelry and coins. In addition to increased spending on these items, the investment demand for the yellow metal progressed as the population sought a hedge against inflation.

2. Jewelry is still the top demand driver.

The WGC report also reaffirms the ongoing power of the Love Trade. The Love Trade, one of the two main drivers of gold along with the Fear Trade, relates to the cultural affinity for the precious metal particularly in Asia, India and the Middle East. Consumers continue to purchase gold jewelry and coins year-after-year, and demand rises in synch with gift giving for religious holidays and celebrations.

As you can see in the chart below, since 2004 the volume of gold jewelry consumed in China has tripled.

What's more, China surpassed India as the world's largest consumer and manufacturer of jewelry in 2013. According to a recent Reuters' article, gold jewelry sales in India slowed by 10 percent since import restrictions were imposed on the country last year - a likely factor placing China in the top spot.

3. Industrial demand is increasingly important.

Though not nearly as strong as the gold jewelry demand in China, the country's rise in GDP has also increased industrial demand for gold. The WGC says that electronics are the dominant source of this industrial demand. Gold is used in cellphones, computers, circuit boards and recently the automobile industry has seen an increased demand for the metal.

Gold may seem like an expensive option to choose from to build cellphone parts or airbag connectors in vehicles, but as the report states, "Although manufacturers are always trying to reduce the cost of components and substitute gold with lower cost alternatives, this cannot be done where optimum performance and, especially, safety concerns are to the fore."

In our slideshow, The Many Uses of Gold, we explain other ways gold is used; not only for industrial needs, but for medical and technological advances as well.

4. China is diversifying away from the U.S. dollar.

When it comes to foreign exchange reserves, China's totalled $3.8 trillion U.S. dollars in 2013, a sharp increase from the mid-90s as you can see in the chart below. There are several challenges facing the Asian nation's monetary system too; the multi-currency system which includes the renminbi and the dollar is no easy task to manage.

But how are China's foreign exchange reserves and monetary troubles a driver for gold demand?

For starters, according to the WGC, the majority of growth in China's reserves (implied specifically by the country's current account surplus) has been in U.S. dollars. China used the dollar to buy American debt securities, but upon the global financial crisis and the start of quantitative easing (QE), China has been pulling away from exposure to the dollar.

In a recent article from Casey Research, Chief Economist Bud Conrad even comments on the decline of the dollar's reserve status in foreign countries such as China. He says, "In 2000, the dollar accounted for 55 percent of all foreign exchange reserves. In 14 short years, that number has dropped to 33 percent. By 2020, I project, it will drop to 20 percent. At that point, other large economies of the world won't need dollars nearly as much for international trade."

I believe that government policy is a precursor to change, so as fiscal and geopolitical challenges rise between the two countries, it's no wonder China wants to back away from the dollar and thus, diversify to gold. Gold is a hard asset, making it a prime currency choice for China. In regards to gold, the WGC report even states that, "It cannot be created out of thin air at the whim of central banks. Nor can it be manipulated for the benefit of its issuer."

So what is China up to now?

So perhaps the People's Bank of China is amping up its gold reserves to diversify away from the U.S., but one question remains. Exactly how much gold does China have?

As Mineweb reported this last week, China deemed Beijing as an additional import city for gold, a clear indicator even more of the precious metal will find its way into the country. China does not release any official numbers about its gold imports, so Beijing will be another source of unpublished data. Rather than reporting its own gold traffic, other countries report their gold export data to China. Hong Kong provides insight into China's gold holdings and in February I wrote how Switzerland released its gold trade data this year for the first time since 1980. Only through these alternate reports can we infer the amount of gold China truly holds.

No matter the exact amount of gold that China has, this country is a good example that the demand drivers for gold remained the same. People around the world react with concern over government policies that can devalue currencies, thus making gold attractive. Similarly, as economies flourish and people have money, they will spend it on gold. The Love Trade will also continue; consumers will purchase gold as gifts as long as cultural celebrations and religious traditions carry on.

It's important to follow the money, or in this case the gold, to see how people around the world react to this rare commodity. Looking forward, stay curious as an investor and you'll see if China can keep the key to the gold market.

Article By: Frank Holmes

Key Events In The Coming Very Busy Week

The coming week will be busy in terms of data releases in the US

CALENDAR

Monday, April 28

• Events: ECB’s Noyer holds press conference; Debate of candidates for European Commission Presidency.
• United States | Pending Home Sales MoM (Mar): Consensus 0.70% (-10.20% yoy), previous -0.80% (-10.20% yoy)
• Italy | Consumer Confidence Index (Apr): Consensus 101.2, previous 101.7
• Sweden | Retail Sales MoM (Mar): Consensus 0.20% (2.70% yoy), previous 0.40% (2.50% yoy)
• Israel | MPC: rates are expected to remain on hold,
• Thailand | Mfg Production Index ISIC NSA YoY (Mar): Consensus -7.80%, previous -4.40%
• Turkey | Consumer Confidence Index (Apr): Previous 72.7
• Also interesting: [DM] US Dallas Fed Manuf Activity Index; UK Hometrack Housing Survey; Germany Import Prices; Sweden PPI and Trade Balance; Japan Retail Trade; Hong Kong Trae Balance [EM] Trade Balance in Colombia, Mexico and Thailand; Leading Index in China and Taiwan.

Tuesday, April 29

• Events: US SEC’s White testifies; EU’s Van Rompuy presents book on Euro crisis; IMF releases Europe Spring Regional Economic Issues Report; French Parliament votes on Hollande spending cuts.
• United States | Consumer Confidence Index (Apr): consensus 83.0, previous 82.3
• United States | S&P/CaseShiller Home Price Index NSA (Feb): Consensus 0.6%, previous 0.8%
• United States | GS Analysts Index (Apr): Previous 56.5
• Germany | GfK Consumer Confidence (May): Consensus 8.5, previous 8.5
• France | Consumer Confidence (Apr): Consensus 88, previous 88
• Germany | CPI EU Harmonized MoM (Apr P): Consensus -0.10% (1.30 yoy), previous 0.30% (0.90% yoy)
• United Kingdom | GDP QoQ (1Q A): consensus 0.90%, previous 0.70%
• Hungary | MPC: We expect another cut in rates by 10bp (from 2.60% to 2.50%). We also expect the MPC to announce the end of the easing cycle and to use non-rate tools from now on to ease financial conditions, support lending to the private sector and demand for government bonds, and to anchor the yield curve.
• Also interesting: [DM] Euro area consumer, economic, and industrial confidence; Euro area M3 Money Supply; Italy Retail Sales and Business Confidence; UK Services Output; NZ Overseas Merchandise Trade; Spain Unemployment; Germany various regional CPI; Sweden Economic Tendency Survey [EM] South Korea BoP CA; Brazil IGP-M Inflation and Bank Lending.

Wednesday, April 30

• Events: BoJ’s Kuroda press briefing after outlook report; Speeches by EU’s Van Rompuy and Barroso, former Fed Chair Bernanke.
• United States | ADP Employment Change (Apr): consensus 210K, previous 191K
• United States | Employment Cost Index (1Q): Consensus 0.50%, previous 0.50%
• United States | GDP Annualized QoQ (1Q A): consensus 1.10%, previous 2.60%
• United States | Personal Consumption (1Q A): consensus 1.90%, previous 3.30%
• United States | Chicago Purchasing Manager (Apr): consensus 56.5, previous 55.9
• United States | FOMC: Consensus expected a $10 billin reduction in monthly taper to $45 billion
• Euro area | CPI Harmonized MoM (Apr P): previous 0.50%
• Italy | CPI EU Harmonized MoM (Apr P): Consensus 0.50% (0.5% yoy), previous (r) 2.20% (0.30% yoy)
• Spain | GDP QoQ (1Q P): GS 0.30%, consensus 0.40%, previous 0.20%
• Spain | CPI EU Harmonised YoY (Apr P): Consensus 0.30%, previous -0.20%
• United Kingdom | GfK Consumer Confidence (Apr): Previous -5.0
• Japan | MPC: The BoJ is expected to keep monetary policy unchanged. In the press conference following the previous meeting, the Governor stressed that there was no need for monetary easing for now, and given that few economic data in the wake of the VAT hike have been published yet, additional easing seems unlikely.
• Japan | Industrial Production MoM (Mar P): GS 0.70%, consensus 0.50%, previous -2.30%
• Japan | Housing Starts YoY (Mar): consensus -2.90%, previous 1.00%
• Canada | GDP MoM (Feb): Consensus 0.20%, previous 0.50%
• Australia | Private Sector Credit MoM (Mar): consensus 0.40%, previous 0.40%
• New Zealand | ANZ Business Confidence (Apr): Previous 67.3
• South Korea | Industrial Production SA MoM (Mar): consensus 1.00%, previous -1.80%
• Taiwan | GDP YoY (1Q P): consensus 3.08%, previous 2.95%
• Ukraine | GDP YoY (1Q P): consensus -1.60%, previous 3.30%
• Also interesting: [DM] Germany Retail Sales and Unemployment Change; France Consumer Spending and PPI; Unemployment in Norway, and Italy; Spain CA; Switzerland KOF Leading Indicator; New Zealand Building Consents Issued; Japan vehicle production; South Korea Business Survey; Singapore Unemployment [EM] Israel unemployment; Trade Balance in Turkey, South Africa and Thailand; Mexico Bank Lending; Chile Manufacturing Index, Retail Sales, and Unemployment; Argentina Construction Activity; Colombia Unemployment.

Thursday, May 1

• Events: Speeches by Fed’s Yellen, BoE's Cunliffe.
• United States | Personal Income (Mar): consensus 0.50%, previous 0.30%
• United States | Personal Spending (Mar): consensus 0.60%, previous 0.30%
• United States | PCE Deflator MoM (Mar): consensus 0.20%, previous 0.10%
• United States | PCE Core MoM (Mar): consensus 0.20%, previous 0.10%
• United States | Construction Spending MoM (Mar): consensus 0.60%, previous 0.10%
• United States | ISM Manufacturing (Apr): consensus 54.2, previous 53.7
• United States | Domestic Vehicle Sales (Apr): consensus 12.80M, previous 12.78M
• United Kingdom | Mortgage Approvals (Mar): Consensus 72.0K, previous 70.3K
• United Kingdom | Markit UK PMI Manufacturing SA (Apr): Consensus 55.4, previous 55.3
• China | Manufacturing PMI (Apr): consensus 50.4, previous 50.3
• South Korea | CPI YoY (Apr): consensus 1.50%, previous 1.30%
• South Korea | Exports YoY (Apr): consensus 5.00%, previous (r) 5.10%
• Thailand | CPI YoY (Apr): Consensus 2.30% (0.26% mom), previous 2.11% (0.22% mom)
• Peru | CPI MoM (Apr): consensus 0.28% (3.40% yoy), previous 0.52% (3.38% yoy)
• Also interesting: [DM] UK Nationwide House Prices; Australia RP Data House Prices and Commodity Index; Denmark Unemployment and Danish PMI Survey [EM] South Korea Trade Balance.

Friday, May 2

• Events: Speech by EU’s Barroso; Norway sovereign debt rating published by Fitch, S&P.
• United States | Change in Nonfarm Payrolls (Apr): GS 220K, consensus 215K, previous 192K
• United States | Unemployment Rate (Apr): GS 6.60%, consensus 6.60%, previous 6.70%
• United States | Change in Private Payrolls (Apr): GS 215K, consensus 210K, previous 192K
• United States | Average Hourly Earnings MoM (Apr): GS 0.20%, consensus 0.20%, previous 0.00%
• Euro area | Unemployment Rate (Mar): Consensus 11.90%, previous 11.90%
• Euro area | Markit EU Manufacturing PMI (Apr): Previous 53.4
• United Kingdom | Markit/CIPS UK Construction PMI (Apr): Consensus 62.2, previous 62.5
• Japan | Overall Household Spending YoY (Mar): GS 1.00%, consensus 1.70%, previous -2.50%
• South Korea | HSBC South Korea Manufacturing PMI (Apr): Previous 50.4
• Indonesia | CPI YoY (Apr): Consensus 7.28% (0.05% mom), previous 7.32% (0.08% mom)
• India | HSBC India Manufacturing PMI (Apr): Previous 51.3
• Also interesting: [DM] US Factory Orders and ISM New York; PMI Manufacturing in France, Germany, Italy, Norway, Spain, Sweden, Switzerland; Japan Unemployment; Australia HIA New Home Sales; Australia PPI; New Zealand ANZ Commodity Prices; Hong Kong Retail Sales [EM] PMI Manufacturing in Brazil, Czech Republic, Hungary, Indonesia, Mexico (HSBC and IMEF), Poland, Taiwan, Turkey, and South Africa (Kagiso); Mexico Worker Remittances; Trade Balance in Brazil and Indonesia

Source: Goldman, BofA

Spot the nation that just had "major sanctions" handed down to it

What is fascinating is the ramp in US equities managed to catch them up to Russia's post-sanctions outperformance... before they collapsed again... almost as if someone wanted to prove that US was not suffering.

Turnover plunges 70% in first fortnight of this fiscal; CTT, NSEL effects continue to haunt.

The commodities futures market continues to reel under the twin impact of the commodities transaction tax (CTT) and the National Spot Exchange Ltd (NSEL) imbroglio. These developments, which have affected liquidity and discouraged trading, have led to a sharp dip in turnover in the market.

In the first fortnight of this month, the turnover dropped by 70 per cent to ₹2.36-lakh crore from ₹7.87-lakh crore in the corresponding year-ago period.

“Interest in commodities trading has been on a downswing ever since the CTT was imposed in July last year. The immediate effect was the trade turnover falling 40 per cent,” said an analyst.

Sliding turnover

Trade turnover during July 1-15, 2013-14 dropped to ₹4.08-lakh crore from ₹7.87-lakh crore in the first fortnight of that fiscal.

During 2013-14, the trading in commodity futures plunged to ₹101-lakh crore from a record ₹170-lakh crore in 2012-13.

The numbers relate to the six national commodity exchanges (MCX, NCDEX, MNCE, ICE, ACE and USEL) and 10 regional exchanges.

The Centre imposed a 0.01 per cent CTT from July 1, 2013 on all non-agricultural commodities such as gold, silver and metals. The CTT for a trade worth ₹1 lakh is ₹10.

350% expensive

Traders feel that the CTT has made exchanges 350 per cent more expensive. “Imposition of CTT has increased the cost of hedging and trading. Because of the high cost on commodity exchanges, small and mid-size traders are shifting to illegal (dabba) trading,” said Sandeep Jain, Director of Tradeswift Commodities.

“The NSEL imbroglio in August further brought down the turnover by another 10 per cent. It has shrunk the money available in the commodities market. Besides, the imposition of additional margins by the Forward Markets Commission, which regulates commodity trading, on various products also affected trading,” said the analyst.

Naveen Mathur, Associate Director (Commodities and Currencies) at Angel Commodities Broking, said that apart from the CTT, the NSEL episode sapped investor confidence. “Besides, the past few months we have witnessed low volatility in some of the major commodities. This, along with equity markets touching new highs, has resulted in commodities trading taking a hit,” he said.

Shift to equity

There has been a shift towards the equity market as the Sensex rises with each passing day, said a trader. The Sensex had surged to record 22,939.31 last week before retreating to 22,631 on Monday.

Genuine physical market hedgers and international reference jobbers are also missing from the commodities exchanges. “Only small-time jobbers and traders are left, and this particular category of participants needs volatility to trade, which has been missing for quite some time,” he said. Commodities trading saw some improvement during January-March after the additional margins were removed.

Besides, the Forward Markets Commission permitted high-frequency trading in mini- and micro-contracts from January. “These improved trading before the interest waned in the first fortnight of April,” said the analyst. During January 16-31, trading on the commodities exchanges increased to ₹3.74-lakh crore from ₹2.77-lakh crore during December 16-31. In the first fortnight of March, the turnover was ₹3.43-lakh crore.

Poll effect

Elections and non-participation of industrial hedgers, too, are affecting commodity trading. Also, prices of key commodities such as gold, crude oil, and metals are ruling flat, leading to lack of interest among the trading community.

According to Vandana Bharti, Assistant Vice-President (Commodities) at SMC Global Securities, “If a stable government is elected, then we may see some increase in the prices of base metals and energy products. The bullion counter may see some decline as the haven appeal will decline. Further, if the newly-elected government goes for an import duty cut, then we may see a further decline in bullion prices.”

Shale Boom Sends U.S. Crude Supply to Highest Since 1930s

The U.S. is stockpiling the most crude since the Great Depression, thanks to the shale boom that has boosted production to the most in 26 years.

Inventories rose 3.52 million barrels last week to 397.7 million, the highest level since 1931, according to Energy Information Administration data going back to 1920. Crude output climbed 59,000 barrels a day to 8.36 million, the most since January 1988, as the combination of horizontal drilling and hydraulic fracturing, or fracking, unlocked supplies from shale formations in the central U.S., including the Bakken in North Dakota and the Eagle Ford in Texas.

The burgeoning supply has sparked arguments over whether a 1975 law that prevents most U.S. crude exports should be repealed. It also may reduce the impetus for a quick approval of the Keystone XL pipeline moving Canadian crude to the U.S. Average weekly imports are down 3.7 percent so far this year, compared with the same period in 2013.

“This paints a secure supply picture for the U.S.,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. “This will add to the political debate about exports and Keystone. Whatever issues arise, it’s important to remember you would rather deal with the problems of a supply glut rather than a dearth.”

Keystone XL

President Barack Obama’s administration said on April 18 that it will postpone a ruling on Keystone XL. The State Department said it wouldn’t make a recommendation until questions are resolved about the way the pipeline’s northern route through Nebraska was approved. The southern portion of the project began moving crude in January to the Texas Gulf Coast from Cushing, Oklahoma.

Inventories along the Gulf Coast, known as PADD 3, rose 2.44 million barrels to 209.6 million last week, the most in EIA data going back to 1990.

Much of that inventory is light, sweet crude, or oil with low density and sulfur content, from the shale fields. Many refineries along the Gulf Coast are designed to run most efficiently on cheaper heavy, sour barrels imported from Mexico and Venezuela.

“The problem is that we have a glut of light, sweet crude when what we need is sour,” Schork said. “There have to find a way to swap the barrels we’ve got in hand or exporting them, so we can take full advantage of the rise in output.”

Energy Independence

Harold Hamm, the chairman and chief executive officer of Continental Resources Inc. (CLR), who became a billionaire drilling in North Dakota, told U.S. lawmakers Jan. 30 that the country, which EIA data show supplied 86 percent of its own energy last year, can drill its way to full independence by 2020. Hamm is leading an effort to get Congress to allow crude exports for the first time since the 1970s.

Senator Lisa Murkowski of Alaska, the senior Republican on the Energy and Natural Resources Committee, said in a Jan. 7 speech that she also supports changing the export rules.

The federal Jones Act restricts domestic seaborne trade to vessels owned, flagged and built in the U.S. and crewed by citizens. Thirteen tankers can haul crude domestically out of a global fleet of about 2,400, according to the U.S. Transportation Department’s Maritime Administration. The Jones Act is a 94-year-old law.

WTI Slips

West Texas Intermediate crude for June delivery slipped 31 cents, or 0.3 percent, to settle at $101.44 a barrel on the New York Mercantile Exchange. Futures ended trading at $104.37 a barrel on April 21, the second-highest level of 2014.

The U.S. inventory level was the highest in EIA weekly data begun in 1982 and monthly government data going back to 1920. Reports before 1976 were based on data from the Bureau of Mines, according to the EIA, and stockpiles of Alaskan crude oil in transit were included starting in 1981.

Imports decreased 475,000 barrels a day to 7.8 million in the seven days ended April 18. Arrivals have averaged 7.46 million barrels in 2014, according to EIA figures, down from 7.74 million for the first 16 weeks of 2013.

“Imports remain strong,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “We’ve yet to waive off imports but may be nearing a breaking point because of swollen supplies along the Gulf Coast. When that occurs, there will be a major rebalancing of global markets.”

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

Commodities futures trade volumes fall for second year

(Reuters) – Commodity futures trading volumes in India fell 40.49 percent in the year to March 2014, its second straight year of decline, the market regulator said on Tuesday.

In value terms, futures trading at commodity exchanges fell to 101.44 trillion rupees in the first twelve months from April 2013 from 170.46 trillion rupees a year ago, the Forward Markets Commission said in a statement on its website.

Trading in gold bullion fell more than 25 percent to 43 trillion rupees in the year to March 2014, from 78 trillion rupees in the same period last year. Metals volumes fell 46 percent to 17 trillion rupees, and volumes in agricultural commodities fell 25 percent to 16 trillion rupees.

The plunge in volumes and lack of fresh capital is expected to cause at least one national-level exchange, the Indian Commodity Exchange controlled by Reliance Capital (NSI:RELCAPITAL), to shut down.

The world’s second-biggest buyer of gold and second-biggest producer of wheat, India allowed commodities futures trading only in 2003. But enthusiasm has dried up since a scam was unearthed last July at the National Spot Exchange owned by Financial Technologies India, which also owns the largest exchange, the Multi Commodity Exchange (MCEI.NS).

In addition, also last July, India levied a Commodities Transaction Tax (CTT) of 0.01 percent on trade of all non-agricultural commodities futures and a few agricultural commodities futures, and increased restrictions on imports of bullion.

“The very first jolt was that when CTT was introduced and then the NSEL fiasco,” said Haresh Galipelli, vice-president, Inditrade Derivatives and Commodities in Hyderabad.

“We have already seen peaking of retail participation and for the market to reach new level, we need more participation of banks, institutions….”

India has 21 commodity bourses, including six operating at the national level, trading about 80 commodities ranging from gold to carbon credits. Foreigners are still not allowed to trade in futures, but can buy stakes in the exchanges.

“Consolidation will continue in commodity trading unless we pass the FCRA (Forward Contract Amendment Bill) and launch innovative products like options,” Galipelli said.

The bill has been pending in parliament for a decade.

Massing Of 15,000 Ukraine Troops, Hundreds Of Tanks Around Slavyansk - Satellite Images

Russian RIA Novosti reports that it has received satellite photos, "which clearly show the accumulation of a large number of Ukrainian military equipment and weapons on the border with the Russian Federation and in the vicinity of Slavyasnk." RIA cites a source in the Russian Defense Ministry, who commented that the pictures show a military formation designed "to wipe out the city and all its inhabitants from the face of the earth."

According to source, the group has more than 15,000 troops from the Ukraine army and national guard, about 160 tanks, 230 infantry fighting vehicles and APCs, and as much as 150 mortars, howitzers and multiple launch rocket systems ("Grad" and "Smerch").

The source concludes that "This concentration of troops in one area is not compatible with the potential of self-defense forces, armed with only a small number of pistols and submachine guns."

The satellite images are below:

It goes without saying that a matching build up (or at least an attempt at one) by Ukraine is normal and to be expected. The problem is that as we have witnessed every day over the past two weeks, military provocations on both sides of the conflict happen every day if not every hour. The latest one happened moments ago, as reported by RT:

Unknown assailants landed in helicopters and attacked a checkpoint in Soledar city in eastern Ukraine’s Donetsk region, a militia source told RIA Novosti adding that there is a fight going on. There is no information on the number of casualties.

Soledar is located about 30 kilometers south east of Slavyansk.

The people’s governor of Donbass region Denis Pushilin confirmed to RT that there is fighting in Soledar. As the unknown men attacked the checkpoint, the militia was forced to retreat, the source told RIA.

The second checkpoint is preparing for attack he said, adding that there are about 50 activists, many without weapons.

For now these skirmishes around "checkpoints" have been isolated events. But how long before the Ukraine "special forces" which may well amount to 15,000 troops as reported by Russian media, get involved. And how much longer after that until Russia retaliats. But the biggest question: who will be the agent provocateur who fires the first shot in hopes of launch an all out war? Indeed, who stands to gain the most from yet another war - one which will hardly be "contained"