HKEx to launch copper, aluminium, zinc mini-futures this year

* HKEx plans futures settled in renminbi

* Traders say could rival Shanghai exchange's

April 22 (Reuters) - Hong Kong Exchanges and Clearing Ltd <0388.HK> plans to launch copper, aluminium, zinc and coal futures contracts this year, it said on Tuesday, the exchange's first foray into the fiercely competitive, burgeoning Chinese commodities derivatives market.

The company said it will introduce mini futures for the three base metals based on settlement prices of the futures on the London Metal Exchange (LME) owned by HKEx and settled in cash with Chinese renminbi. They will trade in 5-tonne lots, rather than the 25 tonnes on LME futures.

The thermal coal contract will be U.S.-dollar denominated.

The move will aim to capture the growing appetite among investors in China for commodities trading and will offer currency convenience for its Asia clients. China is the world's largest industrial metals consumers and one of the largest producers, consumers and importers of thermal coal.

"The rationale behind our Asia commodities platform is to meet the needs of the industry here in Asia. This is just the beginning of our Asia commodities plan," HKEx Chief Executive Charles Li said.

If successful, the new products could also rival the Shanghai Futures Exchange, which sets the reference price for physical and futures metals trading in China. The copper, aluminium and zinc contracts are also 5-tonne lots and settled in renminbi.

While ShFE's metals turnover is still lower than the LME, the world's no. 1 metals market, trading the arbitrage between LME and ShFE copper contracts is one of the most active plays in the market.

"The contract could have significant implications for the LME/ShFE arbitrage," said Standard Bank base metals analyst Leon Westgate.

Li said he does not expect the contracts in Hong Kong to erode the ShFE's existing share of the market.

"I do not necessarily see it as competing (with the Shanghai contracts) because you have big users and have huge need to hedge," Li said in a news briefing.

The exchange hopes that the contracts would be a starting point for building mutual access to futures contracts in both Hong Kong and mainland China, Li said.

In the longer term, HKEx aims to licence some futures contracts from China's futures exchanges, such as iron ore contracts, to trade in Hong Kong, Li said.

The contracts will all be monthly cash-settled futures without physical delivery of the commodities. The LME also has LME mini copper, aluminium and zinc contracts in 5-tonne lots priced on the dollar.

The API 8 thermal coal futures in 200-tonne lots will be settled against the monthly average of all API 8 prices published in the Argus/McCloskey's coal rice index report in the expiring contract month. The contract will cover the spot month and the next 23 calendar months.

The index tracks the price for coal delivered to south China and is used for international physical and derivatives coal business.

To see the full HKEx statement, go to:

www.hkex.com.hk/eng/newsconsul/hkexnews/2014/140422news.htm

2014 gold price rally fades as ETF investors, hedge funds exit market

The gold price extended recent weakness on Tuesday losing sight of the psychologically important $1,300 level as investors rotate out of the metal into surging stocks.

On the Comex division of the New York Mercantile Exchange, gold futures for June delivery settled at $1,281.10 an ounce, down $7.0 from yesterday's close.

Earlier in the day the gold price fell to levels last seen February 10 of $1,275 an ounce. In contrast the US benchmark stock index, the S&P 500 recorded its sixth straight session gain.

Post-Easter trade remained thin with only 110,000 contracts changing hands against usual volumes of closer to 200,000 contract of 100 ounces each.

"Traders seem to have given up on gold as a provider of safe haven at the moment," Saxo Bank's head of commodity research Ole Hansen said in a note:

"Instead the focus remain firmly on the United States, where earnings and economic data continue to indicate interest rates will rise sooner rather than later.

"Hedge funds cut their net-long position back to February levels and total ETP holdings have dropped to a new 2009 low. So with the US healing, Chinese demand questionable and investment demand not showing signs of picking up, gold is back on the defensive."

Latest data from US Commodity Futures Trading Commission show hedge funds and other large investors added to bets that the price of the metal would fall for the fourth week in a row.

Short positions – bets that price would decline – held by managed money increased 15% to just under 28,000 lots in the week to April 15 according to CFTC data.

With the US healing, Chinese demand questionable and investment demand not showing signs of picking up, gold is back on the defensive

At the same time long positions were cut by 4,766 contracts which translates into a 8.5% decline in the net-long positions held by commercial traders in the precious metal to 90,137 futures and options.

Investors also continued to pull money out of the SPDR Gold Trust (NYSEARCA:GLD), the world's largest physically-backed gold ETF accounting for some 40% of total holdings in the industry.

Holdings in GLD dropped to 792.1 tonnes or 25.46 million ounces on Tuesday, the lowest level since January and down almost 30 tonnes in less than three weeks.

The world's physical gold trusts have experienced net redemptions of more than 800 tonnes collectively last year, with the value of precious metals assets investments falling by a record $78 billion in 2013.

Here Come The Boots On The Ground: US Troops Heading To Eastern Europe

It seems the truce "deal" is well and truly dead...

• 600 U.S. TROOPS HEADING TO EUROPE FOR EXERCISES: PENTAGON
• U.S. AIRBORNE TROOPS GOING TO POLAND, LITHUANIA, LATVIA,ESTONIA
• U.S. MILITARY EXERCISES ARE IN RESPONSE TO UKRAINE CRISIS:KIRBY
• MORE MILITARY EXERCISES 'COMING THROUGH' NATO: PENTAGON

The question now, of course, is - what will Putin do in response to this action?

As for where these troops may be arriving from the answer is simple: that other US military intervention success story - Afghanistan. From Reuters:

The number of U.S. troops in Afghanistan may drop well below 10,000 - the minimum demanded by the U.S. military to train Afghan forces - as the longest war in American history winds down, Obama administration officials briefed on the matter say.

Since Afghanistan's general election on April 5, White House, State Department and Pentagon officials have resumed discussions on how many American troops should remain after the current U.S.-led coalition ends its mission this year.

The decision to consider a small force, possibly less than 5,000 U.S. troops, reflects a belief among White House officials that Afghan security forces have evolved into a robust enough force to contain a still-potent Taliban-led insurgency. The small U.S. force that would remain could focus on counter-terrorism or training operations.

That belief, the officials say, is based partly on Afghanistan's surprisingly smooth election, which has won international praise for its high turnout, estimated at 60 percent of 12 million eligible votes, and the failure of Taliban militants to stage high-profile attacks that day.

The Obama administration has been looking at options for a possible residual U.S. force for months.

"The discussion is very much alive," said one U.S. official who asked not to be identified. "They're looking for additional options under 10,000" troops.

There are now about 33,000 U.S. troops in Afghanistan, down from 100,000 in 2011, when troop numbers peaked a decade into a conflict originally intended to deny al Qaeda sanctuary in Afghanistan after the September 11, 2001, attacks.

Of course, it would be peak irony if the next country Russia decides to destabilize is none other than its old "buddy" Afghanistan, which lately appears far more amicable toward the Kremlin than the White House. It certainly would be an additional egg in the face of US foreign policy if Aghaniitan - so critical to the US controlled heroin trade - were to show a return to some of its Taliban roots for which it is so well-known.

El Nino Seen Starting as Early as July as Pacific Warms Up

An El Nino will probably start as soon as July, according to the Australian government forecaster, adding to predictions for the event that can transform weather around the world and roil commodity prices.

All the climate models surveyed indicated that an El Nino was likely this year, with six of seven models suggesting that thresholds for the event may be exceeded as early as July, the Bureau of Meteorology said in a statement today. A warming of the Pacific Ocean, which drives the changes by affecting the atmosphere above it, will probably continue in the coming months, the Melbourne-based bureau said.

El Ninos can bake Asia, while bringing wetter-than-usual weather to parts of South America and the U.S., challenging farmers from Indonesia to Brazil with too little rain or too much. Palm oil and sugar were listed by Goldman Sachs Group Inc. this month as among crops that may be affected if an El Nino sets in. The World Meteorological Organization warned last week of a dramatic rise in world temperatures should an El Nino reinforce human-induced warming from greenhouse gases.

“El Nino has an impact across much of the world, including below-average rainfall in the western Pacific and Indonesian regions,” the bureau said. “For Australia, El Nino is usually associated with below-average rainfall, with about two thirds of El Nino events since 1900 resulting in major drought over large areas of Australia.”

Last Event

The last El Nino to form was in 2009 to 2010, and since then the Pacific has either been in its cooler state, called La Nina, or neutral. Disruptions associated with El Ninos have been most important for agriculture markets, with palm oil, cocoa, coffee and sugar most affected, Goldman analysts including Jeffrey Currie wrote in an April 13 report. An El Nino would boost risks to soft-commodity price forecasts, they wrote.

The chances of an El Nino have increased to 65 percent from 52 percent, the U.S. Climate Prediction Center said on April 10. There are signs that an El Nino is imminent, presaging changes to global weather patterns, the United Nations’ World Meteorological Organization said April 15. Two weeks ago, the Australian bureau put the odds at more than 70 percent.

China Turns Zinc Into Car Parts as Consumer Demand Surges

Record spending by Chinese consumers on new refrigerators, cars and laptops is boosting zinc demand, creating the biggest production shortfall for the metal in eight years.

Demand for zinc used in everything from steel auto parts and brass plumbing fixtures to rubber and sunscreen will exceed output by 117,000 metric tons this year, almost double the 2013 deficit, the International Lead and Zinc Study Group estimates. Morgan Stanley predicts prices in London will rise more than any other industrial metal in 2015.

Chinese producers including Baiyin Nonferrous Metals Co. are restarting smelters they closed last year as stockpiles tracked by the London Metal Exchange shrink to a two-year low. While the economy is slowing in China, the world’s biggest user, growth is more than twice the rate of the U.S. as Premier Li Keqiang seeks to spur consumer spending and car sales increase by double-digits.

“The supply-and-demand picture has really improved,” said Sameer Samana, a St. Louis-based international strategist at Wells Fargo Advisors LLC, which oversees about $1.4 trillion. “Inventories have come down, and we’re starting to see the very beginning of demand rebounding.”

Zinc for delivery in three months on the LME is up 0.3 percent this year at $2,060.50 a ton, after slipping 1.2 percent in 2013. An LME index tracking zinc, copper, aluminum, nickel, lead and tin is down 2.5 percent. The Standard & Poor’s GSCI (SPGSCI) Spot Index of 24 commodities rose 4.3 percent. The MSCI All-Country World Index of equities climbed 0.6 percent, and the Bloomberg Treasury Bond Index rose 1.9 percent.

Cash Prices

Annual average cash prices on the LME may climb 13 percent to $2,331 in 2015 from $2,066 in 2014, more than the other five industrial metals on the bourse, Morgan Stanley estimated in an April 8 report. Barclays Plc forecast a price of $2,400 in a March 26 report. Zinc averaged $2,024.65 this year.

Use of the metal will expand 4.5 percent to 13.6 million tons this year, while refinery output will increase 4.4 percent to 13.5 million tons, the zinc study group said in an April 2 report. Deutsche Bank AG sees a gap of 400,000 tons, forecasting demand growth at 5.4 percent, up from 4 percent last year.

China will use 7 percent more zinc this year, according to Barclays. The nation now accounts for 44 percent of the world total compared with 16 percent in 2000, the study group estimates. Imports rose 21 percent last year, customs data show.

Chinese Consumer

Li wants Chinese shoppers to have a bigger role in the economy. The government will employ “a comprehensive set of policies to boost consumer spending, raise people’s spending power, increase consumption of goods and services and reduce distribution costs so that consumption can provide greater support for economic development,” he said on April 10.

The shift will provide a bigger jolt to purchases of zinc than for copper and iron ore, said Samya Beidas-Strom, a senior economist at the Washington-based International Monetary Fund.

“Metals move with per capita income,” Beidas-Strom said in a telephone interview. “As the Chinese people start buying more washing machines and fridges and cars, they will use more metals that go into durable goods,” including zinc, she said.

About half of the metal’s use is for consumer products, electrical appliances and transportation, the zinc study group estimates.

Household Spending

China’s per-capita urban household spending climbed 8.1 percent in 2013 to the highest since Bloomberg began collating the data in 2002. In terms of zinc demand, the nation is following the same track as South Korea, Asia’s third-largest user, where consumption has surged in line with per-capita income, Beidas-Strom said.

By contrast, Chinese demand for copper will slow to 5.7 percent this year and 5.5 percent in 2015, from 7.3 percent last year, according to Morgan Stanley. Prices will slip to $6,200 a ton over the next 12 months from $6,649 today, Goldman Sachs Group Inc. said in an April 13 report.

Prospects for a slowing economy are still a concern, with 55 economists surveyed by Bloomberg forecasting 2014 growth at 7.4 percent, which would be the weakest since 1990. While China last month set an expansion target at 7.5 percent, the same as last year, that’s less than the 7.7 percent reached in 2013. There’s already speculation it will miss its goal. Growth eased to 7.4 percent in the first three months.

Outside Exchanges

Chinese demand may also be “overstated” as unreported stock building is confused for consumption, Citigroup Inc. said in an April 14 report. Signs of declining inventory in exchange warehouses may be driven by traders seeking to take advantage of lower rental rates in non-exchange storage, the bank said.

The market “continues to struggle under what we believe is a considerable volume of reported and unreported zinc inventory,” according to the bank, which forecasts the metal will remain in a range of $1,900 to $2,100 a ton this year. It forecasts stronger prices in 2015, rising as high as $2,400.

While stockpiles on the Shanghai Futures Exchange are 40 percent below the record high reached in 2011, they rose about 5 percent this year, according to bourse data.

About a quarter of zinc goes into transportation, mostly cars. Vehicle sales in the top market will grow 10 percent a year through 2020 and reach 40 million units annually after reaching 22 million last year, according to the China Association of Automobile Manufacturers.

Inventories

The ratio of global stockpiles to usage, a measure of how long inventories would last, will drop to 4.4 weeks by 2015, the lowest since 2008, Morgan Stanley forecasts. LME inventory is now 35 percent below an 18-year high in 2012, after slipping 14 percent to 801,500 tons this year.

Mine output will grow 5.9 percent in 2014, with gains slowing to 3.9 percent in 2015 and 0.5 percent in 2019, the bank estimates. New capacity arriving in a timely fashion and at reasonable cost could prove “a challenge,” Morgan Stanley says. The long-term incentive price needed to attract new developments is $2,740 a ton on a nominal basis, it said.

Baiyin Nonferrous Metals, China’s sixth-biggest smelter, last month started one of two plants in Gansu province it shut in August as prices fell. The 100,000 ton-a-year plant resumed operations on March 26, with the other still idled, Zhang Jinlong, a company spokesman, said April 15.

‘Zinc Cycle’

“Commodities move in cycles, and the zinc cycle has been bad for some time now,” said John Kinsey, a fund manager at Caldwell Securities Ltd. in Toronto, which oversees C$1 billion ($908 million). “When these things happen, the marginal mines close, and so that reduces supply. This is a better year for zinc because supply and demand is in better balance.”

For Shenzhen Zhongjin Lingnan Nonfemet Co. (000060), China’s third-largest producer, improving demand means it can keep mining and smelting at full capacity. Operating profit, which shrank 50 percent to 481.4 million yuan ($77.4 million) in fiscal 2013, will rise 4.5 percent this year and 15 percent in 2015, the average of four estimates compiled by Bloomberg shows.

“We would hope operating profit will increase by 10 to 15 percent this year,” said Wu Xijun, the senior analyst at Shenzhen Zhongjin. “Zinc consumption will remain strong in the next ten years.”

What Hedge Funds Are Buying And Selling

Large speculators reduced ther S&P 500 positioning to net short this week and their NASDAQ longs to a one-year low as BofAML reports on CFTC data. Macros funds decreased their long exposure to S&P500 and NASDAQ to now hold short exposure. They also decreased their long exposure to US Dollar (raising their AUD longs to a record high) and maintained their long exposure to 10-year Treasuries. They decreased their long exposure to commodities and increased their long exposure to EM. Across all asset classes, positioning is at extremes.

Significant HF moves across asset classes, based on CFTC data

Equities. Large specs decreased S&P 500 to net short and reduced NASDAQ longs. They also increased Russell 2000 shorts last week

Agriculture. Large specs increased their long positioning in Soybean futures but decreased longs in Corn and Wheat futures

Metals. Large specs decrease Gold and Silver longs and increased Copper shorts. They maintained Platinum and Palladium longs.

Energy. Large specs increased their Crude longs and Gasoline longs. They also increased Natural Gas shorts but Heating Oil shorts.

FX. Large specs increased their EUR, AUD and GBP longs. They decreased their JPY shorts and MXN longs position.

Interest Rates. Large specs increased their short positions in 10-year while increasing their long position in 30-yr. They also reduced 2-year shorts

One can't help but see this positioning and wonder just who the big boys are selling to - as we noted here,

Based on Bloomberg's Smart Money Flow indicator, there is a very significant amount of distribution going on... the question is just who is soaking up the smart money selling? Company buybacks, Johnny 5, or a greater-fool retail investor?

Perhaps this chart from Lance Roberts at STA Wealth provides some color for who?

However, the idea that individual investors are still "out of the market" should be taken with a bit of caution. The chart below is data compiled by the American Association of Individual Investors (AAII) which surveys it membership on portfolio allocation.  The data is compiled and released monthly. 

With cash hovering at the lowest levels since the "Tech Wreck," and equity exposure at the highest,investors are more than just "warming up" to equities. They are effectively "all in" with respect to the financial markets.

Barclays is the next big bank pulling out of commodities: report

British multinational banking and financial services Barclays is said to be the next big bank planning to sell large parts of its metals, agricultural and energy business in a move that, FT.com reports (subs. required), will be announced on Tuesday.

The decision echoes moves by other major players, such as JPMorgan Chase and Morgan Stanley, which have been recently walking away from their commodities business.

Since the US Federal Reserve determined in 2003 that certain commodity activities were "complementary" to financial activities and therefore permissible to Wall Street bankers, many jumped at the chance, but that tide has now turned.

Morgan Stanley, Goldman Sachs, JPMorgan, Deutsche Bank, UBS and Royal Bank of Scotland are either shrinking their commodities units or plainly moving away from everything to do with them, including mining, processing, transportation, warehousing and trading.

JPMorgan (NYSE:JPM) got $3.5bn last month after selling its physical commodities unit to Geneva-based trading house Mercuria, while Morgan Stanley has cut back on commodities operations and staff.

Barclays, which is one of the top five banks in commodities, got to control roughly 70% of the commodities trading market last year. But in response to pressure to cut costs and improve returns, the UK bank announced Friday a shakeup of its investment bank management team, including a new head of markets and new co-heads of banking.

The British lender also told staff last week it was looking to simplify its operations and that it could axe thousands of jobs, mainly at its investment arm, while conducting a strategic review, which will report next month.

Revenues for the investment banks from the sector surged to $15 billion at the peak of the cycle, but has now fallen back dramatically in line with a retreat in metal and mineral prices.

Braclays is set to present a strategic update on May 8.