MCX-zinc (₹144): BUY

The zinc futures contract traded on the Multi Commodity Exchange (MCX) has rallied strongly over the last three months.

The contract has risen over 17 per cent from ₹122.4 a kg in May to ₹144. Increase in demand coupled with a sharp fall in inventories is supporting the price rise.

According to the data from the International Lead and Zinc Study Group, , the market for zinc ran into a deficit for the first time in 2013 after many years.

Also, the deficit has widened to 2,34,000 tonnes in the first half of this year, which is much higher than the 94,000 tonnes deficit recorded for the entire 2013. Widening deficit is expected to limit the downside and could push the price further higher in the coming weeks.

Moving in tandem with the global zinc price, the MCX-zinc futures contract witnessed a sharp rally in the months of June and July. Subsequently, this rally took a pause and the contract has been on corrective consolidation since August.

The price action in the last two weeks of August suggests that the consolidation could be nearing its end. The contract appears to be gearing up for a fresh leg of up move.

This offers traders with a short-term perspective a good opportunity to initiate fresh long position in the contract.

Short-term view: The short-term outlook for the MCX-zinc futures contract is bullish.

The contract’s corrective fall from the August high of ₹146.95 found support at ₹137.6 – the 38.2 per cent Fibonacci retracement level.

An upward reversal from this support level has thereby kept the uptrend intact. The 21-day moving average level at ₹142 is the immediate support for the contract. Key short-term support is at ₹137.6. There is no danger for the short-term bullish outlook as long as the contract trades above this level. Resistance is at ₹147. A strong break above this level can take the contract higher to ₹155. Traders with a short-term horizon can initiate fresh long position at current levels. Stop-loss can be kept at ₹136 for the target of ₹154.

The short-term outlook will turn negative if the contract falls below ₹137.6 decisively. The ensuing target on such a fall will be ₹130.

Medium-term view: The medium-term outlook is also bullish for the contract. It has been trading in a bull channel for more than a year. Key medium-term support is at ₹130 which is also the channel support level.

While the contract trades above this level, a rally to ₹163 is possible over the medium-term. Traders with a medium-term perspective can consider holding their long positions with a wide stop-loss at ₹129 for the target of ₹162.

Intermediate declines to ₹130, if happens can be considered for accumulating long positions.

The medium-term outlook will be mitigated if the contract records a strong close below ₹130. The next target will be ₹121.

Putin Calls For "Immediate Talks" Over Eastern Ukraine "Statehood"

Vladimir Putin, who has repeatedly said that he does not favor the break-up of Ukraine - but only greater autonomy for the East, appears to have changed course rather dramatically today. In a speech broadcast on Russian TV, the Russian leader stated "we need to immediately begin substantive talks... on questions of the political organisation of society and statehood for southeastern Ukraine." As The Washington Post reports, use of the word "statehood" reflects a major shift in Kremlin policy towards 'Novorossiya' - it would be a direct challenge not only to Kiev but also to Western European nations and the United States, which have been trying to force Moscow to back down. While not directly addressing the latest round of sanctions chatter, Putin concluded, perhaps ominously, "they should have known that Russia cannot stand aside when people are being shot almost at point-blank."

As AFP reports,

President Vladimir Putin today dramatically raised the stakes in the Ukraine conflict by calling for the first time for statehood to be considered for the restive east of the former Soviet state.

"We need to immediately begin substantive talks... on questions of the political organisation of society and statehood for southeastern Ukraine with the goal of protecting the lawful interests of the people who live there," Putin was quoted as saying by Russian news agencies on a TV show broadcast in the far east of the country.

Russia has previously only called for greater rights under a decentralised federal system to be accorded to the eastern regions of Ukraine, where predominantly Russian-speakers live.

And as The Washington Post reports,

Putin spoke of the need to end hostilities before winter and criticized European leaders for supporting Ukraine, in remarks made during a television interview first broadcast in Russia's Far East and reported from Vladivostok by Russian news agencies. The interview was to be broadcast in Moscow seven hours later.

Putin has said repeatedly that he does not favor the breakup of Ukraine — though Russia seized Crimea from Ukraine in March — but only greater autonomy for the east. The word "statehood" suggests more than that, and if it reflects a major shift in Kremlin policy, it would be a direct challenge not only to Kev but also to Western European nations and the United States, which have been trying to force Moscow to back down.

...

"These are the inclusive talks that should determine the relationship with the eastern regions, that is, negotiations inside Ukraine on the internal Ukrainian order with respect for the interests of the country's eastern regions, the interests of Novorossiya," Peskov told reporters, according to Russian state-owned news agency Itar-Tass.

*  *  *

Doesn't sound very de-esacalation-y to us... but we are sure stocks will rally on the hopes of front-running the post-escalation de-escalation buying panic.

Middle-East 'Frenemies'

The enemy of your enemy is your... frenemy; and so it is across the Middle East as the WSJ notes the spread of The Islamic State has united many parties once at odds with each other to become 'strange bedfellows'.

Strange Bedfellows
Parties that display friction or outright aggression toward one another are finding themselves aligned in a desire to counter Islamic State.

Groups of colored lines between parties represent shared interests.

U.S. and Iran
The U.S. and Iran share an interest in fostering an Iraqi government strong enough to fend off Islamic State.

U.S. and Syria
The U.S. and Syria’s Bashar al-Assad share an interest in quashing Islamic State in Syria, even if the regime appears to put a higher priority on fighting other rebel groups.

Israel and Egypt
Israel and Egypt have come together to oppose Hamas, and they now have a similar long-term interest to do the same in confronting Islamic State.

Syria, Kurds, Turkey and Iraq
Turkey and Syria, long fearful of building up the region’s Kurds, have a shared interest in building up the Kurdish Peshmerga to combat a more immediate threat, Islamic State. Iraq has acquiesced.

Turkey and Qatar
Turkey and Qatar suddenly have a shared interest in keeping the Islamist movement they separately helped foster in check before Islamic State absorbs and consolidates it.

Iran, Saudi Arabia and Iraq
Saudi Arabia supported Sunnis in Iraq while Iran supported Shiites. They now have an interest in aiding the Shiite-led Iraq government to counter a common threat.

U.S., China and Russia
Russia and China have plenty of disputes with the U.S., but they agree that, as big powers, they are threatened in similar fashion by the expansionist Islamic extremism of Islamic State.

U.S., Egypt, Qatar and Turkey
Egypt’s military ruler sees Qatar, Turkey and the U.S. as hostile to his suppression of the Muslim Brotherhood. They all now fear Islamic State will consolidate the Islamic threat.

U.S. and al Qaeda
The greatest odd bedfellow of all: Islamic State threatens al Qaeda as well as the West, meaning that, in fact, al Qaeda and the U.S. now have a shared enemy. 

Full Wall Street Journal interactive chart here...

China HSBC/Markit Manufacturing PMI for August, 50.2 expected 50.3

 China HSBC/Markit Manufacturing PMI for August, 50.2 

expected 50.3, prior was 51.7, flash reading was 50.3 (to a 3-month low)

India's GDP External Debt Graphics

The Fall Is Golden For Bullion Bulls

September is the hottest month of the year for gold prices, rising on average 3% over the past 20 years. As the yellow metal tests hovers off 2-month-lows, Bloomberg notes that "Indian jewelers and dealers will be stocking up in the coming weeks," ahead of the festival period, which runs from late August to October (andis followed by the wedding season) when bullion is bought for part of the bridal trousseau or in jewelry form as gifts from relatives. As GoldCore's Mark O'Byrne notes, "a lot of traders are aware of this trend towards seasonal strength... They tend to buy and that creates momentum."

Chart: Bloomberg

Some color on the week's Precious Metals Trading from Alasdair Macleod of GoldMoney,

The pattern of trading in precious metals changed for the better this week. After London's bank holiday on Monday, for the first time in a long time the market opened in London's pre-market with higher prices. This indicated Asian or Middle-Eastern physical demand was returning to the market. Predictably, prices drifted lower during London hours as paper trading took over, and all the gains were more or less lost by close of play on Comex in New York.

It was a similar story on Wednesday. Yesterday, (Thursday) started the same way, but this time the move gained more traction; but volumes remain pitifully low, in common with open interest. Today this pattern was not repeated with gold kicking off unchanged on overnight levels. However, gold is up $15 on the week and feels more firmly based.

Measured by deliveries on the Shanghai Gold Exchange, Chinese demand is increasing, with last week's figure rising to 46 tonnes, having increased every week in August. So far this year over 1,200 tonnes have been delivered, and the extension of trading and therefore potential demand into the Free Trade Zone is due to kick off in September.

The chart of the gold price and open interest on Comex is shown below.

August is a notoriously poor trading month, with traders in the northern hemisphere on holiday, or at least not thinking about markets. September is wake-up time, and statistically the best month for gold. Will this be the pattern this year?

Trading in silver continues to be healthier, even if the price performance has been disappointing, with the gold/silver ratio rising to 66 from 63 earlier in the month. Open interest had its first significant fall on Wednesday, when the price rose marginally. This suggests that on balance there is some bear closing in futures. The action is shown in our next chart.

Could this be a harbinger of better times? Quite likely: being mostly an industrial metal, there is some evidence that commercial users are locking in low prices by holding futures positions. Bear in mind that two years ago, users probably estimated silver prices at $35+ in their business plans, so current prices for them are too good to miss.

Quick side-note: palladium continues to power ahead, having made all-time highs consistently in recent months to challenge $900 this week.

It's Settled: Central Banks Trade S&P 500 Futures

Based on the unprecedented collapse in trading volumes of cash products over the past 6 years, one thing has become clear: retail, and increasingly, institutional investors and traders are gone, probably for ever and certainly until the Fed's market-distorting central planning ends. However, one entity appears to have taken the place of conventional equity traders: central banks.

Courtesy of an observation by Nanex's Eric Hunsader, we now know, with certainty and beyond merely speculation by tinfoil fringe blogs, that central banks around the world trade (and by "trade" we meanbuy) S&P 500 futures such as the E-mini, in both futures and option form, as well as full size, and micro versions, in addition to the well-known central bank trading in Interest Rates, TSY and FX products.

In fact, central banks are such active traders, that the CME Globex has its own "Central Bank Incentive Program", designed to "incentivize" central banks to provide market liquidity, i.e., limit orders, by paying them (!) tiny rebates on every trade. Because central banks can't just print whatever money they need, apparently they need the CME to pay them to trade.

So the next time you sell some E-minis, ask yourself: is the ECB on the other side? Or the BOE? Or, perhaps, you are selling S&P 500 futures to Kuroda. Who knows: there is no paper trail anywhere, although a FOIA request and/or the discovery from a lawsuit, class action or otherwise, of the CME's central bank incentive program would likely yield some stunning results.

But the only place where "discovery" would be by far the most interesting, is for the CME to disclose just which central banks provide, or take such as at 8am every morning when one market sell order takes out the entire bid staack, the most liquidity when it comes to central bank trades in "Metals Futures Contracts (Physicals)."

Because imagine the shock and awe if and when it is uncovered that the biggest active manipulators of gold are not some junior-level traders out of Britain's criminal bank cartel, but the central banks themselves.

Finally, while the list above deals with international central banks "providing" ES liquidity, those wondering why the NY Fed is not on the list and just how the Fed's active trading team participates in the market without breaking the law, we have just one word: Citadel.

Source: Modifications to Central Bank Incentive Program. CME/CBOT/NYMEX/COMEX #14-038