Tag Archives: Precious Metals

article 3 months old

Material Matters: Drivers Of Commodity Outlook For FY17

-Gold main beneficiary from Brexit
-Zinc and tin stand out in base metals
-Demand growing but not strongly
-Supply being rationed
-But not enough to push up prices
 

By Eva Brocklehurst

Strategy and Outlook

Commonwealth Bank analysts suggest, as another disappointing year passes for mining and energy companies, that FY17 is shaping up for further falls in commodity prices, albeit not as severe. The analysts expect the slowing of China's commodity-intensive sectors will continue as government stimulus fades.

Construction, which accounts for 40% of China's steel demand, is the most important end-user demand segment and late last year, the analysts observe, property construction volumes were falling materially in year-on-year terms.

Lower production costs and rising US interest rates should also apply downward pressure to commodity prices. Some miners view the recovery in commodity prices as sustainable and this suggests supply will be more reluctant to exit the industry. Yet if the recovery is not sustainable, which the CBA analysts believe is the case, this behaviour will weigh on prices.

The analysts anticipate oil prices will lift modestly as the market appears to be re-balancing. Gold and other precious metals also look more promising. Among the base metals the analysts consider zinc to be the stand-out commodity, given mounting concerns about a deficit as London Metal Exchange inventories head lower.

The decision by the UK to leave the EU has created all sorts of fears, the analysts maintain. Commodity demand waxes and wanes with economic growth so the impact will be about the extent to which global economic growth slows.

Metals generally feel the affect of swings because their demand is most elastic, with energy somewhat less so and agriculture less so again. At this stage investors and currencies have felt the most impact, the analysts maintain.

They also suggest, for the most part, fundamentals will remain foremost in commodity markets. In terms of Brexit, the primary impact should be felt through a stronger US dollar, safe haven demand and falling commodity consumption in Europe. One effect that may be material is any disruption to global trade flows of goods and commodities.

The depth, maturity and liquidity of different commodity markets are also relevant. Copper, gold and oil may be prone to volatility. Equally, developing markets for coking and thermal coal and iron ore may be relatively immune, the analysts believe.

In aggregate, this suggests gold will perform the best. While other commodities are less appealing the analysts believe coal and oil are likely to outperform and nickel and aluminium to underperform. Iron ore could fare worse because of its strong inverse relationship with the US dollar.

In essence, the analysts believe the consequences of Brexit will emerge slowly and caution itself, as much as sentiment delays spending decisions, may be the biggest issue for commodity market for the rest of 2016.

Macquarie observes, overall, commodities have performed better than feared at the start of 2016. Much of the sequential price increases can be attributed to changes in China but the broker believes the industrial recovery is a global phenomenon. While the recovery remains modest, especially in comparison to how the sector was performing before the GFC, this is a positive development for commodity demand.

The broker notes headwinds for both metals and bulk commodities, such as US dollar strength and oil prices, have eased in the year to date and this will help to stall the multi-year cost deflation cycle moving into the second half of the year.

Macquarie agrees zinc has been the most conspicuous performer among the base metals this year but, half on half, tin was actually stronger and remains the only base metal up year on year in terms of its June average price. The broker struggles to find catalysts to move copper out of its current range but agrees the long-awaited deficit for nickel is finally emerging.

The main surprise in the six months to June has been stronger bulk prices. Macquarie has raised its 2016 demand forecasts across most commodities but does not expect this to be strong enough to create bottlenecks.

Given excess capacity in all markets, and with interest rates set to stay lower for longer, pricing is expected to be at a level where supply is suitably rationed. The broker expects gains in price are most likely to be a result of a cost-push from rising oil prices, with the exception of zinc.

One of the big themes in 2015 was the rebalancing of markets via a reduction in production, Morgan Stanley observes. These announcements declined sharply in the first quarter of 2016 and improved demand growth has meant some markets have tightened sufficiently to support prices. The broker cites zinc, iron ore and coal in this regard.

Nickel appears to be an exception as its supply-side response to the price fall in 2015 was quite modest, Morgan Stanley observes. The broker believes, with the nickel price still below half of the cost curve and inventories high at exchanges, more production closures are likely.

Recovering prices pose a new risk too, the broker maintains. This is the risk of operations restarting. This is most acute for alumina/aluminium where large operations which were closed late last year and early this year in China are now being re-opened. Estimates suggest around 500,000 tonnes per annum of aluminium smelting capacity was re-started in the first half and should lift in the second half.

The broker also notes the price upside for zinc is capped by the potential of a full return of Glencore's 500,000tpa, apparently removed from the market in October 2015. Re-starts elsewhere are considered unlikely as a seasonally quieter season looms for iron ore, copper and nickel.
 

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article 3 months old

The Overnight Report: Turnaround

By Greg Peel

The Dow closed up 78 points or 0.4% while the S&P rose 0.5% to 2099 and the Nasdaq gained 0.8%.

Finding Support

The local market traded down from the opening bell yesterday in line with offshore markets. Banks are in the frame once more – both globally as a result of Italian bank fears and domestically through ongoing talk of a Royal Commission – while dips in commodity prices saw pullbacks for both the materials and energies sector.

At midday the ASX200 was down 80 points and it looked like we may be in for another nasty capitulation session but at the support level on the charts of 5150, the buyers decided to move in.

Large caps were in favour as falls in the banks and resource sectors were pared, leaving financials down 0.8% on the day, materials down 1.1% and energy down 1.8%. But it was otherwise clear what investors were looking for.

In a world of record low interest rates, including negative ten-year bond rates in Japan and Germany, a new record low ten-year yield in the US, and in Switzerland, a fifty-year bond rate that has dipped into negative, the search for yield has become ever more inspired.

Yesterday saw only three sectors finish in the green on the local bourse – utilities, telcos and consumer staples.

There was also a growing indication, as the afternoon wore on yesterday, that the coalition is clearly leading the count to determine the undecided seats and there is a slim chance it may even get over the line for an actual majority. If it doesn’t quite make it, there may only be the need to bring a couple of cross-benchers onside and thus avoid having to deal with the left-leaning members. The Kat in the Hat is one candidate, and Mr X is a reasonable man. The chance of an unworkable government and ongoing uncertainty has reduced.

And that’s a relief for the stock market, even if it were Labor in the same position.

The buyers were confident to take the index back to the 5200 level yesterday, and with Wall Street turning around for a positive close last night, the futures are pointing up 35 points this morning.

Don’t Panic

The bank story and Brexit flow-on story was not getting any less alarming last night as the London stock market fell 1.2%, Germany 1.7% and France 1.9%. As is typically the case, such selling carried over the Pond.

The Dow was duly down 127 points around 11am. But at that point a Dutch EU official suggested that there should not be any problem in Italy citing exemption rules in order for the Italian government/central bank to bail out troubled Italian banks with liquidity injections. Interestingly, the Netherlands is one EU member that has already seen the prosecution of new “bail-in” rules with regard Dutch entities.

We recall from yesterday that Germany had suggested Italy cannot call an exemption and Italian banks would be forced into “bail-in” measures to avoid going under, which would have left mum & dad investors with haircuts on the bond holdings and fire up more EU unrest. Brexit, Germany believes, is not a “systemic event”. It seems not all agree.

At the point at which the Dow was down 127 points the US ten-year yield hit another new record low, down 5 more basis points at 1.32%. But the Italy news turned the US stock market around in a flash – driven by the banks – and at the same time the ten-year yield rebounded to close up 2bps on the session at 1.38%.

Not long ago it was oil, now it’s bond yields.

Oil actually did have a solid session nonetheless, recovering 2% on weekly data showing a bigger inventory drawdown than forecast, and on a slightly weaker greenback. The greenback also reversed on the Italy news and as such is down 0.2% over 24 hours at 96.00.

The other news of the day was the release of the minutes of the June Fed meeting. They revealed a split committee, but at the end of day the doves won over the hawks by suggesting it was not the time to raise US rates when rates across the rest of the world were heading the other way. And we recall that the June meeting was held pre-Brexit vote, when the US ten-year traded as high as 1.75%.

So if low global rates were a reason not to move higher in June, lower global rates surely prevent any hike late this month or perhaps in 2016 altogether. But tomorrow night sees non-farm payrolls, which could well throw the cat amongst the pigeons once more with regard the strength or lack thereof of the US economy.

On that note, Wall Street was heartened by the June services PMI number, which showed a much bigger than expected jump to 56.5, reversing apparent weakness in May.

We note the S&P500 is back at its favourite pivot level of 2100.

Commodities

West Texas crude is up US$1.05 or 2.2% at US$47.91/bbl.

The nickel price has been flying all over the shop of late, with volatility centred on whether the new Philippines government will force the closure of some smelters. Last night saw nickel jump 3% in an otherwise mildly weaker session for base metals.

Iron ore is unchanged at US$55.80/t.

The pressure may have eased on Italian banks but the incremental climb in the gold price continues. It’s up US$7.00 at US$1363.20/oz.

The Australian stock market bounced off its lows yesterday and the Aussie also began a rebound from the previous session’s falls which carried on offshore. It’s up 0.8% over 24 hours at US$0.7518.

Today

The SPI Overnight closed up 35 points or 0.7%.

The local construction sector PMI is out today and in the US, the ADP private sector jobs report for June will provide a precursor for Friday night’s non-farm payrolls.
 

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article 3 months old

The Overnight Report: Italeave?

By Greg Peel

Hitting Home

The concluding paragraph of the RBA’s monetary policy statement last month read:

“Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”

Yesterday’s new statement made the following statement with regard Brexit…

“Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern.”

…and then concluded as such:

“Taking account of the available information, the Board judged that holding monetary policy steady would be prudent at this meeting. Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”

This conclusion points more to the possibility of an August rate cut than the June statement did. Glenn Stevens, like everyone else, has no idea how Brexit will play out but the central bank is ready to respond. The RBA statement did not, however, offer any joy to the local market yesterday.

On Monday the local market appeared to shrug off the possibility of a hung parliament and focus more on stronger commodity prices. Yesterday saw a sharp reversal however, which may reflect the possibility of fiscal stalemate hitting home in a delayed reaction, but I’d hazard a guess and suggest what we saw was foreign selling following the US long weekend.

Selling was relatively even across sectors, with the banks understandably among the leaders with a 1.3% fall while 0.5% for materials reflected an offset from stronger iron ore and gold prices. Utilities was the only sector not to fall, given its attraction as a bond proxy, while the leading 1.9% fall for consumer discretionary had an additional local feel to it.

The ASX200 fell steadily in the morning and had basically reached its closing level by midday, with no late cavalry appearing. No RBA rate cut had been expected, so there was no response to the statement release in the afternoon. The Aussie saw a choppy session before offshore movements took over last night.

There is little doubt the Australian economy is facing a new source of uncertainty in the form of a non-government, but that’s nothing compared to ongoing uncertainty in Europe.

Banking Crisis

The Bank of England last night relaxed regulatory requirements on the UK banking sector and thus effectively released 150bn pounds of new lending to businesses and households. But this did nothing to stem the ongoing fall in UK bank shares. The FTSE 100 actually closed 0.4% higher last night but as is now oft noted, the 100 contains big multinationals such as mining & energy and pharma stocks, as well as banks, and these benefit from the lower pound.

Bank shares fell again on news overwhelming cash outflows from UK commercial property REITs had forced the suspension of redemptions from some funds. But the focus was not just on the UK, but on Italy.

Big falls in EU banks stocks post Brexit have brought into focus the parlous state of the Italian banking system, where non-performing loans are running at some 17% -- ten times more than in the US. The world’s oldest bank, Monte dei Paschi, has stuck its hand up for a bail-out but there is a problem.

As of this year, new “bail-in” rules have been in place in the EU. These prevent any direct EU injection of bail-out funds ahead of bank bondholders taking a haircut on the value of their holdings, thus reducing the bank’s interest cost as an inside form of bail-out, or “bail-in”. But the issue here is that most of the bondholders of the likes of Monte dei Paschi are mum & dad investors, not global hedge funds or sovereign wealth funds.

Italy is thus calling for exemption rules to be triggered with regard bail-in, as is allowed in the case of a “systemic event”. Is the Brexit vote a “systemic event? Germany says no. Forget about the Netherlands being the next in line. Talk is now of “Italeave”. No doubt freelance exit consultant Nigel Farage will stick his hand up as an advisor.

The Italian bank sector is down 50% post-Brexit. Last night the French stock market fell 1.7% and Germany 1.8%.

European selling flowed into Wall Street as US traders also dealt with a 4% drop in the oil price. If Brexit jitters are not alone sufficient to spook the oil market, ongoing falls in the pound and euro had the US dollar index up last night by 0.8% to 96.22, and there is renewed concern of US supply ramping up again now WTI has seen US50/bbl once more.

Wall Street has seen a complete Brexit rebound, so last night traders were suggesting a hundred point drop for the Dow is hardly surprising given uncertainty still reigns and is there is little reason to suggest this won’t impact on the US, albeit the US looks ever more like a safer place to invest.

On that note, last night the US ten-year bond yield fell 9 basis points last night to a new record low of 1.37%.

Commodities

West Texas crude is down US$1.87 or 3.8% at US$46.86/bbl.

Uncertainty and the stronger greenback hit base metal prices, with copper and lead down 1% and nickel plunging 5%.

Iron ore fell US10c to US$55.80/t.

Gold is up US$5.60 at US$1356.20/oz. While few disagree gold is the safe haven du jour, in US dollar terms it is fighting a very strong headwind.

The good news is the Aussie is down 1% at US$0.7462.

Today

The SPI Overnight closed down 19 points or 0.4%. There is likely some consideration here that yesterday’s trade on Bridge Street was ahead of last night’s trade offshore.

The minutes of the June Fed meeting are out tonight, which will include a nod to Brexit risk being a reason not to raise. But as the meeting was held pre-Brexit, relevance will be limited.

Rudi will be presenting in Melbourne today, plus participating in the first Evening With Rudi with local FNArena subscribers.
 

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article 3 months old

Silver Price Touches US$21 For The First Time In Two Years

By Jeremy Wagner, head forex trading instructor, FXCM

-Silver prices hit initial target with today’s intraday high of $21.17

-Risk can be set near May 2 high of $18.04

-Anticipate sideways to lower trade as these strong gains may be consolidated

Silver prices printed $21 intraday for the first time since July 2014 as the Brexit vote has traders anticipating more central bank easing. Lower interest rates make metals like silver and gold generally more attractive. With silver prices poised to finish higher 5 sessions in a row, you would think they just won the Miss Universe contest.

However, later this week we have the US non-farm payrolls printing. Though the market is pricing in a very low probability of a rate hike in 2016, a strong NFP number may cause some repricing of future rate hikes and perhaps taper some of silver’s growth.
 


Silver prices have some technical headwinds to contend with. Two main areas we’ll discuss further below is:

  1. Measured wave relationships near $21.00-21.50
  2. Previous 4th wave near $21.60

When viewing the XAG/USD chart, which is a CFD that tracks silver, $21-21.50 is an area of potential resistance that may slow down increases and make it difficult for strong continued gains in the short term.

We wrote on Friday July 1:

“Much above $19.33…and we can set our sights on the next level of measured resistance near $21.05-$21.50. Risk to the immediate bullish outlook can be placed near the May 2 swing high of $18.04.”

Friday afternoon did break above $19.33 so we can move our medium term risk level to $18.04. A move below $18.04 suggests that a medium term to longer term high is in place.

Additionally, today’s intraday high is $21.17 where prices subsequently spiked lower. It is possible that prices may dip back to the $19.00-19.50 price zone. This price zone could be an area to buy the dip as it was a former break out level.

After having 2 weeks of strong moves higher, silver prices are at risk of a meaningful pull back. On a more bearish note, a previous 4th wave (which is a common retracement level) is the July 2014 high of $21.60. Though future gains are possible, one has to consider the possibility of the shorter term trend consolidating from near current levels.

Bottom line, the train has left the station so new bulls may want to consider waiting for a dip towards $19.00-19.50. The risk for bulls is $18.04.

If the medium term to longer term top is in place, then we’ll reconsider our wave labels on a break below $18.04.


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Technical limitations

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article 3 months old

The Overnight Report: Uncertainty Home And Abroad

By Greg Peel

Groan

On Saturday morning futures traders had pushed the SPI Overnight up 32 points by the close, one hour before the first polling booths opened. Sure enough, the ASX200 closed up 35 points yesterday.

But it wasn’t cut and dried. The rise in the futures would largely have been driven by big gains on Friday night for metals prices and ongoing strength in gold. There was something new for the market to consider on the weekend nevertheless, when the election provided a no-result and a big win collectively for minor parties. The risk of either a Labor government being formed or a Coalition government being forced to bow to cross-bench wishes lifted the risk of an oft called for Royal Commission into the Australian banks.

So down went the banks from the opening bell yesterday, and down went the index, by 28 points. The selling did not last long, however, and fortunately for the banks APRA made a timely announcement in declaring it was satisfied Australia’s Big Four were carrying capital ratios that put them in the top 25% globally.

By day’s end the financials sector only lost 0.1% while the materials sector led the gain to the close with a 2.6% rally, backed up by energy on 1.4%.

While APRA’s announcement may take the pressure off the banks in the short term, vis a vis feared capital raisings, the banks are still awaiting the finalisation of international capital rules for banks deemed “too big to fail” domestically and APRA has yet to quantify its “unquestionably strong” requirement. The banks are not out of the woods just yet.

The Aussie dollar also took a tumble in early trade yesterday thanks to the election, given the ratings agencies wasted no time in warning Australia’s AAA rating will be under threat if the job of budget repair is undermined by whatever new multi-headed beast emerges as the country’s parliament. But the Aussie, too, turned around. Having traded as low as 74.6 the currency is currently up 0.5% over 24 hours at 75.3.

Helping the Aussie rebound, aside from commodity price strength, was the Melbourne Institute’s inflation gauge for June, which showed a larger than expected 0.6% gain following a 0.2% decline in May. Would this threaten an RBA rate cut in August?

Not likely. The annual headline pace on the MI’s measure is 1.5% and the core rate of inflation, which excludes a recent rise in petrol prices, rose only 0.2% to be up 1.2% annually, well below the RBA’s 2-3% target band.

More of an issue, therefore, is the local labour market.

ANZ reported a 0.5% rise in job ads in June for an annualised rate of 8.0%. June’s gain was down on May’s 2.2% surge but ANZ’s chief economist suggested: “The strength in labour demand over the past two months is consistent with robust business conditions and solid momentum in the domestic economy. This should support a healthy pace of employment growth in the near term”.

So inflation is still weak but jobs growth looks solid. How’s the housing market faring?

Building approvals fell 5.2% in May when 3.5% was expected, to be 9.1% lower than a year ago. This looks ominous, but the approvals are falling from quite a peak and we do have this big dichotomy in place between the states. The May RBA rate cut is yet to influence the numbers, thus economists are not sounding the warning bells just yet.

So how will the election turn out? Why do I get the feeling we’ve just been through all this? The bookies had the “stay” vote in Britain comfortably ahead and the bookies had decided the Coalition would cross the line locally. Let’s hope the bookies don’t have Clinton in front, or we’re all in trouble.

Stock markets do not like such uncertainty but ultimately just get on with it. When 2011 produced the hung parliament and eventual Gillard minority government the local index fell over 2% initially before rallying back fairly soon after. Yesterday we saw a dip and rebound all in one day.

Frustration is the more likely response to the mess rather than fear.

Commodities

After their big surges on Friday night, base metal prices pulled back a bit last night despite a 0.2% dip in the US dollar index to 95.48. Zinc fell 2% and copper 1%.

However, iron ore jumped US$1.90 to US$55.90/t. Helping iron ore was the announcement from BHP Billiton ((BHP)) it would shelve its African project that threatened to add to global oversupply, and concentrate on squeezing the most out of the Pilbara instead.

For an oil market missing US traders, we had Saudi Arabia on the one hand reiterating its forecast that the global market will return to demand-supply balance by year’s end, and Morgan Stanley on the other warning oil prices are set to take another dip.

In the end, West Texas crude has fallen US57c to US$48.73/bbl.

As uncertainty continues to reign across the globe – and we can throw in a major Italian bank that is in trouble – gold continues to find favour. It’s up another US$8.60 to US$1350.50/oz.

The Aussie is up 0.5% at US$0.7534.

Today

The SPI Overnight closed down 13 points.

Locally we’ll see retail sales numbers and the services PMI today before the RBA meets and decides to leave its rate on hold.

Caixin will publish its take on China’s services PMI as other countries around the globe follow suit.

Counting will recommence locally, but it’s going to be a long wait.
 

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article 3 months old

Evolution Mining’s Expansion Draws Attention

-Positive grade uplift at Mt Carlton
-Value of Mt Carlton understated?
-Considerable upside for Cowal
-Evolution Mining now larger scale
 

By Eva Brocklehurst

Evolution Mining ((EVN)) has been elevated to Australia's second largest gold producer with the consolidation of recently acquired assets and several brokers are upbeat about the potential.

Guidance for FY16 production broadly met Morgan Stanley's expectations, with a record final quarter, while the pay down of debt has also been faster, supporting a view that Evolution Mining will be net cash by the second half of FY17, although possibly earlier if gold prices and FX are favourable.

The company plans to lift its dividend policy to 4% of revenue, from 2%, and this demonstrates to the broker that the board is confident in the future cash-generating ability of its projects. The company's all-in sustainable cost guidance of $985-1045/oz covers Morgan Stanley's forecast for FY17. Production guidance is 800,000-860,000 ozs.

The Mt Carlton, Queensland, site visit has led to further understanding of the positive grade reconciliation and the extension opportunities that exist. Plans to advance plant optimisation are afoot. Credit Suisse notes the operations excelled in FY16, with production of 113,000 ozs materially exceeding the 80-87,500 ozs guidance.

Recovery has lifted considerable and this signals that actual production could again exceed guidance in FY17, set at 90-100,000 ozs. Exploration success and a stronger gold price, as well as positive grade reconciliation have combined to create new value in the project, the broker maintains.

Deutsche Bank also suspects the Mt Carlton FY17 guidance is conservative, as it does not factor in any positive reconciliation. Moreover, the asset generates cash and, with continued positive reconciliation, should be able to maintain its performance beyond the current six-year reserve life.

Further to the site visit Credit Suisse suspects the value of Mt Carlton is being understated by modelling only reserves, as the reserves are being depleted at a 30% slower rate than previously assumed. The broker predicts a 10-year life, based on known reserves and blending rates on lower grade ore but does not envisage an extension to defined mineralisation.

Deutsche Bank notes the level of cover and alteration in the Mt Carlton region makes exploration difficult. Hence, proving up an underground reserve is more crucial to the future of the Mt Carlton mine.

The underground targets are being pursued because of the very high grade/small scale which means they can only be used as a supplementary ore source. As a result, they need to be brought into production as soon as possible, Credit Suisse notes. A 160,000 tonne, 44 grams/tonne, underground potential has been defined already.

Cowal, NSW, has also revealed material progress is being made in extending the mine life. Credit Suisse observes there is upside in the near term from productivity gains and cost reductions. The broker considers the operation is well run with a clear line of sight on life for 16 years without further work, with potential for 20 years.

Drilling is revealing broad intersections at consistent grades which supports pit extension and high grade underground potential. While only early days under Evolution Mining's ownership (acquired 2015), Credit Suisse considers the acquisition overwhelmingly positive, with considerable upside ahead. The company has moved very fast to unlock the potential of a mine which had been starved of capital and exploration by the previous owner (Barrick).

Cowal has increased the company's geographic and asset diversity and puts it on stronger footing by providing increased purchasing power and scale to compete for larger opportunities as well as investor attention. FNArena's database has three Buy ratings and three Hold. The consensus target is $2.11, suggesting 21.2% downside to the last share price. Targets range from $1.98 to $2.40.
 

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article 3 months old

Is Gold The Place To Be?

By Greg Peel

Everyone was surprised by the Brexit vote but no one was surprised when gold leapt to over US$1300/oz in a flash as a result. When it comes to global uncertainty, it is prudent to rush into a safe haven first and then reassess the circumstances later, rather than to be trampled in the rush.

We need only go back a couple of months to find analysts mostly talking gold down – extending the bear market run that began in 2013 – as the Fed looked to raising its cash rate several times. While rising US interest rates imply, by default, a stronger US dollar, and thus mathematically a weaker USD gold price, we might also consider Fed rate rises as representing a tentative “end to the GFC” after seven years.

Gold was popular to hold during the significant uncertainty of 2008 and for various reasons beyond including such things as the Grexit scare and the US credit rating downgrade. As post-GFC fear began to fade, gold’s appeal as a safe haven quickly began to subside. The price fell from US$1800/oz at the beginning of 2013 to US$1200 at the beginning of 2014, and was trading below US$1100 earlier this year, with much talk of triple digits looming.

Now it’s back hovering over US$1300. For a brief moment this week it looked as if gold might fall back below US$1300 once more as global stock markets rebounded from their initial panic drops but still the metal is holding its ground. And that’s not hard to understand. Equity markets may have rebounded but global Brexit fallout uncertainty has by no means faded.

But now that gold has adjusted for such a risk, brokerages and research houses across the globe have been falling over themselves to upgrade their gold price forecasts, and for the most part suggest the gold revival rally is not over yet. Inflows into gold exchange traded funds (ETF) are already running at the fastest pace on record, Deutsche Bank notes, at an annualised rate, year to date, of 29.7moz, far exceeding the previous record of 20.8moz in 2010.

Gold positioning via the futures market on Comex reached a new high of 33.5moz on June 21, UBS notes.

And then along comes the Brexit vote, and the gold price spikes. But despite all the ongoing uncertainty as to what happens next, gold has only managed to jump from around US$1280 to around US$1320 and held there. If every man and his dog are talking up gold, why isn’t it moving higher?

Well that question to a large extent has already been answered above. Every man and his dog might be talking up gold but every man and his dog is already long. When trades become “crowded”, further movement is restricted by those first movers who take profits on any further gain.

A second reason is that while there is little doubt uncertainty abounds, opinions on what the ultimate fallout from Brexit will be range from a minor disruption to the end of the world as we know it. Some say the UK will descend into recession, others say the devalued pound will provide a great economic boost. Some say the EU will now disintegrate, others say that’s rubbish. The point is, even the uncertainty is uncertain. Thus gold has made its price adjustment but no one wants to be caught long if it turns out the panic was all overblown.

UBS posed the rhetorical question this week “Shouldn’t gold be higher?” The response from UBS global strategist Joni Teves is this:

“The short answer is yes, we think so. But for now, the combination of uncertainty, volatility and potential lack of liquidity across markets as a result of the UK's vote to leave the EU have kept participants cautious and less willing to take significant positions until ample time has passed to digest recent developments.”

That about sums it up. But Teves still believes that after a period of consolidation, and some reduction in the sheer extent of long gold positions being currently held, gold will have to move higher. Despite this year’s surge back into the metal, anecdotally UBS finds that many market participants are still underweight gold. And the 33.5moz now held as futures may be a Comex record in a volume sense, but only represents 77% of the 2011 record in dollar terms.

Beyond that, UBS’ opinion echoes that of most of its peers.

Let’s start with the Fed.

Wall Street was perplexed back in April when the Fed seemed to turn very hawkish despite a weak first quarter US GDP. It was mostly about the jobs numbers, which continued to be solid, and about inflation expectations boosted by the first signs of actual wage growth. The market was cautious but the Fed appeared to be assuming four rate hikes in 2016, starting in June.

Or maybe not starting in June. There was this thing in June that might just prompt the Fed into holding off in case it went the wrong way – the Brexit vote. Okay, so July then.

Then came the shockingly weak May jobs number. Maybe not July then, maybe September. Sure enough, the Fed didn’t hike in June, citing the Brexit vote as a major reason. We know what happened next.

Goldman Sachs still believes the Fed will raise once in 2016, but not before December. Macquarie has also pushed its expectation out to December. The magnitude of Brexit fallout will certainly not be known by July, Macquarie suggests, and probably not by September. But there are now many in the market who believe there won’t be a rate rise at all in 2016.

Since the Brexit result, central banks across the globe have all assured they are ready to act if necessary. It is expected the Bank of England will have to cut its interest rate and possibly reintroduce QE. The Brexit gave investors yet another reason to push up the yen, much to the exasperation of the Bank of Japan, hence it is expected the BoJ will also have to act once more.

The ECB has claimed to be relieved markets have not crashed further than they did, and that equity markets have rebounded, but given Europe has been hardest hit to date by Britain’s decision, further ECB stimulus may also be necessary. And when the world’s attention was turned elsewhere on Brexit Friday night, The PBoC quietly slipped through another renminbi devaluation.

Before the Brexit vote, cash rates in Japan and much of Europe were already in the negative. The German ten-year yield traded into the negative. Since the vote, the US ten-year yield has fallen to 1.45% from 1.75% and stayed there. Bond markets are anticipating further monetary easing across the globe. How, then, can the Fed raise its own rate in such an environment?

While all agree the Brexit is not another GFC – credit markets are operating freely – the difference between now and 2008 is that central banks had plenty of room to move back then to provide monetary stimulus. Now, they have none. Negative rates are already being criticised as counterproductive given rather than encouraging commercial banks to lend, they are imposing a tax on those banks. QE cupboards are already stuffed full.

But this is not discouraging assumptions of further central bank stimulus. Goldman Sachs and Macquarie are among those now assuming no Fed rate hike until December. Others are saying no rate hike until 2018. Still others are saying the Fed’s next move will be to cut, back to zero again.

This all adds up to price support for gold. As one European analyst puts it, in the context of global negative interest rates, “Gold is increasingly attractive in this environment. It used to be said that gold doesn’t pay interest, now it can be said gold doesn’t cost interest”.

Goldman Sachs, Macquarie and many others have now lifted their gold “price decks”, meaning their forecast average prices for 2016, 2017 and beyond. But this is not a reason for holders of gold to salivate. For many analysts, such upgrades represent a swing from prior expectation of a weaker gold price due to Fed rate hike expectations.

Goldman’s three-year USD gold price forecast is now 1300. At the time of writing, gold is trading at US$1313. Goldman’s 2018 average price forecast is US$1250, up from US$1150. Macquarie has gold averaging US$1300 in mid-2018. Many of these gold forecast upgrades are more catch-up than anything else.

There are nevertheless others forecasting gold to surpass US$2000/oz by 2018, which, let’s face it, is a long time away.

While falling global bond yields are supportive of more strength in gold, in the shorter term gold’s movement will be more about the “fear trade”. It all depends on what transpires. UBS suggests investors should watch for how negotiations between Britain and the EU play out, whether they are amicable or confrontational, changes in support for anti-establishment movements across Europe, and whether the EU will move towards closer integration or towards disintegration over time.

“We believe these factors are likely to drive retail physical gold buying in Europe,” says UBS, “and it will be interesting to see if there are signs of this in the coming days”.
 

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article 3 months old

The Monday Report

By Greg Peel

Playing to Script

Friday on Bridge Street played out as expected, despite it being the first day of the new year. The market opened higher in line with global momentum post-Brexit, traded sideways for a while and then at 2pm, the square-up bell was rung.

The index came most of the way back as traders took profits on a very solid week, ahead of a weekend, a long weekend in the US, and the local election, just in case something disturbing like a hung parliament should transpire.

On that note, we are reminded stock markets are usually ambivalent with regard which party is in power, but do not like uncertainty. And that’s exactly what we have this morning.

We also, of course, have a more elevated case of uncertainty over in the UK/EU. But whatever happens now, markets are convinced another wave of central bank easing is afoot. Central bank easing helps support stock markets but also directly supports commodity markets, and as such we saw some big moves up in commodity prices through Friday.

It it thus no surprise the materials sector was the stand-out performer locally on Friday with a 2% gain when every other sector closed as good as flat.

Investors were not fazed by the latest data out of China, which were far from encouraging. Beijing’s official manufacturing PMI fell to 50.0 in June from 50.1 in May, right on the cusp between expansion and contraction. Caixin’s independent equivalent showed a fall to 48.6 from 49.2 – the fastest decline in four months and the sixteenth consecutive month of contraction.

We can perhaps take some heart in the fact Beijing is trying to steer China away from reliance on manufacturing and export, and note the official service sector PMI rose to 53.7 from 53.1, although that doesn’t much help the sellers of rocks. What will help is government stimulus in the form of infrastructure investment, which is expected to be beefed up as China looks to its own favoured means of easing, beyond renminbi devaluations.

Who’d have thought?

Who’d have thought a week ago that Wall Street would post its best week since 2014? Both the Dow and S&P500 gained 3.2%. Friday’s trading nevertheless played to script as well, given both the week’s rally and the long weekend.

Afternoon selling wiped out initial gains, such that the Dow closed up 19 points or 0.1%, the S&P gained 0.2% to 2012 and the Nasdaq added 0.4%. Interestingly, the indices were back at the flat line just after 3pm before a late burst ensured the S&P closed above the psychological 2100 mark.

The US manufacturing PMI posted a much more encouraging rise to 53.2 from 51.2, beating expectations.

Traders have always been keen not to take positions home over weekends but weekends have become even more scary in this post-GFC world. Beijing likes to pull little tricks on a weekend and as we learned from the whole Grexit saga, weekends can often bring meetings between relevant parties that have particular ramifications the following week.

Nothing happened this weekend beyond the no-result Australian election, but the fact gold was up US$20.20 to US$1341.90/oz and the US ten-year bond yield fell back 3 basis points to 1.46% suggests investors were happy to top up their safe haven positions as a hedge against the “no alternative” equity rally.

Commodities

The UK has signalled monetary easing ahead, the EU is ready to do whatever it takes, Japan will probably be forced to do something and Beijing has already slipped in another renminbi devaluation. And on that basis, many do not see the Fed raising anytime soon. Put it all together and global stimulus is supportive of commodity prices.

The US dollar index fell a mere 0.3% to 95.64 on Friday but in London, aluminium rose 0.7%, copper 1.5%, zinc 2.5%, lead 3.5% and nickel 6%.

West Texas crude rose US90c to US$49.30/bbl.

Only iron ore bucked the trend, falling US20c to US$54.00/t.

The Aussie dollar was up 0.8% on Saturday morning at US$0.7499 as the sausages sizzled and the vanilla slices flew out the door, but in the cold hard light of Monday morning, has slipped to US$0.7465.

It was also Saturday morning when the SPI Overnight closed up 32 points or 0.6%.

The Week Ahead

Wall Street is closed tonight but there follows a big week for US releases, including the minutes of the June Fed meeting on Wednesday and the non-farm payrolls report for June on Friday.

Tuesday it’s the services PMI and factory orders, Wednesday the trade balance, and Thursday chain store sales and the ADP private sector jobs report.

In a rudderless, which unfortunately is not as positive as Rudd-less, Australia we’ll see ANZ job ads, the Melbourne Institute inflation gauge and building approvals today and retail sales and the services PMI tomorrow ahead of the RBA meeting. No rate change is expected, but the market will be interested to hear the board’s take on Brexit.

Thursday it’s the construction PMI.

Tuesday is services PMI day across the globe including Caixin’s take on China.

There is very little in the way of local corporate events or releases this first week on the new year but as of next week we start to see the first quarterly reports.

Rudi will be traveling to and presenting in Melbourne this week. Hence no live appearances from the Sky News studios in Macquarie Park.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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article 3 months old

The Overnight Report: As You Were

By Greg Peel

The Dow closed up 235 points or 1.3% while the S&P rose 1.4% to 2098 and the Nasdaq gained 1.3%.

Wet Sail

The US broad market index last night traded back almost to 2100 last night which is roughly where it was before the Brexit vote. The FTSE rose yet another 2.3% to put it well above its pre-Brexit level. Yesterday the ASX200 made it back to 5233 which is still short of the 5280 close on the Thursday before Brexit.

The futures are indicating up 49 this morning which would imply a complete recovery, but there are other factors to consider.

Firstly, a big chunk of dividends went out on Wednesday, so add that back and we’re close anyway. But secondly, yesterday was end of financial year so we have to consider just how much of the 91 point rally was genuine buying and how much was fund manager window-dressing. Today might be the tell-tale, but then today is a Friday, and Fridays will often bring profit-taking after solid gains for the week. Monday is July 4, meaning no Wall Street, just to provide more reason to square up and enjoy the weekend.

Healthcare was the biggest mover yesterday with a 3.4% gain. Healthcare was initially hit hard by Brexit given UK/EU exposure so it makes sense some ground might be recovered, but a 28% jump by Mayne Pharma ((MYX)) following an announced US drug deal and capital raising also helped.

Elsewhere the moves were more even but what did catch my eye is the 1.4% gain for telcos and 2.3% gain for utilities. These two sectors mostly held their ground as defensives during the brief Brexit panic, so why do they need to come surging back? This is where window-dressing may be apparent.

It is also possible the market was further assisted by the latest election polls, which suggest the coalition is fairly safe. Stock markets are not particularly biased towards either party but do prefer status quo over uncertainty.

There is also an Australian economy actually still ticking along in the background, which we now perhaps can refocus on.

Private sector credit rose by 0.4% in May to be 6.5% higher year on year. Housing credit rose 0.5% for 6.9%, down from 7.0% in April and below last year’s 7.5% peak. Within that figure, investment housing credit rose 0.4% for 6.0%, down from 6.5% in April and 11.5% a year ago. Business credit rose 0.3% for 7.1%.

The numbers indicate overall credit is rising modestly, and housing credit is slowly losing pace. Business credit growth is not yet outperforming to offset this decline. There is nothing here to prevent another RBA rate cut.

Back to the Fed

The London stock market rose another 2.3% last night while France gained 1.0% and Germany 0.7%. The continental markets are still well below their pre-Brexit peaks but the FTSE 100 is now above its peak. The explanation is as straightforward as the much lower pound. Britain’s GDP is roughly 80% weighted to the export of goods and services.

But London’s broader market FTSE 250 has not found its way back. This index encompasses more of the smaller companies that will be hit by a slower UK economy, if that is to be the case. The BoE thinks it will be the case, hence last night guvna Mark Carney all but confirmed monetary easing sooner rather than later, which provided another boost for stocks.

So, we’re back to being under the spell of central banks. And that brings the focus back on the Fed. Brexit, so far, has not resulted in global meltdown. As to whether it might ultimately set in train total EU disintegration will be a longer term story. Is the Fed now comfortable enough to raise in the Brexit wake?

Despite many on Wall Street assuming no further hikes this year or next, it will still come down to next Friday’s June US jobs number. If that shows a big reversal from the May shocker, talk of a possible September hike will reignite. However if the Fed decides it needs to wait for the actual Brexit lever to be pulled by whoever is the new British prime minister -- and it won’t be Boris -- and assess what transpires, then December is more likely, if at all.

It was also end of quarter/half on Wall Street last night and as such commentators were suggesting the rally back to the pre-Brexit level also no doubt involved an element of window-dressing. And because it’s a Friday before a long weekend tonight, the chances of profit-taking are high.

Commodities

There was certainly end of quarter profit-taking in oil last night, according to oil traders. West Texas crude suddenly took a dip just ahead of the day’s official close and is currently down US$1.14 at US$48.40/bbl.

Base metals were all higher in London, but none by as much as 1%.

Iron ore rose US80c to US$54.20/t.

Stock markets continue to rally but gold is hanging in there, up US$3.40 to US$1321.70/oz despite the US dollar index being up 0.25 at 95.88.

The Aussie is steady at US$0.7442.

Today

The SPI Overnight closed up 49 points or 1.0%.

Remember China? Today sees June manufacturing and service sector PMIs from Beijing, and manufacturing PMIs from across the globe.

Locally we’ll also see June house prices today, and tomorrow all the pain and suffering will finally come to an end with a sausage sizzle.

Happy New Year.

Rudi will Skype-link with Sky Business around 11.05am to discuss broker calls.


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article 3 months old

Silver Rises Come Rain Or Shine

By Fawad Razaqzada, market analyst, FOREX.com

Is it really “risk-on” today [Wednesday], or are the sellers just taking a breather after what must have been a very rewarding period for them? In other words, are the buyers back in numbers or are the sellers just easing off the gas? While no one can answer these questions with certainty, it is likely that today’s apparent “risk-on” trade is a combination of the two: bargain hunting and profit-taking. This is what makes silver the more appealing of the two major precious metals. On the one hand, silver tends to follow the safe-haven yellow precious metal at times of high uncertainty. Other times, when the movement in the US dollar is taken out of equation, silver can correlate positively with risky assets such as stocks and copper. That is because the “grey” precious metal has many industrial uses, too. At the time of this writing, the precious metal was trading at a good $17.80 per troy ounce after recovering from earlier losses which saw it momentarily dip below $17.55. With gold being lower, silver was therefore benefiting from the general improvement in risk appetite. It will be interesting to see if the metal will be able to extend its gains if risk aversion were to rise once again.

From a technical perspective, silver looks poised for further gains. As can be seen from the daily chart, below, the precious metal has been making a series of higher highs and higher lows throughout 2016. As a result, the moving averages are now all pointing higher and reside in the correct order for a bullish trend. In addition, following last week’s Brexit vote, silver formed a large bullish engulfing candle on its daily chart on Friday. So far, it hasn’t moved outside of Friday’s range but the fact that it is holding near the highs does suggest that a break out, rather than a break down, may be the more likely outcome as far as silver’s next move is concerned.

The precious metal now needs to clear through sturdy resistance around the $17.85-$18.00 area, where it had struggled previously. If successful, then there are little further immediate reference points to watch until the long-term resistance zone between $18.45 and $18.70 (previously support). Within this region, we also have the convergence of the 127.2% Fibonacci extension level of the most recent corrective down move with a trend line. Thus, it is an ideal profit-target area for the buyers, and maybe an ideal location for the sellers to step in also, at least in the short-term anyway. It would be very bullish however if resistance there turns out to be mild.

Meanwhile the sellers will be looking for the breakdown of some support levels on silver now. One such level is at $17.55, which was tested earlier today and held as support. Below this level, there is just thin air until the next prior reference point at $17.15 and should silver break below this level too then a more significant sell-off could be on the way.
 


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