Yes, we know it’s not new, but the divergence between stock markets and commodity prices is now looking extreme. Consider this chart from Julian Jessop at Capital Economics…
We’ve been reading a lot lately about the potential for cheap natural gas to replace oil-derived transport fuels in the US — and perhaps globally.
Much of this excitement overlooks some fundamentals of energy and commodities in general and the US natural gas sector in particular. The short version is that energy markets are incredibly difficult to predict, and adding interactions between energy sources only adds to the uncertainty. Read more
When it comes to commodities everyone understandably likes to focus on supply and demand. However, there is another important driver for commodity prices that’s sometimes overlooked.
The real interest rate. Read more
Silver is off 6.4 per cent and gold is down 3.8 per cent, although the latter follows a steeper fall on Friday:
From Capital Economics on Friday:
At the time of writing (Friday afternoon in the UK), equity and commodity prices and government bond yields are all falling sharply. This appears to be in response to weaker-than-anticipated US data on retail sales and consumer confidence (discussed further below). If so, this is probably an overreaction, as the figures were hardly disastrous. The falls in the prices of riskier assets may also have been exaggerated by week-end position squaring after the Bank of Japan-inspired rally in the previous days.
Nonetheless, most of these moves are consistent with our long-held view that a disappointing global recovery will cause the equity market rally to run out of steam, the prices of industrial commodities to fall further (with Brent crude in particular heading back below $100) and 10-year US Treasury yields to dip to 1.5% or so by year-end. The pick-up in market volatility more generally is something that we had been anticipating too.
A small selection from our inbox the last few weeks.
First, this from Barclays on Friday, about copper: Read more
Societe Generale’s big (bearish) scorecard on “the end of the gold era” – click to enlarge:
The latest commodity advice from Goldman Sachs suggests the current sell-off may be overdone.
Here are the key points from Monday’s note:
Shifting to near-term overweight as commodity sell-off overdone
Commodity markets declined sharply in February along with emerging market (EM) equities due to renewed concerns over China, which we believe is overdone. Although our price targets other than gold remain unchanged, this pull back has pushed our near-term return forecast from 2.0% to 6.0%, making commodities the asset class within the ECS coverage universe with the most robust near-term outlook. However, our 12-month neutral recommendation remains unchanged as our returns forecast is still a more subdued 3.0%, as we continue to remain structurally neutral on long-dated oil and commodity prices due to the structural supply-side response to persistently high prices.
Almost a year ago the Telegraph’s Thomas Pascoe put out an interesting piece on gold. We’ve decided to reprise it this Friday because we think it offers an interesting and useful perspective on current developments in the gold market:
One of the most popular trading plays of the late 1990s was the carry trade, particularly the gold carry trade. In this a bank would borrow gold from another financial institution for a set period, and pay a token sum relative to the overall value of that gold for the privilege.
FT Alphaville doesn’t tend to follow the nickel market too closely, but the research from Goldman Sachs on Thursday did strike us as interesting (our emphasis):
2012 nickel market summary: Weak demand growth and lower input costs As background, nickel underperformed in 2012, starting the year at $18,910/t, rising to $21,700/t in early February, and finishing the year at $16,998/t, declines of 10.1% and 21.4%, respectively. Overall nickel prices averaged $17,536/t in 2012, down 23.4% yoy from 22,900/t in 2011. Price weakness reflected a combination of soft global consumption growth set against significantly higher low-cost nickel pig iron supply in China, and, importantly, a shift down of the nickel cost curve in 2H2012 (largely reflecting lower energy and nickel ore input prices).
A final word on Thursday’s defenestration of Rio boss Tom Albanense (via JP Morgan).
Nothing short of an RNS fit for framing from Rio Tinto this Thursday morning:
Rio Tinto expects to recognise a non-cash impairment charge of approximately US$14 billion (post tax) in its 2012 full year results. These impairments include an amount of approximately US$3 billion relating to Rio Tinto Coal Mozambique (RTCM), as well as reductions in the carrying values of Rio Tinto’s aluminium assets (mostly Rio Tinto Alcan (RTA) but also Pacific Aluminium) in the range of US$10-11 billion. The Group also expects to report a number of smaller asset write-downs in the order of US$500 million. The final figures will be included in Rio Tinto’s full year results on 14 February 2013.
Eric Hunsader at Nanex presents us with a nice start to 2013 markets — a no less than an 8 per cent drop and subsequent clawback in natgas futures during early Wednesday trade:
This is the most awesome chart we’ve seen since Lisa’s Starbucks tax graphic: Goldman Sachs comparing the attention given to climate change, the eurozone crisis, and Justin Bieber. Read more
China’s copper mountain continues to build. Over the past month Chinese bonded (as in copper inventories in Chinese warehouses that are yet to pay VAT) and SHFE copper inventories have risen to record high levels, according to Goldman. Anyone with new pics of the phenomenon will be rewarded with an Alphaville mug (probably).
Capital Economics ponders whether falling commodities prices will harm the emerging economies that rely most on selling them, and comes up with an answer: not much. At least, for most of them… Read more
Last week FT Alphaville drew attention to the fact that HSBC had joined the cohorts of the “don’t call QE money-printing” brigade. We thought this was great progress for the mainstream analyst community.
Moreover, we thought their explanation was really good. Read more
A few nervous bid arbitrageurs have their eyes on the Qataris right now — wondering, expectantly, whether the Gulf state’s sovereign wealth fund will now support the
takeover merger of equals between Glencore and Xstrata.
The Glenstrata share ratio has been hiked and the Qataris, it is assumed, don’t really care about the size of retention bonuses at Xstrata. But a public endorsement of the deal was noticeably lacking on Monday… Read more
First there was Copper Fingers. Then there was Choc Finger. Later we had The Whale.
What all of these traders respectively had in common (and no, they weren’t all Bond villain rejects) was that they all became the markets they were trading. Read more
Presenting some very insightful comments about developments in commodity financing from a speech by Timothy Lane, deputy governor of the Bank of Canada, given to the CFA Society Calgary on September 25.
Emphasis, FT Alphaville’s: Read more
About that iron ore rally…
Presented without comment (well just a little bit).
Bumi Plc statement, Monday: Read more
So much for D-Day in the unending saga of the Glencore-Xstrata tie-up.
Hot off the RNS feed on Friday: Read more
It could be that a major commodity story is about to go mainstream.
We are, of course, talking about the issue of financialised commodity inventory and the impact it has had on the supply and demand picture, by taking inventory off-market and off-balance sheet. Read more
Is Saudi Arabia having to again resort to Jedi mind tricks? Does the central bank of oil still have such a big problem with its policy transmission mechanism that it can’t weaken prices by production alone — and what effect is this having on world trade?
From today’s FT: Read more
People are still scratching their heads over what possibly sparked crude oil’s sell-off in the middle the US trading day on Monday.
Explanations in contention include: fat fingers, SPR talk and general illiquidity due to the Jewish New Year. Read more