Category: Gold & Commodities

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The Elusive Boost from Cheap Oil | Economic Research

Sylvain Leduc, Kevin Moran, and Robert J. Vigfusson in the FRBSF Economic Letter:

Why has consumption not responded more to cheap oil? Clearly, the U.S. economy was buffeted by headwinds over the past year, like weak foreign growth and the substantial appreciation of the dollar, that may have masked the positive effects of cheaper oil. Moreover, the decline in gas prices has been more muted than the drop in the price of oil. However, another possible reason is that the impact of changes in oil prices on the economy depends not only on the magnitude of the change, but also on its perceived persistence. Consumer spending is more likely to rise if people believe the decline in oil prices will last for a while; by contrast, if consumers think lower oil prices are not here to stay, they may simply decide to save what they don’t spend at the pump.

Figure 4: Estimated share of permanence in oil price movements

Source: Economic Research | The Elusive Boost from Cheap Oil

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The future of Chinese steel | MacroBusiness

Chinese Steel

From Andrew Batson’s interview with Cai Rang, chairman of the China Iron & Steel Research Institute Group:

China’s current steel production capacity is 1.2 billion tons, but domestic demand cannot completely absorb this capacity. In 2015 China exported about 100 million tons of steel products; this was a relief for domestic capacity but a shock to the international market. Already nine European countries have made antidumping complaints, and Japan, Korea and India have also complained. This shows that our country’s current steel production capacity is not sustainable, and must be genuinely reduced.

Now the relevant departments are drafting the 13th five-year plan for the iron and steel industry, and the preliminary plan is to first cut 200 million tons, and eventually stabilize steel capacity around 700 million tons.

How will a 40 percent cut in Chinese steel production impact on Australian iron ore exports? Not well, I suspect.

Source: The future of Chinese steel – MacroBusiness

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Where oil goes, stocks will follow

Where oil goes, stocks will follow. Crude oil prices are the canary in the coalmine at present. June 2016 Light Crude futures retreated from resistance at $43/barrel. Breach of medium-term support at $38 warns of another test of primary support at $32/barrel. Failure of support at $32 would offer a target of $22/barrel*, while respect of support would suggest that a bottom is forming.

June 2016 Light Crude Futures

* Target calculation: 32 – ( 42 – 32 ) = 22

The ASX started Monday with an early rally but ran into a spate of selling before the close. ASX 200 follow-through below 5000 would warn of a test of primary support at 4750. Declining 21-day Twiggs Money Flow, below zero, indicates medium-term selling pressure. Failure of primary support would reaffirm the long-term target of 4000*.

ASX 200

* Target calculation: 5000 – ( 6000 – 5000 ) = 4000

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China trade: Food, LNG, coal to gain ground as iron ore exports slip | afr.com

From Ben Potter at AFR:

Iron ore sales to China are set to fall as a share of total two-way trade, while natural gas, food and even coal exports will become more important, the paper, China’s Evolving Demand for Commodities, finds.

A decline in Chinese crude steel production means iron ore’s share of China trade falls steadily from its current peak of 58 per cent to about 51 per cent by 2025 and 43 to 47 per cent by 2035, the paper, by Ivan Roberts, Trent Saunders, Gareth Spence and Natasha Cassidy of the Reserve Bank of Australia finds

Source: China trade: Food, LNG, coal to gain ground as iron ore exports slip | afr.com

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Iron ore price correction in full swing | MINING.com

Frik Els:

Iron ore is now down 18.3% from a high above $63 struck last week following an insane one-day rally.

…..SGX was the first to launch iron ore derivatives in April 2009 and so-called open interest – a measure of market participation – has surged to an all-time high in recent days according to data from the exchange.

The iron ore market has also gone into backwardation, an unusual situation where spot price are higher than futures prices…..

Source: Iron ore price correction in full swing | MINING.com

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Where oil goes, stocks will follow

Patrick Chovanec

From Patrick Chovanec, Chief Strategist at Silvercrest Asset Management:

…..so far this year stock market sentiment has taken many of its cues from the price of oil. On any given day, if you knew which way oil prices moved, you probably could tell which way the stock market moved. While we believe this linkage fails to recognize the critical distinctions we have so often highlighted, it can’t be ignored in anticipating future market movements, at least in the near-term. The recent firming of oil prices reflects some important developments. After more than a year, we are finally seeing the initial signs of capitulation on the supply side: U.S. oil output has topped out and the most vulnerable OPEC members are agitating for cutbacks. Nevertheless, accumulated crude oil inventories remain at record high levels, which makes us wary concluding that the oil market has reached a hard bottom. While we think the oil price, and the producer industry, will gradually recover, we also think “consensus” expectations of a dramatic +20% gain in S&P 500 operating earnings this year, driven by a large and sudden rebound in the energy and materials sectors, continue to be overly optimistic. With this in mind, we are likely to see more sentiment-driven volatility in U.S. stock prices ahead, even as the U.S. economy continues on its path of slow growth.

Keep a weather eye on the flattening yield curve and shrinking bank interest margins. If these continue to shrink, “slow growth” could easily become “no growth”.

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Gold rallies as crude finds support

Crude finds support at $30/barrel, iron ore rallies, the Dollar strengthens, long-term interest rates fall and all seems right with the world. But is it? Deflationary pressures in Europe are rising. China cut bank reserve requirements to stimulate lending. And long-term interest rates would be rising, not falling, if confidence is restored.

Crude

Nymex WTI Light Crude futures (June 2016) found support at $30 per barrel. Expect a test of $40/barrel. But the primary trend is down and respect of the descending trendline is likely, which would warn of another decline.

Nymex WTI Light Crude June 2016 Futures

* Target calculation: 30 – ( 40 – 30 ) = 20

Long-term interest rates remain weak, with 10-year Treasury yields testing primary support at 1.5/1.65 percent. The flight from stocks is driving up Treasuries (and yields lower), overwhelming sales by China (to shore up the Yuan). Declining 13-week Twiggs Momentum warns of further weakness.

10-year Treasury Yields

The Dollar Index rallied over the past two weeks but further PBOC selling is expected to reinforce resistance at 100. Reversal of 13-week Twiggs Momentum below zero would warn of a primary down-trend.

Dollar Index

Gold has benefited from the uncertainty, with consolidation above $1200 suggesting another advance. Breakout above $1250 would offer a target of $1300*.

Spot Gold

* Target calculation: 1200 + ( 1200 – 1100 ) = 1300

The monthly chart, however, reflects a more precarious position. Momentum has clearly shifted, with breach of the descending trendline and a sharp rise on the 13-week indicator. But there is no higher trough confirming the trend change. So pick your entry points carefully and maintain tight stops. This could still go either way.

Spot Gold

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Sigh…no, iron ore has not bottomed | MacroBusiness

From David Llewellyn-Smith:

…..restocking is the only thing going on here, enhanced by recent Chinese stimulus. It will pass in due course leaving enormous oversupply and far too large Chinese inventories.

….Not only is iron ore going below $30, it’s going below $20 soon enough. This year we’ll see more supply from Minas Rio, Sino, Roy Hill, India and Vale as Chinese demand falls sharply with a swing in the market of 100mt towards greater surplus.

Source: Sigh…no, iron ore has not bottomed – MacroBusiness

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Gold: PBOC makes its move

China’s PBOC made its move against the hedge funds on Monday, while many hedge fund managers were enjoying a long weekend in the Hamptons. With more than $3 Trillion of foreign reserves, this is a fight that the PBOC is likely to win, provided it stands firm. Hedge funds betting on a collapse of the Yuan can leverage their positions, but that makes them vulnerable to margin calls. Driving the Yuan below 6.50 to the Dollar may force some to cover their shorts, which would further strengthen the beleaguered currency.

USDCNY

China’s sell-off of foreign reserves has caused the Dollar to fall, in the midst of a flight to safety. Retracement that respects resistance at 97.50/98.00 would indicate a decline to test primary support at 93.00. Decline of 13-week Twiggs Momentum below zero warns of a primary down-trend.

Dollar Index

Flight to safety has spiked demand for Gold. Expect retracement to test support between $1150 and $1200/ounce. But respect of either level would confirm a trend reversal (after recovery above $1200 completes a higher trough).

Spot Gold

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