The copper price is brightening despite the Brexit vote that rocked the markets

Augustin Eden and Mike van Dulken from Accendo Markets tell Hot Commodity why copper is faring well in a tumultuous week following the Brexit vote…

What a turnaround in the markets this week. Talk of fresh restraint concerning US monetary policy normalisation (a 2018 rate hike, anybody?), reassurances from China that it will continue to meddle in its financial markets as required and hopes of coordinated central bank intervention have all helped boost the price of copper via a weaker US dollar and improved risk sentiment. This has in turn stopped a good portion of the record bearish speculative bets on the commodity, providing further support. You wouldn’t be wrong in concentrating exclusively on Brexit this week, but it’s probably time to start remembering that the wider world does still exist – even more so the fact that the wider world is far more of a going concern for the UK’s FTSE 100 blue chip miners than the country in which their shares are merely listed.

In particular, for all its imperfections, China is a godsend when it comes to copper. The world’s 2nd largest economy may be slowing (no arguments there) but it still currently buys 40 per cent of all the copper produced annually around the world. The Chinese government is doing everything it can to paint a positive picture, while regulators intervene in financial markets to keep all the balls in the air. And with ‘fiscal support’ (whatever that actually means in China’s case) constantly warming up on the touch-line, the positive impact on classic risk plays in the UK’s mining sector has helped offset global growth concerns emanating from Brexit.

Base metals haven’t been rocked as much as everyone thought they might have by the Brexit hit to global market sentiment. We know the miners are less exposed to the UK economy than they are to emerging markets and we’ve got this fantastic tool in the Chinese government primed to act the very moment things start to turn sour. Aside from the safe havens, copper could now be set to benefit most of all as trade talks commence in North America – with energy production a major talking point – and with the potential longer term for more of that between the UK and China. Energy is likely to be on the agenda here too, with the UK facing an impending shortage as coal plants close to be replaced by, er, well, nothing has been decided yet. But many renewables are likely to require a lot of a certain red metal to transmit what they can harness naturally.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

US interest rates: Ignore the scaremongers, non-farm payrolls aren’t enough to derail Yellen

When Janet Yellen speaks in Philadelphia later today, everyone will have just one question on their minds – when will the US Federal Reserve next raise interest rates?

Fed members had been hinting at another rate hike over the summer, but equities are today trading higher – and the dollar is weaker – in anticipation of no change over the summer months, following last Friday’s highly disappointing non-farm payroll (jobs) numbers.

Official data on Friday showed that the US economy added 38,000 jobs last month – the fewest in more than five years – which pushed back expectations of a rate rise until later in the year.

But NFP data is a very small part of the story – and Fed chair Yellen knows it. The surprisingly low figure has been seen as an anomaly by some market commentators, contrasting with broader signs of a US economic recovery.

“Something about the NFP numbers don’t add up for me, when you compare them to more positive recent data such as regional reports from the Beige Book,” said Kully Samra, managing director of Charles Schwab in London.

“Two Fed members have already implied that the figures were an anomaly and I expect Yellen will do the same. I don’t think the NFP data would change the stance of the Fed.”

Perhaps a bigger factor in the expected no-change result at the 15 June meeting of US policymakers is the imminent risk of Brexit, ahead of Britain’s EU referendum vote on 23 June.

“I was amazed as to the degree of importance the Fed puts on the EU referendum,” said Samra. “It was mentioned in the minutes of the last meeting due to its potential impact on the global financial markets.”

Augustin Eden, research analyst at Accendo Markets, agreed. “Suffice to say that a US rate hike seems unlikely either in June or July given the iffy print and added headwinds provided by an intensifying Brexit whirlwind,” he said.

“[But] there remains an outside chance the FOMC will act despite the dire jobs number – it was after all just one number – since to do so would at least signal that US economic conditions are right and that the Federal Reserve is not hiding anything from us.”

While a rate rise now looks more likely later in the year, this should not simply be put down to the NFP number and certainly does not mean the US economy is doing badly. It’s actually faring pretty well, the Fed just needs to convince the markets, as Samra explains.

“There is a difference between where the Fed and where the market wants rates to be,” he said. “Rates have been low for so long and there is a disparity about how strong the economy is.

“It’s all about the consumer – they’re at the heartbeat of the domestic economy,” he added. “Data shows they are continuing to spend and they’re slowly borrowing more. The US is the strongest developed economy. It’s forecast to grow at well over two per cent this year.”

Brexit and the Fed: stock market investors should brace themselves for a bumpy June

This week, Mike van Dulken and Augustin Eden of Accendo Markets tell Hot Commodity why we should brace ourselves for a bumpy June…

An optimistically cautious end to May was punctured by a surprise surge for the Leave camp in the latest UK Brexit poll. Whether this says more about what Guardian readers are thinking as they pack their bags and buggies in preparation for this summer’s festival season, or does indeed reflect a wider swing in sentiment is unclear – and will surely remain so until the result is announced. Remember how polls at the last UK general election showed that they’re not always spot on? Nonetheless, polls are seldom ignored and two markets that certainly didn’t ignore this one were cable (the GBP/USD exchange rate) and the FTSE 100.

The two are only really semi-co-dependent. The FTSE 100 contains so much international exposure as to be almost entirely US dollar sensitive, but the fact that these two markets got a big dose of volatility at the end of May and into June says much about current market sentiment: it’s cautious and it’s jumpy. Cautiously nervous? Nervously cautious? Whichever it is, it doesn’t like loud bangs!

Whoever chose June as the month in which the UK would vote on its future relationship with, let’s face it, the rest of the civilised world could not have predicted that we’d also find ourselves once more staring down the barrel of the US Fed’s proverbial interest rate cannon. And while a mere 25bp rate hike is surely nothing to be worried about, now we’re here, it’s natural to wonder what effect one will have on the other. Might the Fed hold off because of Brexit risk? After all, last September it held off because of “international headwinds”. International headwinds have been a feature of the world for, like, ever. Yet Brexit has no real precedent. On the other hand the Fed went ahead in December, right in the middle of a hideous time for stock markets, just because some jobs were added in the US economy.

The dilemma that faces policymakers right now is hardly a subtle one. June is sure to be a tumultuous month because, right in the middle of it, there’s a potentially paradigm-shifting referendum in the UK. Whatever the outcome, the potential for considerable political unrest in both the UK and Europe is very real indeed, so July may also throw up the sorts of international headwinds the FOMC loathes so much.

All that considered, June might actually present the more realistic opportunity. Will the US simply get it out of the way and adopt the brace position for what will surely follow?! Whatever happens, we can be sure that the FTSE 100 index and the GBP/USD pair will find themselves with few hiding places, if any, for the remainder of the year. It’s time to buckle up.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

Dong Energy’s IPO shows why offshore wind is more than hot air

Like Saudi Aramco, Dong Energy is now in the midst of preparing for an initial public offering.

The Danish energy giant’s June listing is expected to value the firm at up to $16bn (£10.9bn), making it one of the biggest flotations of the year. It will of course be dwarfed by Saudi Arabia’s oil colossus, which has been valued (perhaps overenthusiastically) at up to $2trn, but it’s still not to be sniffed at.

I think the two energy companies make for an interesting comparison. On one hand, you have Saudi Aramco – a longtime oil Goliath that has provided the Gulf state with lucrative revenues, but has recently fallen into comparatively tougher times as a result of the oil price rout. Saudi Arabia has now had to stop using its oil revenues as a piggy bank, has tapped the debt market and will be tapping the equity market in order to get rid of its deficit (which came in at a national record of $98bn last year).

I’m sure its plans to raise money will succeed, as well as its new strategy to diversify its economy away from black gold. But what for oil itself? Where will it sit in a rapidly changing energy sector where it must compete with other sources such as shale, at a time when the West is pushing energy-efficiency and a move to renewable power, while China’s energy demand is slowing down as its economy slows?

This brings me on to Dong. The energy firm, which counts the Danish government as its biggest stakeholder, used to have a major focus on coal but has now transformed itself into the world’s largest offshore wind farm operator. It has tried – unsuccessfully – to sell its oil division, as it looks to shed its “dirtier” assets to become greener than green.

Its efforts have paid off. Since 2013, when it was still struggling post-financial crisis and Goldman Sachs bought a stake in the firm (amid a gigantic public furore into the influence of the US investment bank on a state utility), it has increased its profitability – thanks to its offshore wind division.

Renewables are expensive and controversial. While they make sense environmentally, they require hefty state subsidies in the transition period and transitioning too fast can be a costly burden. Certain types can also be less reliable, such as solar and wind, as they are dependent on certain weather conditions.

In the UK (where Dong makes large profits), energy secretary Amber Rudd has called for deep cost cuts to offshore wind farms if they wish to receive billions of pounds of new subsidies.

But – and excuse the pun here – they’re the way the wind is blowing. Political pressure to implement and raise renewables targets mean that they’re here to stay. They just make long-term sense, despite their short-term challenges.

Perhaps it is a little simplistic to say that oil is the past and renewables are the future, especially at a time when the former is relatively cheap and the latter still expensive. And oil is still one of the world’s major energy sources, while renewables are a mere pipsqueak. A pipsqueak still relying on handouts from mum and dad.

I’m sure bankers and investors will be able to profit from Aramco’s IPO more than Dong’s, despite the changing fundamentals.

But with a move to greener energy sources inevitable in the developed world and oil reserves (and revenues) depleting, I wouldn’t be surprised to see the balance changing – after all, the vampire squid must be smelling money…

Oil price: can $50 be conquered?

Can oil make it back up to $50 a barrel? And what does this mean for US rate rises? Mike van Dulken and Augustin Eden of Accendo Markets give their take on this pivotal day in the recent recovery…

A stronger US dollar is showing no signs of hampering the oil price rally towards $50, even after a trio of Fed speakers (non-voters we must highlight) spiced things up by jumping on a few bright spots of macro data to send the US dollar basket back to 3-week highs, suggesting a June US rate hike remains a possibility.

Wording is surely key here, with a rate hike technically possible at every meeting. Whether one is likely or not is a very different matter. Markets may now be pricing in a slightly higher likelihood, but they are by no means pricing in a hike. It’s generally accepted that the Fed prefers to avoid surprising markets – it’s not a good look for the central bank of the world’s reserve currency and number one economy. Better warm ‘em up and hint for a while before delivering the killer blow. And anyway, last night’s speakers (Lacker, Williams Kaplan) are all non-voters, which suggests this evening’s Fed Minutes will be more important in terms of deciphering the FOMC rate-setting committee’s most up to date views.

As it stands, we just don’t see June on the cards for a hike, even if some US data is surprising to the upside (did the trio miss May’s Empire State Manufacturing data cratering on Monday?). Certainly not with a UK referendum on EU membership set to take place less than a week after the Fed next meets. It’s assumed that a Leave vote would ‘pound’ sterling even more than jitters already have, which would only go to put unwelcome upward pressure on the dollar – in essence delivering a rate hike of sorts.

Surely the Fed would be better holding off. If a Remain vote prevails, a relief rally in GBP could provide more room for manoeuvre via a corresponding drop in the dollar. Furthermore, as if that wasn’t enough, with each day that passes it looks increasingly possible (scarily so) that Donald trumps his democrat rival Hilary in the race for the a White House. Is that a geopolitical environment the Fed really wants to be hiking into? Of course not. The committee knows its choices have far-reaching implications. It was given a timely reminder in January via an aggressive market selloff in response to its December decision to go for it and deliver that first major post-crisis hike.

Which brings us to the non-currency drivers of the price of oil, the stuff we should really be concentrating on. THE FUN-DA-MENT-ALS. Supply disruptions have been a major issue of late, with Canada and Nigeria tagged as major reasons for prices continuing their 2016 reversal recovery. But these are likely short-term issues, in which case supply perceptions could be set to calm, thus hindering oil prices.

Extra help came from last week’s surprise drop in US weekly crude stocks (which suggests that consuming more = good) coupled with continued drops in US rig counts and stateside production as Opec-competing frackers call it a day. Opec mouthpiece Saudi Arabia remains stubborn within a divided cartel. All have helped usher prices ever higher and, as we write, there is the possibility (borrowing from Fed terminology) that another big drawdown in stockpiles is delivered this afternoon, sealing a test by oil prices of that key $50 level. Add to this improving, if patchy, US data and a better than expected rebound in Japanese GDP (big oil importer) and fundamentals are supportive of the near-term uptrend.

The question now is whether the current trend has legs? How close is US production to a turning point as shale and frackers return to bring production back on-line at more sustainable prices? They had been talking about $45-50 which is where we are. Those nasty 18-month term downtrends have been overcome to take us back to six-month highs. Can a major psychological level in $50 really be conquered too?

This commentary was provided exclusively by Accendo Markets for Hot Commodity: https://www.accendomarkets.com.

BHP investors: hold on to your seatbelts, you’re in for a bumpy ride

This week, Mike van Dulken and Augustin Eden from Accendo Markets warn that BHP Billiton investors should brace themselves for legal action of BP proportions…

BHP Billiton (BLT) is this week underperforming a similarly weak commodity sector, one which is already under the cosh from a US dollar rebound, an oil price turning over from its highs and persistent global growth concerns after the latest China data sapping investor sentiment. The reason Billiton’s faring worse than its peers stems from news of a $44bn civil legal challenge from Brazilian federal prosecutors related to last November’s Samarco dam failure. That in itself may appear to be a minor driver. It’ll be sorted out soon, won’t it?

Er, well, something similar happened to BP about six years ago and this has quite rightly spooked investors, who would now appear to be pricing in the prospect of long and protracted litigation akin to that which BP only put to bed in July last year – a whole five years and $53.8bn after its 2010 Deepwater Horizon Gulf of Mexico disaster!

The claim against BHP Billiton relates to clean-up costs for waterways and villages, community rebuilding and compensation for the deaths of 19 people and resulting homelessness inflicted on a further 700. Sound familiar?

While BP worked tirelessly to limit the impact (both environmental and financial) of its disaster, several attempts to close the affair failed, and now a fresh legal challenge for BHP Billiton sees its situation echoing that endured by BP. The March 2016 settlement between BHP Billiton, its domestic partner Vale and the Brazilian government was potentially just the beginning of a long road. While there remains the possibility that such an imposing precedent as BP’s Gulf of Mexico disaster is inflating the claim against BHP, one can’t help but see investors take flight at the prospect of added risk in an already risky sector.

Sure, the Brazilian government has form for demanding initially huge reparations for environmental disasters before conveniently reducing them, and a smaller settlement may well be agreed for BHP and its Samarco colleagues. But there is no guarantee of this. Then again, this is Brazil, where the president faces impeachment and replacement by any one of a number of equally dubious cronies.

BHP shares are still holding their uptrend from 2016 lows. Just. However, after giving up 50 per cent of their 2016 gains (now up just 40 per cent YTD vs highs of 80 per cent on 21 April), we have to wonder whether an already difficult situation could get even messier.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

Breakfast with Hot Commodity: the Brexit debate

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Hot Commodity’s inaugural event, held yesterday morning at The Clubhouse in Mayfair, went off with a bang! JD Wetherspoon boss Tim Martin and Philip Davies MP went head-to-head with economist Vicky Pryce and entrepreneur Alex Mitchell to debate the highly topical issue of Brexit ahead of the EU referendum.

The well-informed panellists did not hold back – from Philip calling Vicky’s pro-EU arguments “drivel” to Tim calling the Treasury “George Osborne’s PR department” and the chancellor “disreputable”.

The be-leavers

Publican Tim gave a spirited argument as to why we should leave the EU, centred around democracy and the need to control our own laws.

“If you look around the world, the successful economies are democratic and have a very high level of democracy that you don’t have in Europe,” he said.

“The European Court judgements, we have no control over and are supreme. The European Commission isn’t elected. It frames the laws and we cannot sack them. It is not democratic. And the 751 Members of European Parliament are too remote to be democratic,” he added.

Eurosceptic Tory MP Philip Davies, who founded the Better Off Out campaign in 2006, focused his argument on how much we could save by leaving the EU.

“We should be ashamed of ourselves that we are handing over £10.2bn this year to be part of a backward looking, inward-facing protection racket set up to prop up inefficient European businesses and French farmers,” he said. “This is not what the UK has ever been about and should not be what the UK should ever be about.”

Stronger in

But remain-ers Vicky and Alex fought back with equal force. Vicky, who is on the board at the Centre for Economics and Business Research, argued that the benefits outweigh the disadvantages of being in the EU.

“There is no doubt at all that having been part of the EU has helped us quite substantially in the past few decades,” she said, explaining that it helps “productivity, innovation and investment”.

“What it also does for the consumer and of course any entrepreneur who has to sell the goods is that it is a very keen market in terms of prices,” she added. “Look what’s been going on as the markets opened up in the airline sector…and the telecoms sector. There has been a huge consumer benefit coming out of this, with a huge increase in the number of possibilities in terms of what can be offered.”

Alex, an entrepreneur and UK President of the G20 Young Entrepreneurs Alliance, conceded that Brussels is “a difficult beast” that “needs change”, but emphasised the benefits of being part of a larger economic union for smaller and fast-growing industries.

He made the point that UK businesses have benefited hugely from EU programmes such as the Horizon 2020, which is providing nearly €80bn of funding for research and development projects over the seven years to 2020.

Trade deal or no deal?

Tim made the point that there is currently no trade deal between the UK and the US and that “it hasn’t done us too badly for the last couple of hundred years”.

“We buy our wine from South America, Africa, New Zealand and Australia. For many years I asked why aren’t we able to get better deals from the French, but we just can’t,” he said, disputing the idea that there are better trade deals to be had in the EU.

And Philip argued that with Britain’s £62bn trade deficit with the EU, it would be easy to secure a free trade agreement – as we have far more to offer the bloc than the likes of Norway.

Vicky came back with a strong riposte to the leave team, who also had concerns about the high levels of immigration coming from EU countries:

“It’s interesting to think we can have an even better deal, with completely free access to the market…Are you telling me we can have everything we want if we leave, but [without] people coming into this country? The chances of achieving that are peanuts.”

She also hit back at Philip’s criticism of the EU being a declining part of the world economy, saying: “If you look at the growth of the countries that we are dependent on and that we would like to be trading more with – and nothing has stopped us so far doing this – or the BRIC countries with the exception of India, they are all in recession. We can’t rely on those parts of the world.”

Rates and rumours

Tim blasted chancellor George Osborne for warning that a Brexit could lead to higher interest rates, labelling him “disreputable”.

“After the 2008 economic crisis, the pound went down, inflation went up for several years and what happened to mortgage rates? They went down,” he said.

“It was highly disreputable for the chancellor to give rise to headlines that say that mortgage rates will go up in an economic crisis, when the last time, they went down.”

Vicky qualified the central bank action by saying that the Bank of England had “very sensibly decided not to raise interest rates in the middle of a recession”.

Interested in taking part in – or supporting – the next Breakfast with Hot Commodity event? Email info@hotcommodity.co.uk.

Exclusive: GMO’s CEO Brad Hilsabeck to depart

The chief executive of US investment giant Grantham, Mayo, & van Otterloo (GMO) is stepping down after five years in the role, Hot Commodity has learnt.

Brad Hilsabeck, who joined the Boston-based asset manager in 2003, will quit as chief executive on 30 June 2016, GMO confirmed today.

The reason behind his departure was not disclosed. He will remain a member of the GMO board of directors.

GMO, which has more than $118bn in assets under management, said that Peg McGetrick will succeed Hilsabeck as chief executive on an interim basis.

McGetrick previously served as a portfolio manager for GMO’s international active equity team from 1984 to 1996, and was a partner at the firm from 1988 until 1997. She then left GMO to set up Liberty Square Asset Management and re-joined GMO as a member of the board of directors in 2011.

GMO was co-founded by British-born financier Jeremy Grantham, who is known for his correct predictions of various stock market crashes including the dotcom bubble and the global financial crisis.

The bearish investment strategist said in an interview with the Financial Times last year that the stock markets “will be ripe for a major decline” at some point in 2016, which could result in several government defaults.

Rio and BHP’s share price rally show the mining recovery is in full swing

This week, Mike van Dulken and Augustin Eden from Accendo Markets explain why bad news can be good news when it comes to mining…

Logistical problems (weather, transport) would normally be considered a negative for a dual-listed mining giant such as BHP Billiton (BLT) or Rio Tinto (RIO). However, trouble getting stuff like the iron ore required to make steel to market in the first quarter of the year has actually proved perversely beneficial to the recovering mining pair.

The news may have impacted recent quarterly financials and resulted in cuts to full-year production guidance, however, prices of the raw material have been buoyed by the interpretation of restricted product supply helping with a slowly reversing global glut. Rather than hurt the companies’ shares, they have maintained their recovery trajectories, even accelerating to make bullish breakouts to levels last seen in October/November. This may serve to attract even more interest, which could prolong the trend.

If I were to tell you that BLT has rallied over 70 per cent from its January lows and RIO by more than 55 per cent, these are exciting moves within the space of three months. Annualise that! Note that their peer Anglo American (AAL) is up 250 per cent from its lows. This is not a typo. It is trading at 780p vs Jan lows of 225p.

No surprise then that commodity prices are well off their lows too, and while the circa 50 per cent oil price recovery has been well documented, and given a depressed commodity sector a boost, it’s the 10-60 per cent rebounds in metals prices (aluminium, copper, nickel, zinc) that have really helped, and iron ore in particular (the winner, up 60 per cent).

This stems from a host of drivers. Tough decisions by the miners included reducing output by abandoning no longer viable projects to stem the supply glut. They have also cut costs and dividends to save money.

A weaker US dollar based on a more gentle normalisation of US monetary policy is also helping by making dollar-denominated commodities that bit cheaper. Short-covering of bearish bets will have added handsomely to early 2016 recovery momentum.

Furthermore, a slower growing China has become more acceptable to the investing masses, the belief being that it is no longer set for a hard landing (the government and central bank will intervene do whatever’s necessary). With China and the rest of the world still requiring mountains of commodities like iron ore for future growth, the outlook is not as bad as it was.

While corporates remain cautious, markets are cautiously optimistic. After the great sell-off we look to be in the midst of a great recovery. The big question now is how far it will run?

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

BP boss Bob Dudley’s proposed pay rise is arrogant and offensive

Bob Dudley is usually pretty good at PR. The BP boss took the helm of the FTSE 100 oil major just after the 2010 Deepwater Horizon disaster – the biggest oil catastrophe in history – when its reputation was in tatters. Since then, the American executive has had to steer the company during an eye-wateringly difficult commodities rout, with the future of the oil market still in question.

At results conferences he usually made an effort to greet all us journalists individually, with a little comment to show that he actually registered who we were (“Ah City AM is a great paper” he said, having seen my name badge), something which I have found that few CEOs bothered to do.

But today it seems that he’s lost his touch. Unsurprisingly, the majority of shareholders voted against BP’s remuneration policy, which proposed hiking Bob’s pay up by 20 per cent to almost $20m (£14.1m) for 2015.

Put this figure alongside BP’s mammoth $5.2bn loss last year and 7,000 job cuts and it looks bad. Marie Antoinette bad.

I’ve seen commentators today argue that poor, overworked Bob has had a tougher time of it last year than a CEO would during a commodities boom (which is undoubtedly true) so he deserves the extra cash.

With this, I whole-heartedly disagree. I am sure that Bob’s job has been more stressful than any of us can envisage; trying to satiate employees, shareholders and everyone else while oil prices remain so painfully low must be nearly impossible. But I cannot imagine anyone in any other job being able to justify earning MORE money by arguing that the company – and their industry – is doing badly.

If that were the case, most journalists in the country would have been raking it in over the last decade, let alone supermarket employees etc etc. There are plenty of people all over the country working harder in tough conditions – this is no excuse for higher remuneration amid a backdrop of job cuts.

The other factor making Bob look bad is that his counterpart at FTSE 100 competitor Royal Dutch Shell, Ben van Beurden, took a whopping pay cut last year to €5.6m (£4.5m).

When we’re talking about such huge, incomprehensible sums it seems unfathomable why Bob would not have followed suit. He’s not stupid; he must have realised what the reaction would have been.

I’m not left-wing by any means – I support wealth creation and capitalism. But surely taking a salary of, say, a mere £5m would be enough for Bob and his family to live in the lifestyle they have become accustomed to, while sparing his reputation?

For sadly I think today’s events show that Bob now appears out of touch with his shareholders and – even worse – that he doesn’t care.