Tag Archives: commodities prices

US rates: Is Yellen set to spoil the party for commodities?

This week, Mike van Dulken from Accendo Markets looks into his crystal ball ahead of Janet Yellen’s speech on Friday…

All eyes (and ears) will be on her majesty the US Fed chair Janet Yellen this Friday, when she delivers what could be major market-moving speech at the Kansas City Fed Economic policy symposium in Jackson Hole, Wyoming. It is hoped that her talk will include hints (both clear and, of course, cryptic) about the path for US monetary policy. This is because the US Federal Reserve is the only major central bank fortunate enough to be in the position of being able to tighten policy post-crisis. And the reach and influence of the world’s reserve currency (the US Dollar) is far and wide as commodity traders well know.

Fed members have sounded hawkish of late, suggesting a rate hike might indeed be warranted sooner than markets are pricing in, but the US dollar remains well off its summer highs. In fact, it’s not far from its summer lows with a rising trend of support going back four months. We believe this provides Yellen with the breathing space she needs to take a rather hawkish tone, without it resulting in so much US dollar strength that it actually prevents her and her committee from voting for another hike in September.

We still see September as highly unlikely. Even December to us is off the cards when you take into account political event risk on both sides of the Atlantic (Trump stateside; Spain and Italy in Europe). Yes, there are US data points suggesting a US rate hike could be due, but surely not while other central banks are doing the polar opposite. The European Central Bank is widely expected to add to stimulus on 8 September while the Bank of England updates us on 15 Sept and the Bank of Japan could move again towards the end of next month.

Don’t forget that every step the latter group takes to ease policy further, which serves to weaken their own currencies, has the offsetting effect of strengthening the US dollar. A US rate hike, or a strong hint of one being imminent, therefore represents a risk for Yellen. It will potentially send the US dollar much higher than the Fed might be comfortable with, thus becoming a hindrance for exporters. Even if it gives consumers more bang for their buck in terms of imports.

The Fed has been at pains to hammer home a message of a ‘slow and gradual’ pace of future hikes, aiming to keep the US dollar index from returning to flirt with the 100 mark it traded around at the beginning of December and end of January. Would it risk sending it back there? Yellen is still having to tread the fine line between countering market complacency about low rates forever while simultaneously prepping traders for another eventual US hike. Not an easy job.

Economic barometer copper is already back testing July lows. We wonder whether a hawkish tone this Friday could serve to deliver a real dent to the commodity space, with a negative knock-on for the FTSE’s mining contingent. We already see the red-metal and others (aluminium, oil) putting raw material-focused names on the back foot this morning as a result of last night’s US dollar rebound. Could these trends become rather unwelcome friends?

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

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.

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.

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.