Tag Archives: hot commodity

shutterstock_358911845

Brexit has been a gem for FTSE miners

Mike van Dulken, head of research at Accendo Markets, tells Hot Commodity why miners have struck gold from our decision to leave the EU…

FTSE miners are in a funny place right now. On the one hand, their share prices are supported by being among the major beneficiaries of a Brexit-inspired weak pound, getting a helping hand from a favourable translational gain on foreign profits. Which is all of the them, given that their London listings have everything to do with being quoted in the right financial centre and nothing to do with extracting minerals from within Blighty’s shores. On the flip side, a weak pound and a rising probability that the US Federal Reserve delivers another rate rise in December is keeping the US dollar strong, hampering the prices of their main products – commodities such as industrial metals – which would normally be a hindrance.

Except that oil is doing just fine, trading around 12-month highs on hopes that a production freeze/cut to put an end to a global supply glut is in the making. And oil often leads the commodities space, a signal of optimism about global economic growth and demand. Whether said hopes prove correct or not is by-the-by. What’s important is that markets are giving Opec the benefit of the doubt while its members meet for more informal discussions on the sidelines of the World Energy Congress in Istanbul. This is only two weeks since what was deemed a ‘positive meeting’ at the IEA forum in Algiers, where Opec mouthpiece Saudi Arabia importantly softened its stance ahead of the official November Opec meeting in Vienna. Will the world’s most famous cartel actually deliver?

Mining sector share price gains are also in spite of the sector’s strong links to global growth, a topic on which markets remain very uncertain to say the least. As we move into third-quarter earnings season, stateside Aluminium giant Alcoa has already disappointed and the IMF has cut growth forecasts for several developed nations, worried about the rise of populist anti-globalisation rhetoric. However, with miners still very much exposed to emerging markets (doing much of their digging there) and growth forecasts for these regions having increased, this is providing yet another helpful tailwind for rampaging share price recoveries from extremely depressed multi-year lows around the turn of the year.

So it’s a win-win situation for the miners from a currency, oil and geographic standpoint. The sector is proving to be a nice investment, sheltered from the Brexit turmoil along with many of those internationally focused US dollar-sensitive high-yielding defensives that everyone has run to amid the global hunt for yield. The latter has been engineered by years of extreme central bank stimulus deigned to keep borrowing costs low but which has taken many yields to near zero, if not negative. When this does finally unravel further down the line, could the mining sector once again prove a very unlikely and unintentional port in a storm?

Look at the FTSE’s best performers in the year to date. The miners make up the top five, up anywhere between a respectable 19 per cent and a whopping 244 per cent. Can a very favourable market set-up keep these trends alive? Will more hard Brexit talk send the pound lower? Will FOMC minutes and Fed chat send the US dollar even higher and the pound lower, maintaining that handy translational benefit? Could the US dollar pull back, giving commodity prices and emerging markets currencies a welcome boost? Will positive Opec talk keep oil on track for a $55/barrel price not seen for 15-months? Will fiscal stimulus and infrastructure spending, taking over from central banks, increase demand for raw materials?

Is everything just rosy for the FTSE’s miners, whatever the outcome?

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

shutterstock_140842708

No cheers from Algiers: oil price set for more volatility

Mike van Dulken, head of research at Accendo Markets, tells Hot Commodity why Algiers was fruitless and what we can expect next from the oil market…

It seems, as expected, nothing will come from an over-hyped Opec-led oil production freeze meeting in Algiers. Except for providing lots of quotes to fill the airwaves and fuelling oil price volatility, that most would have happily forgone.

I’m not sure how markets developed any optimism whatsoever that an agreement would be made, given the poor track record at meetings so far this year. We now likely have to wait for the official Opec meeting in Vienna at the end of November for something more concrete in terms of concerted efforts to stabilise the global oil market, buoying prices in the face of a global supply glut. However, having everybody (Opec and Russia) in the same room and on the same page is a good start. As is some welcome, even surprise flexibility from the Saudis.

The build-up to today’s finale has been as fun as ever, with plenty of inflammatory and contradictory comment almost making a mockery of the event and the major parties involved. Deals and solutions were allegedly plentiful only to result in little. Iran is the linchpin – stubborn as ever. But rightfully so, in our view, preferring to ramp up production from 3.6m/bpd to its goal of 4m. A distinct lack of urgency on its part to find compromise with struggling Opec peers suggests it is nowhere near as desperate to help stabilise prices. It clearly sees more upside in selling 10 per cent additional production at $46-50/barrel than selling its current output at $50+. How so? After years of sanctions, being able to sell any oil at all is a bonus. And if peers do capitulate and cut production, it will only help Iran in its quest to retake market share. Where’s its incentive to play ball before it gets back to pumping at full pelt? Let the others move first.

This makes sense, with Iran’s public finances far less exposed to the oil industry than Opec mouthpiece Saudi Arabia. The latter was, to nobody’s surprise, the most frustratingly but unproductively vocal this week. It helped the oil price rally with talk of a deal offered to Iran (“if you freeze, we’ll cut”) only for the gains to be swiftly eroded by Iran’s flat refusal. This suggests, even confirms, that the Saudis are in a much more perilous position financially, needing a production freeze/cut deal soon. It’s no surprise, with a skyrocketing budget deficit of $100bn, that it’s mulling a Saudi Aramco IPO and selling government debt to ease the burden of lower oil prices on public spending plans inked when oil was closer to $100/barrel. It is set to meet Russia again next month; prepare for plenty more market-moving rhetoric.

This week’s meeting may not have delivered that much, but will hopefully prove a stepping stone on the way to more stable oil prices. The stream of disagreement between all parties involve, however, remains a wide one to cross. What’s the chance that November’s Opec meeting is yet another damp squib, forcing us to look to 2017 and contemplate déjà vu all over again?

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.

Breakfast with Hot Commodity: the Brexit debate

IMG_2301

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.

M&S should have patched up the holes in its clothing division by now

The phrase “progress is a slow process” could have been written to describe Marks & Spencer’s long-awaited turnaround of its lacklustre clothing division.

Today’s fourth-quarter trading update showed yet another decline in sales (down 1.9 per cent, or 2.7 per cent stripping out any new acquisitions or non-comparable aspects) that once again contrasted dramatically to its buoyant food business.

New(ish) boss Steve Rowe has deemed the results “unsatisfactory” and vowed to address it – just as his predecessor vowed to do and no doubt a flurry of highly-paid creative directors and marketing consultants etc etc.

The real question is why is it taking so long? Does the M&S team not read the multitude of commentary about why its fashion lines are so undesirable? Admittedly, certain newspapers that count Marks and Sparks as advertisers will be giving a kinder view of the problem, but there is certainly enough independent analysis out there.

To me it is mind-blowingly obvious that the types of clothes that would sell well at M&S would be: good quality classic workwear; basics such as polonecks and jumpers in neutral colours, not just fluoro-pink (I struggled to find a black poloneck when I was last in there, let alone one in a size 8); middle-of-the-road flattering skirts and dresses that would suit the average person (A-line rather than horrendously unforgiving bodycon). More plain, less cheap airhostess patterns. M&S is NOT Maria Katrantzou and never will be (or should be).

Taking a look at the M&S website today, I trawl through the “New In” section of the womenswear collections.

We have a leather a-line wrap skirt that looks concerningly similar to the outfit worn by serial killer Dexter from the eponymous Netflix series when he butchers his victims.

A white, tassled, lace vest top that looks like something you’d find in the New Look sale but at a far higher price (no disrespect to New Look, but it’s different markets).

Oh, and dungarees. This item in particular makes me question whether M&S has an idea – or even cares – who their customer actually is. The only people I know who would wear dungarees would be hipsters or the very young – probably bought from Topshop – surely not the key demographic for this supposedly high street staple store?

Of course this is not to say there is not a single item I’d actually buy in M&S. They do produce some nice jumpers and if I looked very, very hard, there might be the odd jacket that’s passable.

But here lies the problem. People lead busy lives and every decision you make in your leisure time is the one that you think gives you the best odds of delivering what you want. If you choose a restaurant, it’s the one you think you’re most likely to enjoy that evening. If you choose a shop, it’s the one where you think you’re most likely to find clothes you like. Why would you go to a shop where you might be able to find 2 items out of 100 that you like, when you could go to another and perhaps find 15 out of 100?

It would be a shame to see such an historic brand as M&S lose its clothing division and effectively become just another supermarket. There is still potential for a turnaround – but whether Steve Rowe will be the man to do it, I’m yet to be convinced.

There’s more to Glencore’s agri sell-off than meets the eye

This week, Mike van Dulken and Augustin Eden from Accendo Markets explain why Glencore is still keen on the agriculture sector despite selling off its business…

Deleveraging in the mining sector continues, with Glencore managing to offload 40 per cent of its agricultural business to Canada Pension Plan Investment Board (CPPIB). But Glencore’s situation is rather different from that of sector peer Anglo American, which we discussed a while back.

Glencore struggled through the latter part of 2015 with a massive debt burden, the result of huge over-investment just around the time when commodity prices began turning over, and its shares were part of a group that weighed heavily on the FTSE 100 index last year.

While we’ve seen action taken by the blue chip miner to reduce its debt load before now, the partial sale of its agricultural arm is an indication that there are indeed buyers for mining assets. Sure, the $2.5bn price tag fell short of analysts’ expectations, but it was bang on Glencore’s guidance and has put some much-needed funds into the coffers, which the company says it will use to… expand its agricultural assets. Wait a minute. Glencore is selling part of its agricultural business in order to buy other agricultural businesses? Mad as it sounds, that seems to be correct.

Glencore is currently – despite this deal – a major exporter of grains in Russia, Canada and Australia. It shifted around 44 million tonnes of the stuff in 2015 but saw profits cut in half by an oversupplied and stagnating market. So what Glencore may be engaged in here is a clever marketing ploy – those being somewhat of a speciality of the commodity trading giant. It clearly still sees value in agricultural commodities, otherwise it wouldn’t be looking at South America and Brazil (the world’s #1 soy bean exporter) for potential acquisitions in that sector, right?

The other market in which Glencore lacks a big footprint is the US, and understandably so – the strength of the dollar making US exports less competitive means it’s not a priority right now. But what about the outlook for US monetary policy? If the Fed continues to be dovish – stamping down the hawkish dissenters – then the outlook for the dollar would be bearish, which would strengthen the Canadian Dollar and make Canadian exports less competitive. While Glencore shouldn’t and probably isn’t making a call based on FX forecasts, isn’t it a little funny that it’s sold a 40 per cent stake in its agricultural business to the Canadian Pension Plan Investment Board?!

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

The oil price follows the market’s heart, not head

This week, Mike van Dulken and Augustin Eden from Accendo Markets tell Hot Commodity why it’s sentiment, not fundamentals, that will boost the oil price.

Equities remain rather sensitive to commodity prices – understandably, given their links to economic growth sentiment. In the oil space we continue to hear mumblings of meetings to discuss production freezes (Moscow next?), yet the probability of any agreement between Opec and Russia is non-existent as long as Opec’s own members fail to agree – Iran and Iraq are still increasing production. Can members trust each other anymore? Has the oil price decline on Saudi-led stubbornness taken things too far in some cases? Is the cartel no more? US production has fallen to a six-month low, helping prices recover to their best levels in many weeks, yet as we have written before, this just risks the US shale frackers rolling back in to make the most of more economically viable prices. They are the new swing producers.

While this remains a distinct possibility, we can’t fail to note some interesting technicals of late that are at odds with some of the fundamentals. US Crude has broken above $36 which could see it on for a double-bottom pattern completing around $45. A price in the mid-$40s makes sense after comments from some US producers about $40 being the new $70, and a $45 figure being cited as enough to encourage some of the nimble drillers back to their rigs. Yet US stockpiles continue to grow to fresh all-time highs. Will today’s data show yet another increase?

Brent Crude, on the other hand, never tested its $28 lows twice and so a double-bottom can’t be on the cards. While there is interesting resistance at $41.30, there is still potential for an inverted head and shoulders reversal to complete at $48 after the breakout at $36. Importantly, if both patterns achieved their objectives this would put paid to major long-term downtrends, getting prices back above what has been bugbear falling resistance since those long gone $100+ highs of summer 2014. It was also maintain the current $3 spread between the two benchmarks.

A major broker may have announced to the world yesterday that the recent surge in commodity prices has gone too far with fundamentals unchanged, exacerbated by short covering, ETF buying and banks vying to distance themselves from bad sector debts. That call may have resulted in a sell-off yesterday. However, markets have already regained poise. After all, fundamentals are one thing, but sentiment is very much another. And hopes of a more favourable message from central banks over the next week or supportive chat from major oil producing nations could easily serve to boost bullishness for the barrel again.

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