Tag Archives: hot commodity

Good news! The US economic revival is definitely on its way

This week, Mike van Dulken and Augustin Eden from Accendo Markets tell Hot Commodity why the US is on the up…even if the rest of the world isn’t.

Equity markets went to town yesterday on positive US data and hopes of more stimulus from the European Central Bank (ECB) and China’s People’s Bank of China (PBoC). Yet this is surely supporting the case for the US Federal Reserve to deliver further interest rate hikes this year – something likely to stifle US growth.

So was the market reaction simply increased confidence in the US economic recovery, coupled with a realistic belief the Fed won’t dare hike this year for fear of a repeat of January’s volatility? This should maintain a nice accommodative tilt to global monetary policy to spur economic recovery elsewhere.

US interest rates have risen only a touch to regain 0.5 per cent and equal the historic lows of its peer across the pond – the UK’s Bank of England (BoE). However, US macro data has blown too hot and cold since then for the Fed’s Federal Open Market Committee (FOMC) to be comfortable hiking again anytime soon. Mixed Fed chat of late, with some quite noticeable changes of heart by long-term committee hawks (Bullard), adds to our belief.

With markets already building up to Friday’s US Non-Farm Payroll numbers, it’s worth noting that jobs data has been anything but a worry for the Fed for a good while now, with net monthly additions averaging around 225,000 since 2013. Unemployment at 4.9 per cent remains in a downtrend towards 10 year lows, but wage growth is still lacking.

News that US Q4 2015 GDP growth was revised up to one per cent quarter-on-quarter from 0.4 per cent last week was welcomed by markets, but it still showed a slowdown from previous quarters.

US Consumer Price Inflation (CPI) expectations have also faded quite dramatically (just 1.4 per cent for the next decade, suggestive of another oil price plunge), and sit way below the Fed’s two per cent target. Core CPI figures (excluding food & energy) may have accelerated back to target but for this to hold up oil prices must fall no further, allowing the influence of their 2014 price plunge to dissipate.

So aside from the fact that Friday’s US jobs figures are sure to deliver the traditional monthly market volatility, for us it will only serve to bolster confidence in the US economic revival. Good news. This in turn may further support the case for policy normalisation, but it’s not going to be enough for the Fed to consider the stars truly aligned for another press of the big red button. Even better news for risk appetite. Enjoy the first Friday’s usual fun ‘n’ games, but other data is far more important.

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

There are still some gems among Anglo American’s junk heap

This week, Mike van Dulken and Augustin Eden from Accendo Markets mine a little deeper into Anglo American’s “reversification”.

Shares in Anglo American (AAL), a mining giant that’s always had diversity at the centre of its business model, were the worst performing on the FTSE 100 in 2015. Such diversity was key to maintaining profitability in all commodity price conditions, which had been good for so long. But it’s clear that there’s now just one set of conditions: awful. It’s now become necessary to divest and Anglo American is just the latest miner to announce its plan to streamline its exposure. In this case, we’ll see its portfolio reduced to just three products from nine.

High growth emerging markets are, of course, seen as a bellwether for the commodities space as a whole. It’s little surprise that a perceived slowdown in China has dented a steel industry that’s been producing at very high levels for years. Iron ore and coal, the latter also highly out of favour as an energy source, are thus prime candidates to be dropped from a highly diversified miner’s repertoire. Copper, on the other hand, is a commodity that’s able to move with the times, present as it is not just in heavy industry and infrastructure, but also essential in the microelectronics that will dominate any economy that makes the transition from manufacturing and export-led to consumption and services-led.

With precious metals miners clearly benefitting from renewed safe haven demand in early 2016 and a global car industry that’s not only too big to fail (forget about the banks – this one really is), but subject to tighter controls given global warming and a certain car manufacturer’s recent antics, it makes sense to keep producing these products. Furthermore, the luxury goods market may well be oversold at the moment as investors connect slowing EM growth with a corresponding slowdown in the growth of the middle classes in that part of the world.

It’s pretty clear that slowing economic growth – or “continued transition” – needn’t automatically mean people are getting poorer. If anything, the western lifestyle should only pervade emerging markets more as their populations, more exposed to international markets every day, are increasingly freer to strive for material success. So things like diamonds, if you’re lucky enough to be mining them, look good too.

As far as Anglo American is concerned, there are of course positives and negatives in all this. The company is the world’s largest platinum group metals miner and owns DeBeers diamonds. Tick! However, with such a large portfolio of things no one wants (iron ore, coal…) for sale, Anglo finds itself operating in an already oversupplied buyer’s market as it tries to offload them. That, unfortunately, puts a big fat cloud of uncertainty over the company’s efforts. Yet with the entire sector plagued by exactly this type of uncertainty, what’s new?

And with ratings agency Fitch having today downgraded the miner’s credit rating to junk, one might be spooked by the news and worried about the miner’s future. However, its shares remain on a northerly charge from January all-time lows, almost doubling on improved sentiment towards its turnaround strategy, and they haven’t even batted an eyelid at this morning’s downgrade (AAL shares are currently up 7 per cent, near their highs of the day). Post crisis, we all know the ratings agencies are last to the party.

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

The oil price is now hinged on a war of words

In the latest of Accendo Markets‘ regular commentary for Hot Commodity, Mike van Dulken and Augustin Eden give their take on the latest oil price volatility…

Ever since Russia piped up a few weeks back, saying that it was about to sit down with Saudi Arabia to discuss a worldwide five per cent cut in crude production, there have been several instances of other market players trying the same thing, and just a little oil price volatility to boot. Suffice to say, markets quite quickly called this tactic following a swift rebuttal from the leader of the Opec cartel, and perhaps a few more call-outs by some level headed (and perhaps a little cynical) analysts, ourselves included.
 
The latest attempt (by Iran) to buoy the price of oil by talking about production cuts was mostly unsuccessful, although prices did move by about a dollar and, to give credit where credit’s due, held those gains for a few days. So we’re now entering an era where a war of rhetoric is likely the major driver for crude prices, given that the hard fundamentals – a global supply glut and a squabbling group of producer nations – have not changed. We really could be getting to the point whereby the oil price is moving on the breath of whoever happens to mention production cuts on a particular day. Price action is largely dictated by psychology, but when it becomes completely dictated by psychology, there’s a problem.
 
That’s why some big names like the International Energy Agency (IEA) have had to step in to remind us all about the fundamentals. The world is still awash with oil. Such tones, echoed by some of the world’s largest oil traders (who you’d have thought might actually like the price to rise and make them a quick buck or two on their burgeoning stockpiles) yet rebuffed by oil company executives hoping for a return to $100/bbl for so long, are being brought ever closer to the fore in February. The oil execs are now coming round: BP’s Bob Dudley has gone on the wires to tell us that “every oil storage tank will be full by the second half of 2016”. From the CEO of a company that needs oil prices to be higher, it doesn’t get much more bearish than that.
 
Are we finally seeing a sense of realism come back to the oil market after such a tumultuous January? Shale has proven surprisingly resilient to Opec-led tactics of over production and price depression, and it looks as if low interest rates (they’re still low, and going negative) will continue to assist any fracking company to jump into action as soon as the cracks in the crude producing nations’ balance sheets get wider. In a world where carbon emissions dictate the directions of the energy and automobile industries, lower oil prices are here to stay. Sadly for Saudi Arabia, it’s the market that’s king.

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

Do you agree with Mike and Augustin or do you have a different take on the oil market? Email info@hotcommodity.co.uk with your comments.

President Trump could put UK exports in jeopardy

The UK’s biggest export partner could be put in jeopardy if Donald Trump were elected President of the United States.

The controversial Republican candidate has suggested putting an eye-wateringly high tariff of 35 per cent (or more!) on imported goods in the US, in a bid to boost home-grown US industry.

His comments seem predominantly aimed at the Chinese market, but if a tariff were wielded on all exports to the US, this could have a marked effect on the UK economy.

The UK exported around £37.4bn-worth of goods to the US in 2014, equating to 12.7 per cent of the UK’s goods exports, according to data from economic think tank Capital Economics. When combining goods and services, the US made up 16.4 per cent of our export market that year – a hefty chunk not to be sniffed at.

Economists have widely condemned Trump’s protectionist policies, arguing that the cost of tariffs would be passed on to US consumers in the form of higher prices. But of course, they could have some of their desired effect and prompt US businesses to choose domestic goods where they have the option.

The UK export market has enough to worry about at the moment, with a potential Brexit and all the uncertainty around EU trade levies that would bring. Getting Trump-ed (geddit?) for crucial exports in the US could have a devastating effect.

Furthermore, by pushing US consumer prices up and squeezing the labour force (by removing illegal immigrant workers and discriminating against legal ones), some think that Trump’s policies could cause a major downturn in the US economy. As the old adage says, when the Dow Jones sneezes, the rest of the world catches a cold…

Are you hoping Trump comes up trumps or are you hanging on for Hillary? Email your thoughts to Hot Commodity at info@hotcommodity.co.uk for the chance to have your comments appear on the blog and win a luxury holiday for two (except not the last bit).

Accendo Markets: will the Fed release the doves?

In the first of Accendo Markets‘ regular market commentary for Hot Commodity, Augustin Eden and Mike van Dulken discuss whether the Fed is having cold feet and why gold is good…

This week’s main event is sure to be this evening’s US Federal Reserve policy statement and whether it dares issue some form of dovish mea culpa regarding its December decision to hike, especially given the market turmoil that has greeted us in 2016. While credibility was on the line after such a protracted warm-up, it probably felt obliged to hike rates on US data improvement.

However, it at least has the option to tone down its opening message of 2016 (with no press conference or Q&A) about how many more hikes we might expect this year. From a lofty three, markets are now pricing in one at best. What’s clear is that while the US may have been ready, the global markets were not.

Will the Fed’s focus lie with the US economy’s continued recovery progress or recent financial market volatility? It should be the former, but the latter can’t be ignored. Arguments may dwell on how it was right to move then, but hold now.

Financial markets have neither enjoyed the second half of 2015, nor the tricky start to 2016, but the same needn’t necessarily be said about all asset classes. While equities are hindered by persistent commodity price weakness after an 18-month rout, and a slowing and troubled China, many ask whether the worst is priced in and the doom and gloom overbaked.

So far so gold…

What’s this got to do with the price of gold? Well, it’s having a cracking start to the year, bouncing from 5/6yr lows on talk of output having peaked. Also, as a safe-haven, it needn’t worry about US dollar strength. If people are that fearful (unless they’re Warren Buffett) they’ll probably be yellow-metal bound. The zero-interest bearing asset has seen rising demand from market volatility and technical drivers as well as hopes the Fed will go all dovish on us after December’s ‘mistake’ to raise rates from record lows.

If this does happen, we could well see a pullback in recent USD strength. It’s almost as if the dollar has been simply resting near its 2015 all-time highs, waiting for its next pointer, which could well be revised US monetary policy guidance for 2016. There’ll arguably be a knock-on for the entire commodities sector from that. Even oil could gush a little higher from the FX benefit, despite a more meaningful recovery surely needing moves to cut output and reverse its own supply glut.

This commentary was provided exclusively for Hot Commodity by Mike and Augustin at Accendo Markets – https://www.accendomarkets.com.

Do you agree with Mike and Augustin or do you have a different take on the Fed’s next move? Email info@hotcommodity.co.uk with your comments.

Libyan oil will fail to deliver despite unity government

Libya nominated a unity government yesterday after a lengthy UN-brokered negotiation, aimed at harmonising the embattled country that is currently being run by two rival governments.

But sadly political stability is still far away for this resource-rich country, which is having to fight the aggressively expansionist militant group Islamic State.

As such, it seems unlikely that the North African country, which has the largest oil reserves in the continent, will be able to return production to its 2011 peak of around 1.6bn barrels a day from its current levels of under 400,000 barrels.

With brent crude dipping to 12-year lows this week and hovering at around $28.30 a barrel yesterday evening, an absence of Libyan output will be of no matter to the market. But it is everything to Libya’s financial stability and its peace.

When I edited a Middle East-focused trade mag, I remember chatting to an insurance company CEO in Dubai shortly after Gaddafi had been toppled in 2011. The CEO, and a number of other UAE delegates, had been invited on a trip to Libya to boost trade. At the time, there seemed everything to hope for – I even wrote a feature along the lines of Libya’s oil reserves being the next big thing. But the awaited period of political stability and harmony failed to arrive, with competing armed forces taking control of oil fields even before IS came on to the scene.

Libya relies on oil for around 90 per cent of its revenue, so an unproductive Libyan oil sector means a financially weak Libya. A power vacuum and a struggling economy are manna to IS, which is destroying Libya’s oil fields, rather than taking them over like it did in Iraq and Syria. Whether this is a plan to weaken the country further in order to take control, or simply stage one of a plan to devalue the oil assets before pouncing on them, is debatable.

Either way, Libya is in dire straights. RBC Capital Markets research earlier this month called the country a “wild card” that could potentially add substantial quantities of oil to an already saturated market this year, but I think the term wild card is far too optimistic in this case. For wild card suggests a possible return to the stability needed for Libya’s oil sector to prosper – which would be incredible in the current climate.

Firstly, the new, nominated government needs to win acceptance – the fact that two out of the nine members of Libya’s Presidential Council have already rejected it shows just how divided the country is.

Secondly, to make progress on energy security in the face of low revenues, a divided government and attacks from a number of rebel groups, not just IS, will be a long and arduous process.

Thirdly, a growing number of oil fields have been destroyed by IS, meaning work would need to be done to return them to an operational standard.

Of course, situations change quickly and perhaps 2017 could present a more promising year for Libya and its oil reserves. But the longer it remains in flux since the demise of its tyrannical ruler, the less likely it seems.

Latest oil price slump shows that black gold has lost its lustre for good

Oil tumbled more than two per cent yesterday, edging perilously close to an 11-year low despite growing fears of World War Three kicking off between Saudi Arabia and Iran.

You’d think that the risk of disrupting supply from two of the world’s largest producers would rattle traders, but no! Late last night you could buy a barrel of brent crude for a little over $36 (£25) – small change compared to the $115 highs of Summer 2014. Prices had trickled down to an 11-year low of $35.98 just before Christmas.

I’ve been bear-ish on oil for quite some time now despite some spikes throughout the year and I still think it could drop to $20 a barrel. But increasingly the market consensus appears to be that oil will rise in the medium term.

The typical view from people I speak to is that Opec (for which read Saudi) will keep production high, which will keep prices low by creating a supply glut. This in turn will cause other producers (for which read the US) to cut their output as they can’t make a profit and eventually this will push prices up as there will be less oil around to meet the demand.

I think this is a far too simplistic a theory.

Firstly, I think the decrease in production, namely from the US, would have to be incredibly dramatic and it would take quite some time to show up due to their mammoth stockpiles of oil. This would be a long term not a medium term effect – and would only work this way if there are no other mitigating factors. I wonder if the hand of government would come into play if the mighty US lost its booming shale industry that was turning it from a net importer to a net exporter of energy?

Secondly, this theory only works if demand stays the same. And here lies the unknown. With growth in China – the world’s largest consumer of commodities – having slipped back into second gear, will there be enough demand to keep oil prices high? The market volatility in China this week shows that no-one really has the faintest idea about what’s going to happen.

Meanwhile in the West, increased energy efficiency measures and investment in renewable power sources mean that oil isn’t the master of the energy market that it once was. There are even predictions that the West’s energy consumption will decrease by the 2030s.

Why does everyone assume that oil prices must, and will, stabilise at a higher price? Surely a lower price could eventually become the new normal and economies would have to adapt or die as a result?

Are you an oil bull or a bear? Email info@hotcommodity.co.uk with your views.

Happy New Year to you all!

Axa IM’s Nicolas Trindade talks US versus eurozone debt, EMs and more

Axa Investment Management: Nicolas Trindade

In the latest in Hot Commodity‘s investor series, I chat to Nicolas Trindade, manager of the Axa Global Credit fund and Axa Sterling Credit Short Duration fund.

In an era of incredibly low bank rates in the Western world, bonds have been a popular route of investment for anyone looking for healthier returns. But with the Fed having kicked off its monetary tightening last week (and the Bank of England set to follow suit next year), is it game over for credit funds? Nicolas provides the answers…

“I think one of the biggest issues is that we’re victims of our own success,” said Nicolas.

“Investors have become used to double-digit returns and that’s not going to be the case any more – 2016 will see single-digit returns.”

Rising base rates inevitably push down bond prices, as investors start to look elsewhere. But Nicolas sees some tailwinds to counter the rising yields triggered by the central bank action: “credit spreads are tightening, which should counter the headwinds to some extent”. And he does emphasise that we’re still set to see growth, just slower growth.

The value of the Axa Sterling Credit Short Duration fund has risen from around £200m at the start of the year to £270m. It tends to invest in sterling-denominated debt that matures in less than five years, which Nicolas says provides some protection against rising interest rates.

“I think there will be more demand [for the fund] as I expect the Bank of England to hike rates in May next year – earlier than market consensus – which will impact returns,” said Nicolas. (Shorter duration bond funds are expected to fare better as rates rise). “It’s a low risk, conservative portfolio.”

Meanwhile the Axa Global Credit fund invests in corporate bonds, mostly denominated in dollars, sterling and euros, weighing in at around $100m (£67m) for most of this year.

Nicolas says that his current bias is towards the eurozone market, as it is not as advanced in the cycle as US corporate bonds.

“The US has been reissuing debt to satiate shareholders. Leverage for US corporates has increased, while in the eurozone it has stayed the same,” he said.

“25 per cent of issuance in euros is from US corporates as the funding costs are cheaper in Europe.”

Although he expects to see some changes in 2016.

“I expect US corporates to continue re-leveraging but less quickly,” he said. “The Fed started tightening last week and we expect three more rate hikes in 2016, so US corporates will start to be less and less aggressive.

“Meanwhile eurozone corporates will push up leverage, as they are under a lot of pressure to return money to shareholders. At the moment they are sitting on a lot of cash.”

Where does sterling sit?

“There’s not much supply in the sterling market,” he added. “A lot of householders including Royal Mail and Nationwide have issued bonds in euros, as it opens them up to a larger investor base and the costs are cheaper.”

And what about emerging markets?

“I’m quite cautious on emerging markets,” said Nicolas. “You now have to divide them between oil producing countries and oil consuming countries – the oil producers are obviously struggling due to the low oil price.

“We have exposure to some investment grade companies in emerging markets but no exposure to high-yield emerging markets and I’m not planning to increase that.”

Do you agree/disagree with Nicolas? Email info@hotcommodity.co.uk with your views.

Glencore’s update is better than expected, but miners are set for more pain

On a day like this, Glencore must still be plagued with shopper’s remorse over its badly timed acquisition of miner Xstrata back in 2013. The deal added masses of mining operations to the commodities trader’s business, which have struggled in the commodities price rout.

But the company, which is making grand efforts to reduce its staggering $30bn (£19.8bn) debt pile, today surprised the market with a more ambitious than expected plan to cut its borrowing and hopefully save its treasured investment grade credit rating.

It has increased its debt reduction measures to $13bn, up from $10.2bn, and has a new net debt target of $18-19bn by the end of 2016, an improvement from its previous target of low $20s bn.

It says it has $8.7bn of these cuts already locked in.

Safe to say, the market loved it. Glencore, which has seen its share price plunge by almost three quarters on the FTSE 100 index this year, gained 14 per cent by mid-morning trading.

“Glencore is well placed to continue to be cash generative in the current environment –
and at even lower prices,” said boss Ivan Glasenberg. “We retain a high degree of flexibility and will continue to review the need to act further as required.”

But will Glencore’s efforts be enough? With slowed growth in China and the eurozone severely denting demand, everyone can speculate but noone quite knows just how far commodities prices could fall. As Ivan suggests, there may be a need for Glencore to act further. I certainly do not think this will be the last of it. How can it be, when there is no end in sight to weak pricing?

As for the other miners, Anglo American made its own savage cuts earlier this week, shedding 85,000 staff, with all eyes on BHP Billiton to make the next move.

It seems likely that the latter will follow Glencore and Anglo and suspend its dividend as part of its cost cuts. The sector is hemorrhaging money and nothing seems quite big enough to stem the flow…

Other people’s money: why the Bank of England needs to raise rates

Legal and General Investment Management’s chief economist has urged the Bank of England to start raising rates, amid fears of an impending consumer debt crisis.

“So many UK customers are on variable rate mortgages – more than in the US,” said Tim Drayson. “I think it’s important to get the process of rate rises underway and normalise it, as the longer you leave it, people will take on more debt…then you’ve got potential for a harder landing.”

“Unsecured credit is starting to get frothy again,” he warned. “There is scope to use macroprudential tools…[but] interest rates is one way of doing this and getting in to all the cracks [of the financial system].”

The Bank of England base rate has remained at 0.5 per cent for more than six years. Doves argue that it should stay this way due to low inflation figures, while hawks say that wage growth and excessive lending need to be addressed.

Drayson said that LGIM is “more hawkish than the market”, although he commented that the UK “is a bit of a wildcard” as its growth depends greatly on whether commodity prices recover or not.

Brent crude is currently lingering at around $43 a barrel, with the $115 of summer 2014 but a distant dream. LGIM attributes the decline to an increase in supply, rather than a slowdown in industrial production in China and the eurozone.