Articles in Category: Investing Hedging

Following a global market slump and selloff to begin the year, last week markets were still volatile but, at the same time, more stable.

Free Sample Report: Our January Metal Buying Outlook

Oil prices, and the Chinese and US stock markets managed to finish the week up. A well-deserved finish after the nose-dive we saw in previous two weeks. Now that investors’ eyes are on China, global markets seem more interconnected than ever. When China sniffs, oil prices and US equities get a cold. When one of them rises, the others follow.

A Market Rebound?

Thursday and Friday brought significant gains. Oil prices managed to rise back above $30. Fresh stimulus measures by major central banks helped bring some confidence of improving demand for the important commodity after US inventory data was released Thursday showed that stockpiles of crude and refined products increased in the second week.

Crude oil bouncing after sharp declines

Crude oil bounces after sharp declines. MetalMiner analysis of @StockCharts.com data.

Although a 14% increase in just two days seems like a lot, it’s not. The rise comes after a 42% decline over the past three months. We saw price rallies back in March and August only to then see prices fall back down. So far, the recent rally is being driven by investors hunting for bargains. Oil prices could continue to rally in the weeks ahead, as markets need some time to digest the latest declines, but there is no reason to expect a solid trend shift.

Similarly, stock markets finally made some effort to buck the falling trend, too.

Shanghai Stock Index bouncing off support levels

Shanghai Composite Index bouncing off support levels. Source: MetalMiner analysis of @StockCharts.com data.

In China, the Shanghai Composite Index is hovering near its August lows. That’s a big test for the market. A short-term rally from this level seems possible, but it’s yet to be seen if the index will remain above this level for long.

S&P 500 bouncing off support levels

The S&P 500 bounces off support levels. Source: MetalMiner analysis of @StockCharts.com data.

Not incidentally, here in the US the S&P 500 index is also testing its August lows. A short-term bounce is something reasonable to expect after the previous sharp declines and after US PMI came in above market expectations at 52.7 in January from 51.2 in the previous month.

Free Download: New! The January 2016 MMI Report

Whether this bounce is sustainable, of course, is yet to be seen but we remain very suspicious about it.

What This Means for Metal Buyers

Global markets remain linked and taking a breath after sharp declines over the first two weeks of January. So far, this bounce is nothing to get excited about. We haven’t seen a significant shift in market sentiment yet. For producers or for stock buyers, risk remains high.

You would be a brave investor to bet against George Soros. The billionaire investor has shown a canny knack of making the right calls over the decades. As an article in Bloomberg says he rose to fame as the hedge fund manager who broke the Bank of England in 1992, netting $1 billion with a bet that the UK would be forced to devalue the pound.

Free Download: New! The January 2016 MMI Report

He also successfully bet that Germany’s deutsche mark would rise after the collapse of the Berlin Wall in 1989 and that Japanese stocks would start to fall in the same year. Between 1969 and 2011, Soros led his hedge fund to average annual gains of about 20% before returning money back to investors in 2011. Read more

Morningstar recently published its Basic Materials Outlook. Like most analysts, Daniel Rohr, director of basic materials research is bullish on the overall commodities sector and cautions investors that the transitioning Chinese economy will continue to depress both prices and consumer spending.

Free Download: New! The January 2016 MMI Report

“You are already seeing a knock on effect from the slowing fixed-asset investment environment and deflation of asset prices on households’ willingness to spend,” Rohr said. “That would more broadly fit the pattern that you observe when you look back through history at prior episodes of profound economic rebalancings. Japan, Taiwan, South Korea all had spectacular investment-led growth. Once that growth came to an end, a rebalancing wasn’t accomplished by an acceleration in consumption and a deceleration in investment. In each and every case, consumption decelerated sharply as well.”

Divestment as a Strategy

Morningstar expects Chinese household consumption growth to decelerate from the trailing 10-year average. Rohr said companies are responding to tectonic shifts in the macroeconomic environment by reorganizing their portfolios.

ATI can still pay off for investors, according to Morningstar, once it settles its lockout and uses its new stainless production facility. Source: Adobe Stock/Jovanning.

ATI can still pay off for investors, according to Morningstar, once it settles its lockout and uses its new stainless production facility. Source: Adobe Stock/Jovanning.

Miners coping with poor Chinese demand and weak commodity prices are looking to sell assets and shrink. Agricultural chemical companies have taken a different approach. Faltering crop prices have prompted many to seek mergers in a bid to cut overhead and grab synergies.

Read more

MetalCrawler is becoming a broken record of falling commodity and oil price news, as both fell deeply again this morning. Even top miner BHP Billiton is giving up any shred of optimism for iron ore and coal prices in its latest report.

Stock Plummet Continues

The Dow Jones industrial average sank more than 500 points this morning.

Energy companies were pummeled as the price of crude oil sank 7%, threatening more damage to an industry that has already been stricken with bankruptcies, layoffs and other cutbacks.

Free Sample Report: Our January Metal Buying Outlook

The price of US crude fell below $27 a barrel amid a global glut in oil supplies that seems to be getting worse. That’s the lowest price since May 2003 and a far cry from the $100 a barrel it fetched in the summer of 2014.

BHP and the Bear

BHP Billiton said on Wednesday that it sees no recovery in iron ore or coal prices in the next few years. BHP is still holding out hope for a rebound in copper and oil as it fights slumping earnings set to hit its long-protected dividend.

Free Download: New! The January 2016 MMI Report

The top global miner reinforced the bleak outlook for most commodities in the near term, with markets slammed by oversupply as the economy slows in China, the world’s biggest metals consumer.

Gold is typically considered a safe haven while markets are volatile, and with the recent equity slide both in China and US, investors are thinking of gold as an alternative, safe haven investment.

Free Download: New! The January 2016 MMI Report

Indeed, since the start of the year gold prices have received a boost, hitting a 2-month high as global stock markets sold-off.

The Gold-Silver Ratio Spreads

The global stock rout didn’t have any bullish effect on silver prices since the precious metal has an industrial metal status, too. That might help explain why gold fared better than silver in January.

Gold (in yellow) versus Silver (grey)

Gold (in yellow) versus Silver (gray). MetalMiner analysis of @StockCharts.com data.

Is Gold’s Rally Sustainable?

We don’t think so. Gold’s rally comes after prices hit a six-year low in December so it seems like a normal reaction after an oversold condition. As we can see in the long-term chart below, gold is still in a textbook falling trend.

Gold bouncing off lows

Gold is simply bouncing off lows. Source: MetalMiner analysis of @StockCharts.com data.

If investors were seriously putting money into gold, we would have prices moving significantly higher by now. The key point here is that the stock market selloff is driven by a slump in commodity prices. Gold is also a commodity and falls along with commodity markets.

Free Sample Report: Our January Metal Buying Outlook

Moreover, a strong dollar is also bad news for gold. We expect the dollar to keep strong as interest rates rise domestically and the currencies of commodity-intensive countries keep losing value against the dollar while low commodity prices hurt their economies more significantly.

What This Means For Metal Buyers

We’ve discussed previously that the gold’s safe haven theory doesn’t always work, especially under the market environment we have right now. Gold’s rally is likely to be short-lived. Although stocks don’t look attractive right now, buying gold doesn’t look like a much better idea. Cash will probably give better returns than most assets in this first half.

Oil prices traded yesterday near $30 per barrel, the lowest level since 2003.

Free Sample Report: Our January Metal Buying Outlook

The slump in oil prices is a result of China’s slowdown and the fact that drillers don’t stop pumping despite the oil glut. Also, a strong US dollar is not helping matters. Falling oil prices are a bearish driver for metal prices since it’s an asset closely followed by commodity investors. In addition, oil is the main benchmark for energy prices. Lower oil prices mean lower production costs, which improves the margins of metal producers, delaying the very much needed production cuts to help support metal prices.

Oil prices near $30 per barrel

Oil prices near $30 per barrel. Source: @StockCharts.com.

Together, US oil producers are losing around $8 billion per month at current prices. Energy companies took on huge debts to finance their work and now all they can do is keep pumping oil to generate cash to pay interest on their debts while hoping for demand to come back and lift prices.

Breaking Point?

At these levels, it is estimated that a third of US oil and gas producers could go bankrupt within the next year or two. Many are going to have huge problems and the longer it takes producers to throw in the towel, the longer oversupply stays and the more companies will need to eventually shut down.

Read more

We like to think of ourselves as optimists at MetalMiner.

Free Sample Report: Our January Metal Buying Outlook

If given the option, we prefer the glass half full than the glass half empty, so an article in the London Telegraph and many other newspapers this week reporting RBS Bank’s latest client note makes depressing reading, but unfortunately worthy of discussion.

The note advises clients to “Sell everything except high-quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.

It All Must Go!

Nor is RBS playing a new tune, since November they have been warning the oil price and stock markets are headed lower, sure enough the oil price has continued to fall, dropping to a 12-year low of $30.41 for Brent and $30.43 for West Texas Intermediate this week.

Source: Telegraph Newspaper

Source: Telegraph Newspaper

The markets are clearly spooked and by a number of factors. China’s stock market is being kept alive only on the oxygen of government support via state enterprises buying shares. Oil consumption has stalled due to slow growth and warm weather, and oil supply continues to grow as Iran gears up to enter the market.

Read more

As our editor said last week, the road to hell is paved with good intentions, an apt phrase for the events unfolding in China this week.

Regulators were obliged last year to relax tight controls over the currency in order to qualify for Reserve Currency status from the International Monetary Fund for the yuan/renminbi but had probably not foreseen the consequences. Indeed, many are still not seeing the collapse of share prices on the Shanghai Stock Exchange this week as a currency-related issue.

If You’re an Investor, It’s Your Money Getting Purposely Devalued

Anyone holding shares or a pension will be painfully aware that some $2.5 trillion has been wiped off the value of global equities this week, in just four days, events starting in China have rippled around the world causing one of the worst starts to the year for stock markets since the 1980’s.

On the Shanghai market, trading was stopped on Monday as “circuit breakers” closed the market after shares plunged 5% and, again, Thursday trading was canceled for the day after just 29 minutes when the CSI300 fell more than 7%.

Under the “circuit breaker” system, created after the plunge in shares last August, if an index rose or fell 5%, trading was halted for 15 minutes. If it dropped by 7%, trading stopped for the rest of the day.

So what prompted the sell-off? Many have been saying the Shanghai market is a bubble waiting to burst for quite some time, but is it a sudden epiphany among investors that prices are overvalued? No. Actually, it has little to do with share prices and a lot more to do with currency and ill-judged rules imposed by Beijing to try to control the market, Beijing’s actions often have unforeseen consequences in such situations.

What is the Real Value of a Controlled Currency?

First, the currency: as we mentioned above Beijing allowed the yuan to respond more readily to market forces. We won’t say float, but the trading bands were widened and the currency has fallen for much of 2015 against the rising dollar. This got investors worried, even if the Shanghai market was not shaky, a falling currency makes shares less valuable over time.

Further, holders of yuan,companies and investors made up of China’s rising middle and wealthier classes, see the cost of foreign investments such as houses, land, companies, rising almost daily in yuan terms.

Valuation of the yuan moved to a basket of currencies last year rather than a loose peg against the dollar with the promise by Beijing that it would remain more stable against the China Foreign Exchange Trade System basket. That was December, since then the currency has slid for three straight weeks and the central bank has burned through $140 billion trying to defend it.

Falling Production Data Adds to the Misery

Combine that with a fall in China’s Purchasing Managers’ Index composite for both manufacturing and services to below 50 and frightened investors took flight, dumping shares in a repeat of what we saw last August after Beijing’s snap devaluation of the yuan as this graph from the New York Times illustrates.

Yuan_USD_ Stockmarket

Source: The New York Times

In an attempt to calm the panic selling, Beijing has actually made matters worse. The end of a share sale ban, that was imposed last year wherein investors were prohibited from selling for a lock-in period, was extended. Believing they were going to continue to be locked in to shares that were falling in value and, naturally, becoming spooked by company insiders selling shares, investors rushed for the exits. Beijing then had to move fast to extend the ban into 2016, which has helped calm markets temporarily but done nothing the address the underlying causes.

Read more

This week, we got to see China close its stock market early to stem massive losses not once, but twice. The second one after only 29 minutes of trading.

Free Sample Report: Our January Metal Buying Outlook

China suspended its recently implemented “circuit-breaker” system Thursday, after trading in Chinese stocks was halted minutes into the session because of a plunge in prices. The circuit breaker was a new tool this year that Beijing assured investors would calm the markets and keep massive stock price falls from happening in one day. They just happened on Monday and then, again, on Thursday. Fine work, Beijing.

Bye, Bye Circuit Breaker

“After weighing advantages and disadvantages, currently the negative effect is bigger than the positive one. Therefore, in order to maintain market stability, CSRC has decided to suspend the circuit-breaker mechanism,” a statement from the China Securities Regulatory Commission (CSRC) said in a statement announcing the sidelining.

AdobeStock_signcloud_short_circuit_china_550_011715

The Chinese stock market’s circuit breaker was short-circuited. Source: Adobe Stock/signcloud.

The second trading suspension in China caused global shares to fall sharply on Thursday, with Wall Street opening more than 1% lower and European markets trading 2% down. Read more

Construction spending fell in November for the first time in nearly 18 months, suggesting the economy ended 2015 with less momentum than previously thought.

Free Sample Report: Our Annual Metal Buying Outlook

Our Construction MMI fell 3.2%, correspondingly, to 60, starting the year with yet another all-time low.

Construction_Chart_January_2016_FNL

The Institute for Supply Management (ISM) said its index of national factory activity fell to 48.2 from 48.6 in November which is now at its lowest level since June 2009. While a reading below 50 indicates a contraction in manufacturing, the index remains above 43.1, which is associated with a recession.

Chinese Demand is Not Coming Back

Construction activity continues to be stagnant in China as well, the major market that drove the construction boom of the early 2000s. The loss of Chinese demand has hampered component products of our construction index such as rebar and steel plate for more than a year. The Dow Jones Industrial Average, as well as stock indexes around the globe, plummeted Monday after poor purchasing managers index numbers out of China.

Oil prices continued to shoulder some of the blame for low, low prices, but that only tells part of the story. Manufacturers in the petroleum and coal products sector said low oil prices were “negatively” impacting oil and gas exploration activities. Their counterparts in the fabricated metal products segment reported that activity was “still very slow due to oil prices.”

Spending Decreasing?

Construction had been weathering the storm better than some other market indexes as many general contractors and end users were steadily purchasing and consuming metal while the price was low. With construction spending falling for the first time in a year-and-a-half, that might not be the case anymore. We have, anecdotally, heard that stockpiling of commonly used copper, aluminum and steel products — by residential home builders and nonresidential GCs — has been going on for some time.

A dip in purchasing by these large buyers could mean that construction demand in the US is falling, but also that many bulk buyers have simply exhausted warehouse and surplus stock space.

Commerce’s Big Error

Construction spending in November was held down by a 0.8% drop in nonresidential construction. Outlays on residential construction actually rose a modest 0.2%.

In a separate report, though, the Commerce Department said construction spending slipped 0.4%, the first and also biggest drop since June 2014, after a downwardly revised 0.3% gain in October.

The government revised construction data from January 2005 through October 2015 because of a “processing error in the tabulation of data.”

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The revisions, which showed construction spending was not as strong as previously reported for much of 2015, prompted economists to lower their fourth-quarter gross domestic product estimates by as much as three-tenths of a percentage point to as low as a 1.1% annual growth pace. So, not only is construction spending now falling, but it’s actually been steadily sliding for all of last year and Commerce’s “processing error” masked the market weakness all that time.

The bottom line is not only is demand still on life support in China, but the US demand that many had assumed was strong for all of 2015 was actually lower than we’d thought and spending is now in negative territory.

Actual Construction Metal Product Prices

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