Tag: investing hedging

Is the US Dollar Losing its Luster? What The Fed’s Move Means

The U.S. dollar fell sharply last Wednesday against a basket of currencies as the Federal Reserve announced a rate increase of a quarter point.
[caption id="attachment_83856" align="aligncenter" width="1225"] US Dollar index: Source @stockcharts.com.[/caption]
The move seems to contradict common economic wisdom. In theory, higher raters in the U.S. should make the dollar more attractive for yield-seeking investors when interest are rates are lower around the globe. Then, what caused the currency to weaken?

All About Expectations

A rate increase came as no surprise to U.S. markets. The real surprise came in the language that wrapped the announcement. Fed officials intend to keep raising rates, however they want to keep the economy from getting too hot… but also not too cold.
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Investors were probably betting on an acceleration in the path of raising interest rates, not a warming down.

It’s Not Only the US Economy That’s Growing

[caption id="attachment_83853" align="aligncenter" width="500"] Markit Eurozone Manufacturing PMI. Source: tradingeconomics.com.[/caption]
Another factor working against the dollar is that The U.S. is no longer the sole bright spot in the global economy. Sure, the economic landscape has improved enough for the Fed to start normalizing rates. But the Eurozone — despite a year of political uncertainty — is now growing faster than the U.S. The Eurozone Manufacturing PMI came in at 55.4 in February. The reading pointed to the strongest expansion in factory activity since April of 2011. In China, The Caixin Manufacturing PMI in China rose to 51.7 in February, the eighth straight month of growth.
Economic improvements abroad could cause the rest of the world to start to catch up to the U.S. in terms of tapering and hiking rates. As a result, the dollar could lose its luster.

What To Watch

President Donald Trump has expressed several times his desire for a weaker dollar. That’s a factor to go against the dollar. However, We still need to monitor the situation until Trump provides more clarity on his proposals.
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On the other hand, one thing that favors a stronger dollar is a potential change to U.S. tax policy, especially any that provides incentives for companies to bring the cash they have stashed abroad back into the U.S.. If North American companies repatriate those earnings, the resulting flow of money could boost the dollar.

What This Means For Metal Buyers

[caption id="attachment_83855" align="aligncenter" width="500"] DBB industrial metals ETF. Source: @stockcharts.com.[/caption]
A weaker dollar on Wednesday contributed to a rebound in industrial metal prices. A falling dollar is bullish for dollar-denominated commodities like industrial metals. Metals are in a rising trend, showing no signs of weakness yet.

Why You Can Be Bullish On The US Dollar and Commodities

Why You Can Be Bullish On The US Dollar and Commodities

Many of our readers are wondering what’s going on with the U.S. dollar and industrial metals.

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The dollar and commodities tend to move in opposite directions. Why, then, is the dollar trading at a 14-year high at the same time as industrial metals are on a tear? For how long can these two continue to move together? Who is the real bull and which one is just imitating?

[caption id="attachment_82366" align="aligncenter" width="500"]Industrial metals ETF (in black) vs dollar index (in green) The industrial metals ETF in black vs. the U.S. dollar index in green. Source: @StockCharts.com.[/caption]

To answer these questions we need to look at history. The dollar and industrial metals have risen in tandem since September. Even oil prices are making multiyear highs. But this is not such a strange development.

The US Dollar and Commodities

The dollar-commodities relationship has not been without its temporary periods of decoupling. Over the past two decades there were two major periods in which the dollar and commodities moved up together for a whole year. The last time this happened was in 2005 and the causes were rather similar to what we are seeing now.

[caption id="attachment_82367" align="aligncenter" width="500"]Dollar index (in green) vs Commodities (in blue) The U.S. dollar index (in green) vs commodities (in blue). Source: @StockCharts.com.[/caption]

Has This Happened Before?

Back in 2005, industrial metals were on a tear thanks to China’s increasing appetite for commodities. Today, the main factor driving commodities up is higher-than-expected demand growth, especially from China, while lower than expected supply.

That would normally bring the dollar down, but in 2005 there were a series of factors that made the greenback rise, even in the face of a rising commodity market.

First, the dollar’s role in the temporary break in the dollar-commodity inverse relationship in 2005 was owed to a two-year push of U.S interest rate increases (from June 2004 to June 2006) which lifted U.S short-term interest rates above those in the Eurozone. Currently, the dollar is getting a boost as the Federal Reserve is expected to increase rates while interest rates in Europe are in negative territory.

Another driver of a rising dollar, back in 2005, was a blow to confidence in the European Union and its currency dealt by France’s rejection of a proposed European Union Constitution. Similarly, events like Brexit, a referendum in Italy or the upcoming presidential elections in France are adding tensions about stability in Europe and contributing to an appreciation of the dollar against the Euro.

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Finally, also contributing to the dollar’s surge in 2005 was a temporary tax break granted by the Bush administration to U.S. multinational corporations, allowing them to repatriate profits from their overseas subsidiaries. This prompted a surge of inflows into U.S. dollars from euros and, unsurprisingly, the dollar rose against the euro. A very similar case is what new president-elect Donald Trump has proposed: Lowering the corporate income tax rate from 35% to 15% while allowing repatriation of corporate profits held offshore at a one-time tax rate of 10%. These policies, if implemented, will create more demand for dollars so it’s no wonder that investors have already been betting on the dollar since the election’s outcome.

What This Means For Metal Buyers

By looking back in history we can relate the current macro factors driving dollar and commodities higher to what happened back in 2005. The dollar-commodity inverse relationship is a strong one but there are periods where they can decouple for some time. This means that there is no reason to be bearish on commodities because the dollar is moving higher and vice versa. These two markets could continue to trend higher in 2017. We will continue to watch them closely to determine which one breaks first but, until then, I’m temporarily bullish on both the dollar and commodities.

Copper: More Price Rallies to Come? Many Think So

Copper: More Price Rallies to Come? Many Think So

After rising strongly for the last month or more, copper prices now appear to be buffeted by every scrap of news that comes out.

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“Copper prices fell this week as investors cashed in gains after the previous session’s rally,” news.com in Australia reported yesterday. The gist of the argument seems to be the 23% rise in the copper price last month was a step too far. The site quoted Caroline Bain of Capital Economics saying “You only have to look at the levels of investor buying to see that quite a lot of these rallies have been based on euphoria rather than grounded in fundamentals. We think we will see some profit-taking inevitably as we end the year”

Reuters, on the other hand, took a somewhat contrary view, reporting copper prices climbing mid-week, buoyed by a pickup in U.S. manufacturing. The newspaper reported new orders for U.S. factory goods recorded their biggest increase in nearly 1-and-a-half years in October, evidence that the manufacturing sector is gradually recovering after a prolonged downturn and as demand signals from China also improve.

Reuters suggests that prices are supported by investors looking some years down the line saying a supply deficit could emerge by 2020. Investors are also taking a decline in London Metal Exchange inventory and a growing net long speculative position on the LME as further support for increasing prices.

Copper consumers, of course, would like to know what they can expect for copper prices next year. Will they fall back or continue to be supported? So a letter yesterday to the Financial Times from Simon Hunt, one of the most experienced and respected analysts in the market, is of interest.

Hunt calls out the data on which weak projections for copper prices are based. In his estimation, China’s refined copper consumption is set to rise by around 7% this year — led by strong demand for power cables, high-performance sheet and strip for the auto and computer appliance sectors — by a recovery in magnetic wire demand and by general demand in the wider economy.

Although President-elect Trump’ infrastructure plans have caused quite a stir, Hunt suggests China’s infrastructure spending is, and will continue to be, a multiple of whatever the U.S. is likely to spend. Hunt suggests copper’s rise this year is part of a long-term bull trend establishing itself and that, although a market’s turn from bear to bull is always met initially with skepticism, we should get used to rising prices again.

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The global economy is inflating, he believes, and inventory restocking from raw materials through to finished goods is underway. In his firm’s estimation, world refined copper consumption should rise by 4.5% both this year and next, and by at least 2.7% in 2018. Resulting in deficits appearing earlier than the end of the decade timeframe that many are predicting.

US Dollar Hits 1-Year High, Correlation Between Dollar/Metals Weakens

The U.S. Dollar index, which tracks the performance of the dollar against a basket of currencies, hit a one-year high following President-Elect Donald Trump’s victory last week.

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Investors expect Trump’s proposals to boost fiscal spending, cut taxes and loosen regulation. They also believe he will accelerate economic growth and boost inflation, bolstering the case for the Federal Reserve to lift U.S. interest rates. Expectations for an interest-rate hike in December’s meeting have risen to more than 80%, up from 30% at the beginning of the month. Higher rates make the currency more attractive for yield-seeking investors.

Is The US Dollar’s Rally Sustainable?

Investors are pricing in the effects Trump’s proposed new measures, way before we actually see implementation. Moreover, Trumps’ proposals to renegotiate key trade agreements could be negative for global growth, which could weigh on the domestic economy and the dollar.

Also, it’s important to note that the U.S. dollar is near long-term resistance, a level that prevented the index from rising several times in previous years. Investors might be getting ahead of themselves by driving the dollar up so sharply without waiting for the actual effects of Trump’s proposals. Investors might want to think twice before pushing the dollar above current levels.

[caption id="attachment_81969" align="aligncenter" width="500"]US Dollar Index might struggle near long-term resistance levels. Source: MetalMiner analysis of stockcharts.com data The US dollar index might struggle near long-term resistance levels. Source: MetalMiner analysis of @stockcharts.com data.[/caption]

The Dollar and Metals Lose Correlation

The dollar and metals tend to move in opposite directions. This inverse correlation hasn’t worked lately. This is because the dollar is rising on expectations of higher rates but, at the same time, metal prices are getting a boost on China’s strong demand and Trump’s plans to spend big on the nation’s infrastructure. See the post my colleague, Jeff Yoders, recently wrote about InfraTrumpture.

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Metal buyers need to watch the performance of the industrial metals complex first and then look for secondary indicators such as the dollar. This is particularly true during this period, in which the relationship between the dollar and metal prices seems to be weakening for the reasons explained above.

What This Means For Metal Buyers

In theory, a rising dollar is bearish for metal prices. However, this might not hold true in the short- to mid-term. On top of that, there are reasons to question the sustainability of the dollar’s rally. To conclude: It’s important to keep a close eye on the recent dollar strength. However, it is first and most important to focus on the overall metal complex, which is in full bull mode.

Dollar Libor Rates Ring Alarm Bells for Bonds and, Ultimately, Equities

Dollar Libor Rates Ring Alarm Bells for Bonds and, Ultimately, Equities

The Telegraph newspaper, while widely respected, has a tendency to shout doom and gloom at the first signs of potential trouble, but that doesn’t mean it is always wrong.

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The paper, and particularly those articles of International Business Editor Ambrose Evans-Pritchard, have at times been quite prescient. So dire is his latest offering it should, maybe, not be dismissed as scaremongering for headlines sake. The article makes the point that dollar Libor rates are tightening across large parts of the global economy and will, if they continue, cause significant stress in credit markets and ultimately stock markets.

Three-month Libor rates have tripled this year to 0.88% as inflation worries mount, and the fear is that the U.S. Federal Reserve may have to raise rates uncomfortably fast. That’s leading to an acute dollar shortage, draining global liquidity. The paper quotes Steen Jakobsen, of Saxo Bank, saying “The Libor rate is one of few instruments left that still moves freely and is priced by market forces. It is effectively telling us that that the Fed is already two hikes behind the curve. This is highly significant and is our number one concern. This is a warning signal for the market and it happens extremely rarely,”

Sharp movements in the dollar Libor rate could have a profound impact on not just mortgage and business loans, but, apparently, it’s used as the basis for 90% of the $900bn leveraged loan market. Nor is this just a U.S. problem, some 60% of the global economy is linked to the dollar and the pain spreads rapidly to any country with a dollar peg or dollar borrowing.

Three-month interbank rates in Saudi Arabia have already risen to 2.4%, the highest since the global financial crisis in 2009 — although how much of this is due to dollar Libor and how much is due to the deteriorating financial position of the Saudi economy is unclear.

Underlying growth in the U.S., when one-off inventory effects are stripped out is currently near zero in the third quarter and slow elsewhere. The credit markets tend to smell fear long before equities wake up to the risk, the paper says.

This has been the pattern in each spasm of financial stress over recent years and the market’s reaction to the draining of liquidity from the system may well hit the equities markets at some point next year.

Earnings are falling and firms are stretching payments to suppliers in order to flatter operating cash flow, but a market-wide picture has to be built up like a jigsaw piecing data together. So news that the U.S. trucking industry said freight tonnage dropped 5.8% in September. That may be a one off, or may be part of a more worrying trend.

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The Fed is well aware of the fragility of the system, though, that is why rates have not gone up this year and may well not rise next. Dollar Libor isn’t telling us we are facing a stock market crash, but it is suggesting rate hikes are just not a viable option anytime soon. In the face of slow global growth, the case for a bout of inflation appears less likely as each month goes by.

May Brought a Metals Markets Correction

Two factors dragged metal prices down this month. First, the Chinese government recently played down expectations of further stimulus while fighting speculation by increasing margins and fees for trading. Second, the U.S. dollar strengthened amid new expectations that the Federal Reserve might be more aggressive than expected in raising interest rates.

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Most analysts and miners are still quite bearish on metals markets as overcapacity hasn’t really been solved. Usually market bottoms happen when everyone is bearish, so these negative expectations are not necessarily bad.

The Correction

After metals rallied during the first four months of the year, many of them took a hit in May. So far this seems like a normal reaction as prices zigzag and we don’t see enough evidence to turn bearish yet.

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However, if markets have actually bottomed, prices should find support after May’s correction. We’ll have to wait and see if metals are able to bounce back up after this bear attack. Here are some charts showing some metals losing ground in May:

[caption id="attachment_78967" align="aligncenter" width="500"]Silver prices fall in May Silver prices fall in May. Source: @StockCharts.com.[/caption]

Silver declined 9% from it’s April high while gold prices fell 6%.

[caption id="attachment_78970" align="aligncenter" width="500"]Tin prices correct in May Tin prices correct in May. Source: FastMarkets.[/caption]

Tin prices took a hit after an spectacular run in Q1. Prices fell 9% from April’s high as Indonesian tin exports recovered in April, with exports up 36% compared to April 2015.

[caption id="attachment_78972" align="aligncenter" width="500"]Aluminum corrects in May Aluminum corrects in May. Source: FastMarkets.[/caption] [caption id="attachment_78973" align="aligncenter" width="500"]Copper corrects in May Copper corrected in May, too. Source: FastMarkets.[/caption]

Other metals also lost some ground. Aluminum, nickel, lead and copper all fell 9%.

What This Means For Metal Buyers

So is this rally already over? We think it’s too early to call for that. So far this looks like it could be just a short-term correction before metals continue going up. We’ll have to wait and see if base metals are able to find support after these declines. As always, these two factors will likely determine the trend of metal prices for the rest of the year.

Will Copper and Oil Lead a Commodities ‘Rush for the Exits?’

Will Copper and Oil Lead a Commodities ‘Rush for the Exits?’

A note issued by Barclays recently told customers that, although investors have been attracted to commodities as one of the best performing assets so far in 2016, returns are unlikely to be sustained in the second quarter of the year.

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“This could make commodities vulnerable to a wave of investor liquidation that we estimate could, in a worst case scenario, knock as much as 20-25% from current price levels,” the note to investors said.

Copper and Oil Under Pressure

This would take the price of oil back to the low $30s per barrel and copper to the low $4,000s per metric ton, the analysts said. Channeling its inner bear, Barclays said that the recent price appreciation does not seem to be founded in improving fundamentals, and that the key markets already face overhangs of excess production capacity and inventories.

Net flows of investment into commodities totaled more than $20 billion in January and February, the strongest start to a year since 2011.

“The kind of commodity investment that is taking place currently is not the long-term buy-and-hold strategy for portfolio diversification and inflation protection that underpinned the huge inflows of the previous decade,” the Barclays note said. “It is much more short term and opportunistic, as is clear from the relatively short holding period for (exchange traded product) buyers in oil. Many have been liquidating on the recent move up in prices, having held their positions for only 5-6 weeks.”

The UK investment bank goes further to say both copper and Brent crude could fall by as much as a quarter of their current positions if a mass selloff occurs. The following chart illustrates the precarious position that both commodities find themselves due to recent speculation.

FT_Commodities_scorecard_First_quarter-bar_chart_550_032816

UBS Warns of Volatility

This could easily be dismissed as a the overly cautious forecast of a single investment bank, but it’s not just Barclays. UBS is also warning its investors about short-term swings and, in some ways, is going beyond the Barclay brothers’ analysis in telling them that commodities may be more susceptible to chaotic swings than ever before.

“Changes in the direction of global risk appetite are now occurring more frequently than they did from 2010 to mid-2014, making it increasingly difficult for investors to participate meaningfully in either direction,” UBS wrote. “Although risk sentiment has settled into a tighter range since 2012, it has nonetheless become less persistent — it tends to change direction quicker than it did in the past. The time length of risk cycles — the lag between two crests or peaks in the 13-week change of the risk premium index has gone from 9 months to a year in the period 2012-2014 to three-to-six months today.”

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This might create more opportunities for commodities traders, but it also means a more volatile environment for metal buyers, particularly those buying copper.

Upside Risk for Steel Prices: We Say, ‘So What?’

Upside Risk for Steel Prices: We Say, ‘So What?’

In early October I received a phone call from a well-known consultant/advisor within the domestic steel industry. He wanted to know if we were urging our readers to begin to hedge steel (meaning immediately hedge, as opposed to creating a hedging program).

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My gut reaction to the question was to dodge it because I wanted to understand why he asked it. Our conversation went along the lines of this:

Him: Hi, Lisa. I heard you speak at the recent Steel Market Update event. I was just wondering if you were urging your readers to hedge steel.

[caption id="attachment_71427" align="alignleft" width="172"]lisa reisman MetalMiner Executive Editor Lisa Reisman[/caption]

Me: Why do you ask?

Him: I think there is a lot more steel price upside risk than downside risk.

Me: I don’t disagree with you, in that prices are on the low end of the range relatively speaking, but in answer to your question, no, we are not telling our readers to hedge right now.

Him: Why not?

Me: Because we don’t see signs of a market bottom. Prices would have to stop falling and begin rising, crossing certain levels before we’d suggest companies hedge.

Him: So you don’t see upside risk?

Me: We don’t try and time the absolute lowest point of the market and then lock-in. We try to identify when the trend has shifted (from bear to bull) and take cover, then buy forward or hedge. Until we see evidence of a trend shift — and the market still looks negative to us —we don’t pay much attention to upside/downside risk, per se. It’s not relative in driving industrial buying behavior.

[caption id="attachment_75265" align="aligncenter" width="550"]Source: Adobe Stock/Yury Zap Source: Adobe Stock/Yury Zap[/caption]

Is This Analyst Wrong?

That’s probably somewhat of an irrelevant question. He can be both right and wrong. Right in that, yes, there is likely more upside risk (e.g. steel can likely go a lot higher vs. a lot lower) but from an industrial metal buying perspective — I give it the big SO WHAT?

So what if steel has bigger upside risk? Do we care? If the tree fell in the forest and nobody was there to see it fall, did it fall?

The point: we only care about that which will make us change our buying behavior.

And the notion of “upside risk” just doesn’t do it for me, unless, of course, we see evidence of a market shift occurring.

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The evidence suggests we remain firmly in our bear market.

Check out our latest MMI report here.

See the forecast that accurately calls the trend AND explains the current buying behavior

The Takeaway

We’re not in the business of predicting the rock bottom point to “beat the market.”

However, we are in the business of delivering metal market procurement insight. Here are a few pieces we’ve written over the years on the subject of “timing the market:”

When Should I Buy My Steel?

The Role of Price Forecast Modeling Tools

Metal Decision Trees: Sourcing Strategies and Risk Mitigation Methods Part 2

Don’t Buy Copper On Weakness, Buy On Strength

Almost every metal buyer tries to buy forward, either increasing inventories or fixing prices with suppliers, when they see or they hear that their particular metal is “cheap.”

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This habit is completely intuitive. It’s the way human beings are wired. We tell our kids at a very young age to buy what’s on sale. However, that discount mentality is a very dangerous mentality to bring into the market.

Oil Might Be The Clue To The Future Of Base Metals

Oil Might Be The Clue To The Future Of Base Metals

The decline in oil prices has come to an end….or not?

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At this point, I think we can all agree that no one knows what’s going to happen to oil throughout the balance of 2015. Although prices have stabilized since January, calling for a bottom right now would just be a guess. It would be no more reliable than flipping a coin, especially since it’s in a period of extreme volatility where the psychology of market participants is what determines the price. In the chart, the recent rise is still just a bounce that could fall to succeed.

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