This market comment was written at 8:30 a.m. on July 21st US east coast time...
Apart from aluminum, metals rallied impressively yesterday, with copper leading the way after it tacked on almost 2% on the day. Once again, it was the stronger tone seen in the US equity markets that was behind the rally, as stocks reversed earlier losses to close higher despite mixed macro data. In this regard, we had housing reports showing June building permits and housing starts coming in at 586,000 and 549,000, respectively (vs. forecasts of 560,000 and 570,000). This was no major surprise, and continues to point to a housing sector that remains fairly weak. Earnings also continue to pour in, and although many companies have come in light in one category or another, we sense that investors are concluding that they are at least reporting year-over-year earnings growth, while sitting on piles of cash to boot-- not exactly a sign of tougher times ahead.
We are sharply higher once again in metals this morning on no particular news, just the fact that equity markets seem to be improving in both Asia and Europe, while a higher opening is expected here in the US as well. Investors are waiting for stress results out of Europe later this week, and the early word is that the regulators plan to detail three scenarios on which the tests would be constructed; banks will publish their estimated Tier 1 capital ratios under a “benchmark for 2011”, an adverse scenario, and a third test that includes a “sovereign shock”, this according to a template obtained by Bloomberg. In the last scenario, banks must write down the value of sovereign loans only if there is serious doubt about a state’s ability to repay its debt, but for now, the “sovereign-shock” scenario does not assume any European nation will default. The banks will also publish how much they need to raise in terms of capital if their Tier 1 ratio falls below 6% in the event of the third scenario. We will see how all this plays out in the days ahead, but certainly, the Euro is not doing much today, and holding steady at $1.28. Nevertheless, we suspect markets will breathe somewhat easier over the course of the week once these tests are behind us, and expect the firmer tone we are seeing in most to stay in place at least through Friday.
On the macro side, there are no releases out of the US today, but Federal Reserve Chairman Bernanke gives testimony on monetary policy to the Senate Banking Committee today and the House Financial Services Committee tomorrow. Investors are speculating the Fed may announce more stimulus measures (such as cutting the interest paid on excess reserves) after recent Fed minutes reveal growing concern about a slowing economy.
In other markets, oil prices are higher on weather concerns in the Gulf. On the earnings front, after a solid report from Apple yesterday, we get pre-opening announcements from Morgan Stanley, Wells Fargo, Altria Group, and Coca-Cola, among others.
In other metals news, China's arrivals of refined copper dipped 24.2% in June from a month earlier, customs data showed on Wednesday, slumping for a third straight month and off some 44% from a record high seen a year earlier. In the first half of the year, refined copper imports fell 12.8% to 1.556 million tons. Having said that, local production has increased, while there has been a noticeable drop in inventories as well, so the demand picture is not as bleak as the import numbers suggest. We will publish the monthly details for the various categories later in the week, but the key numbers are summarized in our attachment.
Finally, the latest Reuters poll for metal price projection came out yesterday. Up to fifty-five analysts were polled and their forecasts are listed in our attachment.
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COPPER SUPPORT: $6300 / RESISTANCE: $7050
We are now at $6844, up $203, and pushing towards the top end of the trading range. We expect the firmer tone to continue through the balance of the week, as declining LME stocks, steadier equity markets, and what we suspect will be a favorable reaction to the European stress tests, will all contribute to a steadier tone.
* BHP Billiton said its fourth-quarter copper output dropped 5% from a year earlier with the company forecasting its Olympic Dam mine to return to full production in the current quarter. The mine had been running at only about a fifth of capacity since an accident in October. The company expects aluminum production for the fourth quarter to be flat on the year.
* The global copper market recorded a surplus of 73,000 tons from January to May 2010, versus a deficit of 56,200 tons in the same period last year, the World Bureau of Metal Statistics said on Wednesday. In the first five months of 2010, refined production rose to 7.89 million tons, up 4.95% versus the same period last year. Chinese output rose by 251,000 tons over the period, while Chilean metal production fell by 24,400 tons to 1.326 million tons. Global consumption for the first five months of 2010 was 7.81 million tons, and for 2009 calendar year, the total was 18.25 million tons, the WBMS said. Chinese apparent consumption rose by 105,000 tons due largely to an increase in domestic production.
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ALUMINUM SUPPORT: $1925 / RESISTANCE: $2050
We are now at $2004 on ali, up $33/MT, and being pulled up by copper today despite a sluggish performance yesterday. We seem to be on track to test $2050 resistance. NASAAC is at $1940-$1950.
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ZINC SUPPORT: $1720 / RESISTANCE: $1970
We are at $1913, up $37, and quiet. If prices manage to push and close above $1900, where we see evidence of a triple-top, we could make further inroads towards the $1970 level.
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LEAD SUPPORT: $1700 / RESISTANCE: $1880
Prices are now at $1866, up $27. Lead needs to close above $1880 resistance for a modest breakout to become evident on the charts.
* China's annual refined lead production may fall this year for the first time in at least a decade, as concentrates get scarcer while environmental controls get more stringent. "(Annual) output may fall 5% this year," said the chairman of lead producer Anyang Yubei Gold & Lead in Henan province told Reuters today. Chinese production of refined lead dropped an annual 7.1% in the first half of the year vs. 20% growth seen a year ago.
* Doe Run Peru's suppliers and creditors rejected the company's proposal to settle its $110 million in debt, this according to an official for one of the creditors. The proposal called for the restart of the plant, followed by a government mandated cleanup effort that would cost an additional $150 million in funding. Doe Run has a government deadline of July 27 to restart the plant, which has been shut since June of last year.
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NICKEL SUPPORT: $18,000 / RESISTANCE: $20,500
We are $19,380 on nickel, up $255, with prices possibly on track to test $20,500 resistance.
* Negotiations between Vale and the United Steelworkers Union aimed at ending a yearlong strike at the Voisey’s Bay nickel mine have broken down following an unsatisfactory proposal by Vale, according to the union. "The proposed bonus system is unacceptable. It's based entirely on incentives rather than the present one based solely on the average realized price of nickel or the profitability of the company," a union staff representative said.
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TIN SUPPORT: $16,800 / RESISTANCE: $18,250
Tin is at $18,319, up $79 and above key resistance of $18,250. We are looking for two closes above this mark for tin to gain further upside momentum.
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