Metals ended lower yesterday, as a modest reversal set in on most of the group, except for nickel and tin, both of which eked out modest gains. After having advanced quite nicely this week in the run-up to the stress tests, it was not surprising to see some length come off the table in the various markets, particularly in US equities. The Dow was up earlier in yesterday’s session, but struggled as the day wore on, before finally closing in the red and forcing metal prices lower. Furthermore, there was nothing new to latch onto in terms of US macro news, apart from weekly initial claims figures. Although these came in somewhat better than expected, the continuing claims category still looks pretty grim, telling us that it remains difficult to find a job. Markets were also apprehensive about the stress test results, which despite the leaks, still held up the possibility of a surprise. When the report finally did come out late yesterday, there was not much new in the findings, except for the fact that $75 billion of additional capital needs to be raised by 10 of the 19 banks instead of the $65 mentioned earlier. As expected, Bank of America, Citigroup, and Wells Fargo were among several institutions that need to raise the most capital, but just as significantly, several other names were exempt. (Our attachment contains a list of some of the banks examined and the corresponding results). Banks now have one month to come back with a working plan as to how they intend to raise more money, and then will have five more months to actually do so.
The financial press is full of headlines about whether the stress tests are helpful or even meaningful. Our take is that the tests could provide some psychological relief to the markets, but are unlikely to capture all the potential pitfalls -- or capital needs -- the banks could potentially face over the next year or two. Instead, what is far more important is for the precipitous price declines in real estate values to stabilize and start to rise somewhat. This will, in the least, reflate bank assets and end the never-ending cycle of banks taking charges against their assets, while simultaneously trying to raise additional capital to cover these haircuts.
Later on today, we get nonfarm payrolls for April (expected at 600,000). The ADP number, of course, surprised to the upside on Wednesday, but as we mentioned in yesterday’s note, the two do not always track one another. Unless the payroll number delivers another substantial positive surprise, we suspect that we will likely see another flattish day in the equity markets, resulting in corresponding pressure on metals. One factor that could be an increasing negative for equities heading into next week, is the recent run-up in long-term interest rates. In this regard, yesterday’s $14B 30-yr auction was not very reassuring, as investors took rates to a 4.288%, the highest level seen since mid-November. The 10-year auction was slammed as well, with yields hitting a multi-month high of 3.3%.
Elsewhere, out of Europe, German industrial production held steady in March, ending a six-month slump. Output was unchanged from February, when it fell 3.4%. “There’s a bit of optimism in the air and on the basis of early indicators, the second quarter should be significantly less brutal than the first” one German economist was quoted as saying. Out of Japan, a government official said that the country could see positive growth of 1.2% in the second quarter.
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COPPER SUPPORT: $4300 / RESISTANCE: $4925
We are currently at $4755, up $45, and making up earlier losses. A decline in LME stocks overnight, coupled with a weaker dollar (now over 1.34 against the Euro) is helping the firmer tone. On the flip side, weekly Shanghai stocks rose by some 8,600 tons (see our table above) and there continues to be pressure on nearby Shanghai premiums. Our charts show that we are hovering under $4925, key resistance and the 2009 intraday high. For the market to retest this level anytime soon, another leg higher in US equities would be needed. Although stocks are called to open higher as of this writing, the nonfarm payroll number will likely determine whether these initial gains can be sustained. Our take is that the payroll numbers will not come in with enough of a positive surprise to do the trick, and so we are not that enamored by the long side in copper at this stage.
* U.S. service center shipments of copper and copper alloy products rose by 6.62% in March to 20,232,000 lbs from 19,149,000 lbs in February, this according to the Copper and Brass Servicenter Association. Shipments in the first quarter were down 34.9% on the year. The industry organization for steel and aluminum reported similar results. Both metals saw demand rise on the month and fall sharply on the year by 39.2% and 41.6%, respectively. "The bottom has been reached, but it doesn't appear the climb back has really begun," a spokesman at CBSA told Reuters.
* Chinese scrap metal buying in the EU was up sharply over the last two months, according to the association of German metals traders.
* The head of Vale said he thought the first quarter was the bottom for the world metals market. "The first quarter was the bottom in terms of all types of problems we could face right now," he said. "Overall the market is not getting worse. It's not recovering yet, but it's no longer getting worse."
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ALUMINUM SUPPORT: $1400 / RESISTANCE: $1650
We are now at $1551, down $15. Although charts look solid with two closes above prior resistance of $1550, ali can only pull higher along with the rest of the group and not on its own. Inventories rose by another 13,800 tons overnight, and likely explains today's sluggish performance.
* Rio Tinto said it has not talked to Chinalco about revising a planned $19.5 billion deal that would double its equity stake in Rio to 18%. A top executive at Rio said the deal still makes sense despite the recent improvement in debt, equity, and commodity markets. "I see no reason why not. It's a volatile market out there and we've got another couple of months before our shareholders will need to vote on it," he said. "Many things can change, so we'll just wait and see how it goes."
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ZINC SUPPORT: $1400 / RESISTANCE: $1712
We are currently at $1565 on zinc, down $19. Prices seem to have taken out double-top resistance on the charts, but should we sell off to $1500, the breakout would turn out to be false.
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LEAD SUPPORT: $1400 / RESISTANCE: $1570
We are at $1463 on lead, up $2, and holding steady. Charts suggest that a push towards $1570 resistance looks intact.
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NICKEL SUPPORT: $10600 / RESISTANCE: $13,570
Nickel is at $13,260, down $35, and still being hemmed in by the trading range high of $13,570.
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TIN SUPPORT: $10500 / RESISTANCE: $15500
We are at $14,214 on tin, up $314. The market looks very impressive on the charts, and seems to be on track to push higher. A close above $13,500 resistance yesterday was encouraging, and we are looking for a second day close today, which at this stage is likely. One negative is tin’s RSI, which is at an overbought reading of 79, the highest in the group.
All known news and events has already been factored into the price of the market.
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