The failure to reach an agreement reversed the relatively modest gains we were seeing, sending fresh shorts out in full force. Although metals did not sell off dramatically, there were substantial reversals in precious metals, energy, and US equities. The most significant decline occurred in the European debt markets, where both Spanish and Italian yields soared; Spanish 10-year rates, for example, pushed to 6.42%, and are now inching towards the critical 7% barrier, at which point local debt markets tend to seize up as investors begin to discount the possibility of an imminent default.

We are seeing more of the same downside pressures forming today. Copper is off by about $100 a ton, but the rest of the group is holding up fairly better after working earlier lows. Gold and silver, however, are off sharply, as are energy prices, while the Euro remains under pressure, now trading at $1.2740 after breaking down to $1.2681 earlier in the day. Bloomberg reports that investor George Soros has started nibbling in gold by increasing his holdings in the SPDR Gold Trust. The same article suggests that John Paulson has maintained his gold positions, likely meaning that his funds will report big losses once again.

As the European turmoil starts to spread, we are hearing surprisingly little from the Europeans themselves, who again seemed to have gone AWOL. There is, for example, very little in terms of coordinated actions and nothing being announced in the way of an emergency summit or any kind of preemptive measures that could be taken by either the ECB or the IMF. What we are getting instead are conflicting statements from various officials as to what the Greeks should or should not do, and whether the Euro regime will survive a Greek exit from the common currency.

Of course, part of the muted response is attributable to the fact that French president Francois Hollande has hardly had time to settle in. In his inaugural address on Tuesday, Hollande pledged to “tie the necessary reduction of our public debt to the indispensable stimulation of our economies” and then wasted no time winging his way to Germany to meet Chancellor Merkel. Even here, the gods did not bless his trip, as a bolt of lightning apparently struck his plane, forcing him to turn back and use another aircraft. (No injuries among the passengers were reported). Bloomberg reports that the two leaders finally met late yesterday, and said that proposals to boost growth would be “considered” and that the European Union may also “approach Greece with proposals”.

These words are providing scant comfort to the Greeks themselves who seem to be voting with their checkbooks instead; Bloomberg quotes the country’s central bank head as saying that depositors have apparently removed some $900 million worth of Euros from the banking system, although it is not clear over what period of time these withdrawals were made. More reassuringly, conditions in the streets of Athens were calm today, with no unusual activity reported outside the banks.

At this point, the nervous tone still evident in the markets are telling us that the Europeans need to embark on a series of stabilization initiatives, including ones that could buffet the systems from the shock of a likely Greek exit from the Euro. Simply waiting for the results of the June 17th Greek elections may be too late and risks widening the contagion into Spain and Italy. In the meantime, one thing that at least is going right is that the Euro is selling off; this will make exports out of Europe – and those idyllic Greek island vacations – both more attractive.

In corporate news, Reuters reports that BHP Billiton said it expects commodity markets to cool down in the years ahead and in this regard, has put the brakes on a plan announced by Chief Executive Marius Kloppers in 2011 to spend $80 billion over five years to expand its iron ore, coal, energy and base metal operations. “It is all about appropriate allocation of capital. When Marius (Kloppers) talked about the $80 billion, the environment was different,” Chairman Jacques Nasser told Reuters.
——————-
COPPER SUPPORT: $7445 / RESISTANCE: $7880

We are now at $7675 on copper, down $90, and definitely seeing the bottom end of the trading range now giving way more decisively. Our next downside target is $7445, reached earlier this year, and well within reach. LME stocks continue to decline, off another 1,000 tons today, but not doing much to restore any stability to the market.

* Codelco anticipates strong copper prices this year, although with heightened volatility, the company’s CFO said. “In general we think (copper prices) will be good this year, though subject to important fluctuations,” he said. “Market fundamentals remain solid and upward or downward (price) fluctuations are only to be expected.”

* The CEO of Freeport-McMoRan Copper & Gold expects a spike in Chinese consumption to lead to increased investments in the search for new reserves, citing a Brook Hunt report showing that annual Chinese copper demand was set to jump from about 9 million tons this year to 16.4 million tons in 2025. To keep up with growing demand, Freeport will increase its capital expenditure budget to $4.3 billion in 2012 and $4.2 billion in 2013 from $2.5 billion in 2011. In addition, the CEO said he was confident that an agreement could be reached with Indonesia over the country’s new proposed limits on foreign miner’s output and profits.

Needless to say, the Greek situation remains front and center in terms of investor worry right now, as the politicians there have yet to make the necessary progress to form a government. Late in the day yesterday, the country’s president said he would continue talks with all the parties through to Thursday, at which point if no agreement is reached, fresh elections would be called. The president is attempting to cobble together a coalition comprising mostly of technocrats from the various parties, thus hoping to sidestep the politically charged atmosphere and the power of personalities.

Right now, and as we understand it, there are four Greek parties in the running, with three of them having enough seats among them to form a majority. One of the three is not interested to sign up, but should the fourth and smallest party decide to join the other two pro-bailout parties, a coalition government could be seated with 168 parliamentarians in place, well above the 150 seats needed. However, so far, this fourth party has been unwilling to join the other two parties unless the lone holdout (the leftist Syriza party) also is persuaded to join. This seems to be the main stumbling block right now and we will see if efforts by the Greek president to break the log-jam will be successful.

As we wait for the results of the talks, there is a welcome pause in the selling. Metals are mixed right now; although copper is down slightly, most of the rest are showing modest gains. Precious metals are flat, while energy prices are higher, as is the Euro, now trading at $1.2850, US equity markets are also called to open higher.

In US macro news, we get April retail sales later today (expected at .2%), followed by April CPI data (expected at unchanged), the New York State Empire manufacturing index (expected at 8.4), and the NAHB housing market index for May (expected at 26).

Out of Europe, markets were relieved to see that Germany sidestepped recession after it reported that its first quarter GDP grew by 0.5% in the first quarter of the year, bouncing back from a contraction of 0.2% in the fourth.

Out of China, the government reported that foreign direct investment into the country fell for a sixth straight month in April. A Ministry of Commerce spokesman told Reuters that a “sluggish” global economy had reduced inflows, while “other developing countries have strengthened preferential policies to attract investment, meaning that China faces more severe competition” he added.

Out of the energy markets, Iran said that a second day of talks with UN authorities on its nuclear program is going well and that things are on the “right track”. A successful round of talks would be important ahead of more senior level discussions to be held in Baghdad on May 23rd.

Very short-term, we would probably want to lighten up on short positions here, as many markets are extremely oversold and prone for a rather sizable short-covering rally should the Greeks surprise us and emerge with a coalition deal. As we noted above, if the fourth and smaller party joins up with the other two pro-bailout parties, Greece would have a government and the tone in the markets could undergo a dramatic shift. The Europeans are also trying to help, with Bloomberg reporting that the EU has hinted it would allow Greece extra time to meet budget-cut targets, as long as the its politicians put together a ruling coalition committed to austerity.

Of course, should the talks fail, we could see yet another leg lower set in, at which point the European authorities will likely fast-track exit strategies to get Greece out of the Euro altogether.
——————-
COPPER SUPPORT: $7880 / RESISTANCE: $8280

We are now at $7821 on copper, down $18, and although the declines have been much less than what we have seen earlier this week, the charts nevertheless show that the bottom end of the trading range has been taken out. This means that technically, we could decline further from here, but given how oversold things are and in view of the critical Greek talks, we likely would want to cover some shorts here. LME stocks continue to decline, off another 1,950 tons today.

In addition to the weaker tone seen in metals, energy, precious metals, and ags, all lost ground as well. In fact, the latest CFTC data shows that hedge funds and money managers slashed their bullish bets on commodities by 20%, or nearly $18 billion, last week. Crude accounted for the lion’s share of the drop, losing about $7 billion of length, while gold had the second largest outflow, dropping nearly $4 billion to around $14.

Equity markets, particularly bank stocks, lost ground Friday after JP Morgan was hit by news that it dropped $2 billion last quarter, with its stock losing 10% on the day. The loss will no doubt give fresh impetus to those seeking full implementation of the “Volcker Rule, as the numbers involved are massive. To this point, Andrew Ross Sorkin, author of ‘Too Big to Fail” pointed out this weekend that the $2 billion loss should not be the main worry, but rather the fact that the loss was generated by an initial trading position that approached $100 billion. Even in the banking world, that is not chump change and surely will pique the interest of the politicians in Washington, many of whom are already dusting off their gavels. In the meantime, the bank ousted at least three executives who were in supervisory roles and more heads are likely to roll.

In other news, weekend developments out of Greece did not yield much in breaking the post-election political deadlock. All three parties have now tried and failed to form governments, prompting Greece’s president to take control of the talks. He is not faring much better after a leftist party declined to join a coalition government with the two major parties, which now means that the country will in all likelihood be heading to the polls once again if no further progress is made by a May 18th deadline.

In the meantime, Europeans are watching the latest developments with increasing alarm; the head of the Bundesbank warned the Greeks over the weekend that they would not receive any more financial aid if they do not stick to agreed bailout deals, while two other officials floated the idea that the Euro could indeed weather a Greek exit from the Euro. (We would agree, provided it was handled right).

In the meantime, the Greek government is scheduled to repay $563 million on a floating-rate note. Greece could run out of cash by early July if creditors decide to withhold their next aid payment scheduled over the next few weeks.

On the currency front, the Euro is sinking, now at $1.2840, while Spanish 10-year yields have climbed to more than 6.2% today for the first time since Dec. 1. Italian and Spanish spreads have also jumped against German 10-year notes bunds by more than 30 basis points.

Out of Germany, results of a local election in North Rhine-Westphalia, an industrial state in western Germany could spell trouble for Chancellor Angela Merkel’s party. Polls show that the centre-left Social Democrats (SPD) trounced Merkel’s Christian Democrat rival, who also happens to be Merkel’s environment minister.

Needless to say, markets are sharply lower right now and even left unimpressed with weekend news out of China that the country’s central bank lowered reserve requirements by 0.5%, its third cut in the last seven months. The government also said it will cut taxes for small firms in order to help them cope with a credit squeeze and weaker exports. Neither item is doing much for metals, as investors are concluding that easier money is not necessarily going to reverse the slowing trend in the Chinese economy, nor will it do much to change the fact that the EU – China’s biggest export market – is mired in recession.

In addition to metals being down, we are seeing precious metals continue to sink, with gold off another $24/ounce, while oil prices are down by about $2 brl. There are some lower level meetings scheduled over the next two days between the representatives of the Western alliance and Iranian officials before a more senior-level conference later this month. Any signs of progress emanating from these talks should continue to pressure crude further, evendespite the declines that have already taken place. In fact, we would not be surprised to see Brent join WTI and crack the $100 mark as well in due course.

In terms of macro news out of the US, nothing comes out today, but tomorrow we get April retail sales (expected at .2%), followed by April CPI data (expected at unchanged) and the New York State Empire manufacturing index (expected at 8.4). We also get the NAHB housing market index for May on Tuesday (expected at 26). Wednesday brings us April housing starts and building permits (both expected at 680,000 and 730,000 annualized, respectively), while later in the day, we get April industrial production (expected at .5%). Wednesday brings us the FOMC minutes, while on Thursday we get weekly initial claims data (expected at 365,000), as well as the May Philadelphia Fed regional index (expected at 8.8). Finally, we get the April index of leading economic indicators on Thursday (expected at .2%).

Out of Europe, industrial production in the 17 countries sharing the euro fell 0.3% in March from February, the EU’s statistics office Eurostat said today well below the 0.4 percent increase expected and further evidence that the region as a whole is heading into recession. The figure stood in contrast with German data last week showing output in country up 2.8% on the month.

Price-wise, the declines we have been seeing so far in May were building for some time and are not that surprising. Although we have further room to go on the downside, we ironically could be on the cusp of a sizable market rebound, particularly if markets start to get increasingly comfortable with the idea of a Greek exit from the Euro, especially if they also perceive that the European authorities will provide a strong enough financial firewall to defend the Euro from further contagion. This is a big if, but not entirely outside of the realm of possibility. If handled right, Greece leaving the Euro could be the best thing that could happen to the markets, as it will finally allow a mending process to begin whereby Greece can finally marshal the competiveness of a weaker drachma to climb out its economic straightjacket.

Out of the fund world, Reuters reports that investors in some of the top commodity hedge funds are removing their money after many funds, particularly in the energy space, continue to disappoint. Clive Capital is was reported to be in the red this year, while Fortress Investment Group’s commodities fund closed this week after reporting double-digit losses. Meanwhile, John Arnold is closing down his Centaurus fund after two years, while oil fund BlueGold is also closing following a 35% loss last year.
——————-
COPPER SUPPORT: $7880 / RESISTANCE: $8280

We are now at $7865 on copper, down $148, but did get down to $7813 at one point earlier in the day. LME stocks were off by almost 3,000 tons overnight following a sizable decline in Shanghai on Friday, but investors seem to be correctly focusing on the demand side of the balance sheet and apparently not liking what they see. In the meantime, the backs seem to crumbling more further in, with tom-next now at a $3 contango, but the tightness is holding further down the spread; June-July is at $28-31 back, up from Friday, while cash to June is at $42 back. July to 3’s is at $18 back, pretty much unchanged from Friday. Price-wise, we are watching to see whether key support around the $7880 level, which was the mid-April low, will hold on a two-day closing basis. If it does not, which we think will be the case, we likely will sell off further, perhaps setting up a test of the 2012 lows at $7445.

* China’s refined copper output slipped by 3.7% in April to 491,000 tons from 510,000 tons in March, data from the National Bureau of Statistics showed last week. Aluminum output in the country was also down in April, falling by 2% to 1.537 million tons from 1.568 million tons in March.

It’s a far different story today, with the bears back in charge. Copper is now back below the $8,000 mark and there are sharp declines in lead and zinc in particular. Precious metals are also getting hammered, with gold off another $16/ounce, but oil prices are down by only about $1/brl. The Euro has escaped so far, holding relatively steady at $1.2920, although equities are lower across the board.

Today’s downside catalysts can be traced not only to the usual suspects, but to JP Morgan’s stunning admission late yesterday that it incurred a $2 billion trading loss this past quarter after what apparently were hedging mismatches and other “errors, sloppiness and bad judgment”. JP Morgan’s stock is down some 7% in pre-market trading, contributing to the expected 56 point opening decline in the Dow.

Despite the hit, the bank still reported a small profit for the quarter, but the debacle is a rare blow to the reputation of Jamie Dimon and his hands-on management style. Additionally, it may strengthen the hand of regulators who are pushing for stricter rules restricting banks from trading with their own money. In retrospect, we could have known something was amiss when reports surfaced a few weeks ago that one of JP Morgan’s traders was making inordinately large bets in the European credit markets, so large in fact, that he was nicknamed “the London Whale’ and “Voldemort,” after the Harry Potter villain. Perhaps it was these positions that likely went against the bank and were closed out after the ensuing publicity.

In other news, markets were left unimpressed by the macro reports coming out of China. In this regard, although the government reported that industrial production grew by 9.3% from a year ago, it was the smallest monthly advance since 2009. Other categories were up as well, but most came in on the lighter side of estimates. Local-currency loans, for example, came in at 681.8 billion Yuan ($108 billion on the month) compared with estimates of 780 billion Yuan, while retail sales gained 14.1% from a year earlier, but are clearly decelerating from the February and March levels. Consumer prices rose 3.4% from a year earlier, staying below the government’s annual goal of 4% for a third month in a row, but food price inflation remains uncomfortably high, up 7% on the month.

Elsewhere in Asia, India’s industrial production declined 3.5% in March from a year earlier compared with a 4.1% increase in February, yet another indication that the slowdown in Asia is spreading.

Out of Europe, things still look up in the air as far as Greece is concerned; the leader of Greece’s moderate Democratic Left party dashed hopes of a coalition deal today, saying he would not back a pro-bailout government. In all likelihood, the country will now move to fresh elections. In this regard, recent polls are showing that the anti-bailout parties are actually gaining ground over their mainstream opponents, meaning that investors will likely have to contend with the Greek albatross for at least for little while longer.

We are expecting a relatively sloppy session today, but many markets are quite oversold and due for a bounce. Unfortunately for the bulls, there are no headlines that could make the case for a sustained run higher.

We are now at $8081 on copper, up $27, and fluctuating within a relatively narrow $100 band of between $8010 and $8129. LME stocks were down again today by roughly 1,100 tons.

* Rio Tinto said today that an exit by Greece from the European currency bloc would significantly destabilize the region’s economy and negatively affect global confidence. “Looking at Greece, it is not looking good at all and clearly if Greece would leave the Euro it would destabilize the European economy to a significant extent,” Jan du Plessis, chairman of London-based Rio Tinto, told reporters. “So it will have an impact on our business, and it’s one of the things we keep an eye out on all the time.”. However, the chairman said that despite the downturn in Europe and questions about the U.S. economic recovery, he is a little more confident about the outlook for commodities demand than he was six months ago.

market is around 5%. LME copper stocks are now at their lowest level since October
2008.
Jiangxi Copper, China’s largest single producer, said last week it plans to export
100,000 tonnes to LME warehouses in South Korea over the next few months in a
move to unwind its short positions on the LME. A spokesman for Jiangxi said: “The
only way for us to wind off our short hedging positions on the LME is to destock.
LME warehouses in South Korea are the cheapest option in Asia so we plan to
deliver 100,000 tonnes in the following months.”
Jiangxi Copper, Xiangguang Copper and members of the Chinese Smelter
Purchasing Team said in a statement that “specific companies” are using their
physical positions in a way that has distorted the ratio between the LME market and
its counterpart in Shanghai and impairs the “Chinese copper industry’s healthy
development.”
Shanghai is trading at a deep discount of over $400 per tonne to the LME price so
there is no scope for arbitrage trading between the two centres. And the LME
backwardation means that the Chinese copper smelters are losing money on their
purchases of concentrates from overseas. They are buying the concentrate basis
the LME and selling the cathode inside China on the Shanghai price. Their short
hedge positions against their concentrate imports are also losing money as they
cannot roll them over without paying the backwardation.
And as one experienced copper trader noted in a report to clients last Thursday:
“Any de-stocking of the bonded warehouse inventory (which stands at around
600,000 tonnes) still needs to come via the LME backwardation and re-exports. The
backwardation is continuing to drive down physical premiums, both within the
Shanghai bonded zone and LME Asian warehouse locations, but the wait for sizable
Chinese exports goes on.”
According to a report by Fastmarkets news agency last week: Chinese copper
smelters are unlikely to export more than 50,000 tonnes over the next two months
due to tax restrictions. Under the prevailing tax regime, Chinese smelters with
tolling agreements in place under which they are only permitted to export a certain
volume of copper cathodes each month free of tax. They still have to pay 17% VAT.
Beyond these monthly quotas of up to 25,000 tonnes, they must pay a 5% tax to
export LME deliverable grade A cathodes and 10% to 11% tax for brands of lower
purity than 99.9935%.
Shanghai premiums fell a further $5 per tonne to $10 to $40 per tonne on a CIF
basis. This was the lowest the premium has been since May 2011.

Sunday to Monday: 17:00 CT to 16:00 CT

Monday to Friday: 18:00 CT to 16:00 CT

The impacted products are as follows:

ZC Corn Fut & Options

XC Mini-Sized Corn Fut

ZW Wheat Fut & Options

XW Mini-Sized Wheat Fut

ZS Soybean Fut & Options

XK Mini-Sized Soybean Fut

ZM Soybean Meal Fut & Options

ZL Soybean Oil Fut & Options

ZO Oat Fut & Options

ZR Rough Rice Fut & Options

DDG Distillers Dried Grain Fut

EH CBOT Ethanol Fut & Options

KE KCBT Wheat Fut & Options

MWE MGEX Wheat Fut & Options and all MGEX Index Fut & Options

Gold trading heavy ahead of data, testing back down to low end of recent range after 3 days of lower closes. RBS cut their Gold outlook and sees Platinum and Palladium outperforming Gold this year. Otherwise news remains light with slack physical demand weighing. RSIs back to 38, recent support while OI has seen a slight drop the past few sessions. Follow through weakness in Oil after yesterday’s move took out buyers from Tuesday’s rally over the 50 day MA, with Brent and WTI now both below their 100 day MAs. Market starting to get little oversold with WTI RSIs at 38, near the lows of 32 which was hit during early April lows and Brent at 27, lowest reading there since Aug of last year. Weaker EZ data and light volumes ahead of payroll also weighing, along with on going margin concerns and speculation. The CME did ann’t that they received a 90-day extension for implementing margin changes from CFTC and plans to work with customers during that period.

In the case of base metals, markets recouped earlier losses after US initial claims readings came in well below last week’s figure, but by the time the ISM-services report came out an hour and a half later, these gains were reversed. In this regard, the April services fell to 53.5 from 56.0 in March, a five-month low.

Turnover was light, with COMEX copper volume at around 50,000 lots, more than a third below the 30-day average. We are likely going to see very little action until the non-farm payroll numbers comes out in a few minutes. Current estimates have job growth at +167,000, but we suspect the number could be on the light side, in which case we could see base metals under more pressure heading into next week.

Other markets are down right now, with crude being particularly weak and off another $1 today. Brent is now trading below $115. A series of upcoming meetings with the Iranians this month is raising expectations that some sort of breakthrough could be in the cards. We will have to wait and see what happens, but certainly if there is going to be progress it will be now rather than later given the unprecedented degree of pressure being brought to bear on the Iranian economy.

Of course, the French and Greek elections take place this weekend as well and polls show that Francois Hollande still retaining his lead. We should have an interesting day on Monday, as markets will have a chance to assess how exactly the European landscape will change in light of any changes. We suspect that in the weeks ahead there will be pressure on the Europeans to ease up on austerity measures and introduce more in the way of stimulus, something that theoretically should weaken the Euro in the short-run. In the meantime, ECB head Mario Draghi said yesterday that he would not rule out further easing if the regional economy continues to deteriorate.

The Euro is lower now, trading at $1.3120, and precious metals are also off after yesterday’s drubbing. US stocks are expected to open lower.
——————-
COPPER SUPPORT: $8220 / RESISTANCE: $8600

We are now at $8207 on copper, down $22. LME stocks continue to plunge, off another 4,575 tons overnight, with cancelled stocks up by 6,175 tons. Spreads have remained tight; although cash/May has come in to $35 back form $45 yesterday, May/June and June/July are holding, each at $13 and $8 back, respectively. The full cash to three’s spread is around $90, about $25 higher than yesterday’s levels.

* Metal Bulletin reports that Jiangxi Copper and other Chinese companies plan to export 100,000 tons of copper to LME warehouses in South Korea in order to accommodate short positions on the exchange. Metal Bulletin has Shanghai trading at a 4,400/ton renminbi discount (about $700) to the LME.

* Rio Tinto expressed concern over the global supply of metals as increasing demand from governments, growing costs and calls for buybacks and special dividends discourage the construction of new mines, Rio’s Chief Executive said. “It is getting harder and harder to find supply, harder and harder to find resources. And resources are in places where stakeholder activism is tough and resource nationalism is tougher. It takes longer to get permits approved, if they get approved at all,” he said.

* Contract laborers blocked some roads to BHP’s Escondida mine in Chile, but union leaders and company sources expect a resolution to the dispute soon. Production at the site has not been affected.