A fair amount of interesting developments in the last 7 days, but few of them directly affecting metals markets. The fun part, I suppose, is that everything relates to interest rates and economic growth, so it drives metals trading one way or another. The craziest trading of the week, by far, has to be crude. Last Wednesday’s $4 drop in Brent Sea Crude for December delivery was the largest single day move since June (chart below). And then it recovered in entirety. Geopolitical and economic growth concerns built up against stubbornly high pricing and when a slew of poor econ data was released from China last week and rumors swirled of the administration releasing from the Strategic Petroleum Reserve in Cushing, the bottom dropped out. The next day, however, it recovered in full and is back to trading almost exactly where it was ($112 Brent, $91 WTI).
Almost simultaneously, Japan’s re-upping of their Quantitative Easing program has re-ignited the carry trade for currency and commodity traders. Because of the low yield on Yen, punters will sell short that currency for trades based in any higher yielding currency (most anything) and pick up a yield spread in addition to any returns on bets they place. The last time this trade became extremely common was in the years leading up to 2008. It is not without risk, however, in the era of risk-on or risk-off trading. Check out this chart from the FT article linked to on rolling correlation between AUD-JPY (prime carry trade territory) and S&P.
In a word, correlations are extremely high between otherwise unrelated assets. Speaking of almost non-sensical trading, today marks the 5 year anniversary of the high in the S&P 500 (peak 1565. 7% above current levels). Global equity markets are up mid-teen percentage points and yet global growth is wheezing along at 3.3% according to IMF estimates. Ultimately, something has to give as these are not reconcilable concepts by my logic. Public equity markets outgrowing global growth by that wide of margin implies a few tough assumptions. Either public company efficiency is increasing at a rapid rate (higher margins per dollar of revenue) or these relatively large companies are experiencing the vast majority of revenue growth in the world, simply leaving small and mid-size companies in the dust. Either or both of these may be true to some extents, but I would imagine that return-hungry investors, starved by artificially low interest rates, are chasing profits. Spec longs are growing in equities, oil and metals. While not yet a death knell, this usually leads to choppy trading. Asset prices are being driven higher by cheap credit. Sound familiar, Mr. Greenspan?
How this all plays out is a little beyond my scope, but base case for economic concerns on my end is a mild recession early next year (or something like it, even if not technically there) based largely on languishing global growth, continued struggles in the Eurozone and the uncertainty surrounding the fiscal cliff in the US. A clear winner in the upcoming US election may help with that last bit as a clear mandate would give the political leverage needed for either Republicans or Democrats to embark on a defined path. Any path.
One quick note about the payroll report last week. I’d recommend reading Barry Ritholtz dressing down of the conspiracy theorists regarding last week’s very strong unemployment rate. Basically, keep in mind that the underlying U6 rate (which also includes forced part-time workers) did not budge M/M. If you were rigging a number, you would not leave out this much of a glaring weakness in the labor force (which it is). To the charts:
Oil’s crazy week: this is the last week of trading in Brent (black) and WTI (candle) crude on an hourly basis. Check out Oct 2-4.
Metals trade sideways, volume lower: without a clear direction in markets, metals volumes in the December contracts have slid lower (volume on bottom half). Speculative longs continue to add to positions in gold and silver, which makes me exceedingly nervous.
Gun to my head: Lower. I think a sell-off is in order without a clear fundamental news boost to clean out some of the long positions, especially as core macro traders seem to be focused on other commodities. On a long term basis, we have been rallying for the better part of 6 weeks. You can reference last week’s email for a better look at the long term chart.
Feel free to forward with attribution, call the desk with trades or just to touch base. Have a great rest of the week.
The material contained herein is intended as a general market commentary. Opinions expressed herein are those of Bradley Yates and may differ from those of other NTR employees and affiliates. This information in no way constitutes NTR research and should not be treated as such. Further, the views expressed herein may differ from that contained in other NTR materials. The above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness, any pricing referenced is indicative and subject to change.
Bradley S. Yates
Bullion Desk- Senior Trader
NTR Bullion Group, LLC