The Weekly W(rap): 9-July-2021 – Commodities troubled by growth fears

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Macro Developments

As of 9 July, about 185.7mn Covid-19 cases have been confirmed worldwide, and the death toll has surpassed 4.0mn, according to Johns Hopkins University data. President Biden declared that the US had achieved “independence” from the coronavirus, though he cautioned against complacency with more transmissible variants circulating in the country. Coronavirus variants are “currently winning the race against vaccines”, the head of the World Health Organization said, blaming a lack of equitable vaccine production and distribution.

FOMC minutes indicate there is no timleine for tapering of asset purchases. The FOMC minutes from the June meeting concluded: “Participants judged that the current stance of monetary policy and policy guidance remained appropriate to promote maximum employment as well as to achieve inflation that averages 2% over time and longer-term inflation expectations that are well anchored at 2%. Participants also reiterated that the existing outcome-based guidance implied that the paths of the federal funds rate and the balance sheet would depend on actual progress toward reaching the Committee’s maximum-employment and inflation goals.

A divided Fed said the standard of “substantial further progress” was generally seen as not having yet been met, though policymakers expect progress to continue. Some officials saw benefits to reducing the pace of MBS purchases more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets. Several other participants, however, commented that reducing the pace of Treasury and MBS purchases commensurately was preferable. On interest rate projections (dot plot), “a few” officials said they expected the economy to be ready for interest rate rises “somewhat earlier” than previously thought, but others pushed back. The Fed has said it would only increase interest rates once full employment was attained and when inflation had reached 2% and was on track to exceed it moderately for some time.

Bond yields slumped on fears that global economic growth has peaked and is fading, led by a slowdown in China. Investors seek the safety of bonds as asset classes such as equities and commodities are falling.

Investors seek refuge in bond markets, driving bond prices sharply higher (yields lower) amid risk-off sentiment

Source: Federal Reserve Bank of St. Louis, Trading Economics

Precious Metals

A not too strong employment report suggested that the Fed was in no hurry to tighten policy which supported the complex. Ahead of the FOMC minutes precious metals were little changed, although palladium was firmer on robust industrial buying amid tighter auto pollution standards in Europe and China, and a global market in structural deficits.

Palladium is outperforming, as PGM mines endure South Africa’s third-wave lockdown which could constrain output. The World Platinum Investment Council said that rising emissions regulations are expected to push demand above pre-pandemic levels despite supply bottlenecks in the autos sector. Last week’s US total vehicle sales data showed annualized sales of 15.4mn units in June, down from a peak of 18.5mn in April, the lowest level since August 2020. Meanwhile, car production in Germany in Q121 was around 15% weaker than in Q420, with declines of 10% and 7% in the US and Japan, respectively. Institutional investors expect the price of palladium to rise in the coming months, according to new research. A poll of 150 European pension funds found that 55% expect the price of palladium to reach between $2,801 and $3,000/oz in Q321, with another 18% expecting the price to rise to a range of
$3,000-3,200. Of the surveyed pension funds, which together managed a combined $213bn of client assets, 23% expect the price to remain in a range of between $2601 – $2,800/oz. The study, which was commissioned by Global Palladium Fund (GPF), shows that 43% of the pension funds expect to increase their allocation to palladium over the next 12 months, compared to 15% who expect to underweight the metal.

Gold was trading above $1,800 following weaker-than-expected economic data and as 10-year Treasury rates fell to a 5-month low as investors react to the potential of slower economic growth. After the release of the FOMC minutes gold rallied $10 to $1,807. Prices have broken out of their consolidation pattern and also seem to have a tailwind as a potential bottom seems to be in place. After the recovery that we’ve seen in gold over the past few sessions, the spot metal price is above its 100-day moving average, but below the 200 and 50-day ma. The 14-day RSI is also
around 50 too, so very neutral. Flows into global gold ETFs were mostly flat in June, with slight inflows of 2.9t, according to the World Gold Council data.

Base Metals

The prospects of monetary policy remaining loose boosted sentiment, with China cutting the RRR to stimulate growth. A cut in the RRR would help the country’s SMEs to weather the storm of high metals prices but, at the same time, stokes concerns about a slowing economy following a peak in the credit cycle. The complex was mostly firmer, with dips bought by the Chinese as investors/speculators are largely neutral in their positioning. With the summer lull upon us, the markets may well remain rangebound. The spread of the Delta virus variant is being monitored, and while lockdowns can hit demand, there is also a risk to supply from mine closures or further logistical delays, helping to underpin prices.

The first batch of sales saw 20kt of copper released from China’s strategic reserves. Auctions on Monday suggest demand may be weakening, with bids coming in below current spot prices. The entire batch of 50kt of aluminium put up for sale by auction from Chinese state reserves was sold within seconds of bidding being opened at 8am local time on Monday 5 July. This was only the first batch to be made available for purchase and comprised only 10% of the amount expected to be sold. The Chinese government will sell more reserves of copper, zinc, and aluminium soon to further “stabilize the markets,” it said on Wednesday 7 July. The quantities it plans to sell, and the date of the
next sale were not disclosed in the statement published on the website of the National Food & Strategy Reserves Administration.

Lead was firmer as demand has been boosted by extremely hot temperatures in North America, with more batteries failing under such extremes forcing battery manufacturers to restock depleted inventories.

Tin traded at a new all-time high as a real shortage of metal in physical markets continues to bite amid rising supply issues in China. Increasing coronavirus cases in Yunnan, are raising concerns the subsequent restrictions would impact China’s output of the metal. Imports of tin ore from neighbouring Myanmar are also plummeting due to a worker shortage. This follows on from disruptions earlier this year, as a power shortage in the area forced some operations to close.

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