Post precipitous fall in June, base metals have managed to stabilize over the course of July. Firmness is attributed to the better tone in the Chinese credit markets. Markets heaved a sigh of relief after key Chinese short-term lending rates have plunged to their lowest levels since the peak of the liquidity squeeze. During June, Chinese credit markets were undergoing turbulence, as the monetary authorities deliberately averted injecting additional liquidity into the money markets in order to restrict the expanding credit supply. Overnight interest rates spiked to as high as 30% and forward rates rose also surged during the third week of June, as speculation was rife that the Bank of China ducked out on an interbank payment. The central bank reverted on this by assuring that no banks were in default and the central bank would keep money supply at reasonable levels. Consequentially, interest rates have come off their June highs, with the seven day repo rate now at 5%, down from 11.5%, but still above the normal range of 3-4%. Over the past few years, there has been significant expansion in credit supply. In this respect, China’s domestic credit during the first five months of 2013 itself rose 52% from 2012 levels. However this expansion has failed to effectuate recovery in the broader economy, which can be manifested by the fact that China’s GDP growth has slowed down during the past two quarters. In the meantime, total domestic Chinese debt levels are also soaring, up by 130% of GDP in 2007 to 210% in the first quarter of 2013. Excessive lending has been funneled into larger government-controlled industrial units, effectively leading to excess production capacity and soaring surplus in most of the commodity markets.
Another factor which has been keeping the investors on their toes is the unpredictable communiqué from US Federal Reserve. During June, Bernanke stated that the central bank would start scaling down bond buying from September, if economic conditions are congenial. However, FOMC minutes of June 18-19 meeting revealed that half of the Fed officials want to see more strengthening in the US job market before tapering the bond buying programme. On the other hand, the rest of the officials are calling for an exit of the stimulus by this year end. During a press conference earlier this month, Bernanke elaborated that accommodative policy is needed for the foreseeable future. He provided an assurance that apex body will not raise interest rates, even after the unemployment rates falls to the threshold of 6.5%. In the latest, Ben Bernanke’s testimony to US senate reveals that Fed anticipates tapering monthly bond purchases later this year, ending them around mid-2014. However, asset purchases depend on economic, financial developments and they are by no means on a predetermined basis. Bond-buying could be reduced at faster pace, a slower pace, or even increased for a time, depending on the outlook and it is too early to make any judgment on whether Fed will slow down asset purchases at its September meeting. Decipherment of Ben Bernanke’s language hints that although apex body will keep interest rates low for the foreseeable future, tapering of the quantitative easing seems to be a possibility in the next two to three quarters.
On macroeconomic front, the global landscape remains dichotomous. US seem to be doing well, with housing and automobile industry showing healthy signs of revival. Housing has reinvigorated, characterized by rise in home prices, reduced foreclosure rates and a decline in overall home inventories. Automobile markets have registered robust sales, while vehicle exports have also witnessed a pickup. Employment markets have seen improvement, with the economy adding a monthly average of around 200,000 jobs during the first half of this year. (Please refer to our report on US Labour markets) Even though recovery in the manufacturing sector remains patchy, activity during June has expanded with PMI reclaiming above 50 levels. In China, macro-indicators are visibly exacerbating, including PMI readings, trade figures, GDP and industrial production growth. The country’s GDP clocked a 7.5% growth during the second quarter, as compared with a reading of 7.7% during the prior period. China’s June industrial production growth slowed as well to 8.9% during from 9.2% in May. The trade numbers have been dismal, with exports for June falling 3.1% on yoy basis and imports dropping 0.7%. In Europe, the economic activity remains mired in recession, with the PMI reading across various countries still languishing. The unemployment rate in the region remains substantially high near 12%. Japan’s Q1’13 GDP growth is revised to 4.1%, with factory output and retail sales also moving higher. Meanwhile, IMF has trimmed its global growth forecast and also warned that growth could slow further if US withdraws monetary stimulus. The IMF trimmed its 2013 global growth forecast to 3.1%, down from the prior projection of 3.3%. It lowered its 2014 growth forecast to 3.8%. US White House has also trimmed its outlook for U.S. economic growth. GDP is now expected to rise 2% this year and 3.1% next year, marginally less than the prior estimate of 2.3% and 3.2% respectively.
We infer metals to trade range bound during the course of July, as oversold conditions should be followed by some degree of stabilization. Metals have been hammered during past few weeks and in the process digested the uninspiring economic landscape in China. Moderate bounce from the prevalent price levels cannot be ruled out. Recovery in US economic activity and restoration of calmness in Chinese credit markets should also provide support to the prices. However in the long run, we believe that aggravating slowdown in Chinese economic activity would adversely influence the demand prospects and in the process the bulls remain on the defensive.
Base Metals Snapshot
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