Tradingfloor Insights Q2 2013
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Tradingfloor Insights Q2 2013



Tradingfloor Insights Q2 2013

Tradingfloor Insights Q2 2013



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Tradingfloor Insights Q2 2013 Tradingfloor Insights Q2 2013 Presentation Transcript

  • Equity InsightsAnotherpositiveyearQ2 InsightsTheendofthefreerideFX InsightsTreesstilldon’tgrow to the skyMacro InsightsModestuptickingrowthCommodity InsightsTail-endrisksleavinglittleroomtotheupsideQuarterly Outlook · Q2 · 2013
  • So, it’s the end of the free ride as we know it. Or at least it should be. In economics, theterm “free rider” is used to describe a person who benefits from a variety of resourcesor services without paying for them.As we move into the second quarter of 2013, the concept can be seen everywhere,from competitive devaluations to lack of reform in the US and Europe, not to mentionthe failure of the European Council to agree on a bailout programme and public sectorresistance to much-needed reforms.But where to from here?World growth is being lowered and fiscal deficit projections are on the rise. Sure, thestock market might be upbeat, but that is another example of the free-ride concept– and, it has to be said, it has become a refuge in itself. There is no doubt that theeconomic crisis is in a tailspin and politicians are standing idly by.And with all eyes on Germany and its September election, it has to be asked: will Germanywrite a big cheque and save the single-currency bloc? The facts state otherwise, whilethis hope is based yet again on a “free ride” that there will be a German willingness tohelp. Always.Throw in the Cyprus bail-in, which created no winners, and the conclusion is thatEuropean decision-making has been left bleeding and without hope of recovery. Thelack of coherent policies raises serious concerns over who will pay for future bail-ins.Overall, this adds weight to our general theme of a stronger USD and our belief thatmuch of the investment return for the rest of the year will come from foreign-exchangeexposure.That said, we are seeking a mandate for change, which would be best accomplished bya proactive recognition of the need to reform.And therein lies our optimism: things can’t get any worse.Home
  • HomeSTEEN JAKOBSENChief EconomistPeter GarnryHead ofEquity StrategyJohn J. HardYHead ofFX StrategyMads KoefoedHead ofMacro Strategypeter’sblogjohn’sblogmads’bloge-mail e-mail e-mailtwitter twitter twitterweb web webOle S. HansenHead ofCommodity Strategyole’sbloge-mailtwitterwebSteen’sbloge-mailtwitterweb
  • Three months into the year and we seegrowth being lowered and fiscal deficitprojections increased by all of the Club Medcountries, plus France and now also Germany.The International Monetary Fund has loweredworld growth and we are looking at a 2013 that is,from the outside, a mirror image of 2011 and STEEN JAKOBSEN, Chief EconomistThe endof thefreerideQ2 InsightsHome
  • A free rider in economics refersto someone who benefits fromresources, goods, benefits, or serviceswithout paying for the cost of saidbenefit.This term can best describe how the worldin the first quarter moved from a free-ridingconcept to blatant public disagreement on how tokeep the party going. The stock market is hitting newhighs but employment and growth, the two factorsthat really matter in the long term, are hitting new lowsmonth by month.Attempts to free ride can be seen every day in competitivedevaluations, lack of reform in Europe and the US, the inability ofthe European Council to agree on a bailout (or bail-in) programme,the stock market rise, and how interest groups (read public sector)refuse to reform despite the obvious need and greater good of doingso.The economic crisis has evolved into a full-blown political crisis. Whengovernment debt becomes too large and the fiscal deficit explodes, it is muchmore difficult to induce all interest groups to co-operate. The later the financialreconstructionisinitiated,thebiggerthedeficit–anditismorelikelytobeunsuccessfulbecause of the parties’ lack of “interest”. This is the case in the US and Europe rightnow: they have bought so much time that the problem has moved from being an issuethat could be dealt with to something that must be dealt with.Three months into the year and we see growth being lowered and fiscal deficit projectionsincreased by all of the Club Med countries, plus France and now also Germany. The InternationalMonetary Fund (IMF) has lowered world growth and we are looking at 2013 that is, from theQ2 InsightsHome
  • • Capital controls: one euro in Cyprus is not the same as oneeuro in Berlin or Paris any more. You cannot move yourmoney off the island.• Bail-in of senior bondholders: In Greece, it was only juniorbondholders.• Bail-in of depositors with more than EUR 100,000 in theiraccounts.The more serious “violation” is the capital control. An economicand monetary union no longer exists across the Eurozone.The lack of coherent policy solutions raises the question: whois to pay for future bail-ins? Is it open season on uninsureddepositors for policymakers? It would appear that this sourceof revenue is far more efficient, or implementable, than raisingother types of taxes in countries such as Italy, Spain, Greeceand Portugal.One can speculate that the ultimate goal could be to introducea Swedish-type banking model financed by a levy on assetsfrom depositors and shareholders. To build a fund big enoughto recapitalise all of the banks in the Eurozone, the bill wouldbe EUR 3 trillion, or 30 percent of the bloc’s GDP, accordingto Citigroup’s chief economist Willem Buiter. I repeat EUR 3trillion.A deposit tax is already in place in Italy and Spain. Italy hashad a 0.015 percent tax on assets under management sinceDecember 2011 and only a few weeks ago, the Spanish courtsallowed the government to impose a 0.2 percent to 0.3 percentdeposit tax.outside, a mirror image of 2011 and 2012. But there is onedifference: the German election on September 22 – the mainevent of the year.The German election can’t come soon enough. We need tobreak this negative cycle that is spiralling out of control, inwhich politicians are standing idly by. The bet that Germanywill, ultimately, write a big cheque and accept fiscal unionis prevalent in the market, but perhaps history is betterguide.The single biggest “cheque” ever written was the MarshallPlan offered by the US to Europe post-World War II. Its size?An impressive USD 13 billion in a USD 258 billion economy – or,in other words, 5 percent of US GDP. Let’s assume Germany iswilling to bail-in the rest of Europe with a number equivalentto the US Marshall Plan: Germany’s GDP is USD 3.6 trillion and5 percent of this is USD 180 billion, or EUR 140 billion – hardlyenough considering it is estimated that between EUR 2 trillionand EUR 3 trillion is what is needed to stop the EU debt crisisonce and for all. We are again seeing that hope is based ona “free ride” that there will be a German willingness to help,but the facts state otherwise.The Cyprus bail-in or bailout created no winners – only losers.Nor did it give any credibility to the EU process. It has leftEuropean decision-making bleeding and without hope ofrecovery as the EU Commission and the IMF exchanged harshwords in the name of a power game, never for the sake offuture Europeans. We saw in Cyprus how principles go out thedoor when the Eurozone needs to find a solution that fits thepolitical spectrum. Cyprus was a first in three ways:Q2 InsightsHome
  • “We are looking at a mandatefor change. This would bestbe achieved via a proactiverecognition of the need toreform, but change, most likely,will be triggered by anotherfailure, such not keeping Cyprusor Greece in the Eurozone.”So Cyprus was a first in many ways, but also an extension ofpractices already in place. Let me warn again: the fact thatdeposit taxes are currently low should not make you sleepeasily. VAT was introduced in Denmark in 1967 at 9 percent,but it has since risen to 25 percent. The point is that deposittaxes are easy to collect, come from the private sector andwill be deemed fair by many non-creditors – again back tothe free riding. If you have no money in the bank, a deposittax seems fair and with the present policy of non-reform, thisgroup is getting bigger and bigger by the day.This was best seen in Italy, where Beppe Grillo and his FiveStar Movement polled 25 percent with no programme exceptbeing anti-establishment. This is a warning for all politiciansin Europe. Voters are not going to sit this one out, despitehaving been free riders for a long time. The ultimate challengeof finding jobs and getting back to normal is now moreimportant than looking for the “system” to bail them out.Since Cyprus, this move should get stronger as savings – if inexcess of EUR100,000 – will be targeted by the Eurozone Troika.The EU and its politicians are running out of time. By this timenext year, without change and reforms, there will not only beeconomic consequences to pay, but also political – not onlyfor domestic politicians, but also for their EU counterparts aselectorates will have no patience with their plans to have aplan for a plan in 2018.Meanwhile, the short-term solution is for everyone to engagein competitive currency devaluation. Officially, they are allconducting domestic-driven monetary easing, but the flow ofcapital chasing yield from Japan and the US is now drivinglocals in Singapore out of their own country. Likewise forQ2 InsightsHome
  • the man on the street in Zurich,it is getting extremely difficult tomaintain a standard of living whilenon-domiciled foreigners bid up the costof houses, food, energy and everythingelse. Another social tragedy.The main beneficiary remains the stock market,which has become a refuge in itself. Many peoplerevert to the Marxist argument that property rightsare only truly protected in equity and property, withthe US being the main beneficiary.This plays well to our general theme of a stronger USD andwe believe that the bulk of investment return for the remainderof 2013 will come from foreign-exchange exposure. We do not seean equity market collapse, but the present level of the S&P indexand global stocks almost by nature dictate a pause as we approachexpensive levels for stocks, particularly in the context of lower globalgrowth and weaker earnings. For stocks to continue rising, we would needto see a big improvement in economic growth and a major new source ofmonetary easing beyond the expected rate cut from the European Central Bank.In Q1, the world money printing machine became Japan, so now the race is onfor economic conditions to improve before the monetary experiments in the UK,US and Japan fail. The UK will probably try to expand further to become the “new”impulse in Q3 – but probably not fully before the change of Bank of England governor inJuly. This leaves Q2 vulnerable to more political issues for want of new QE impulses. Mostimportantly of all, Q2 comes right before the German general election. This means ChancellorAngela Merkel will need to expend great energy in explaining her country’s role in Europe tovoters. I do not envy her this task, especially as the crisis radar has already zeroed in on Sloveniaas a potential new bailout candidate in the second quarter.Q2 InsightsHome
  • We are looking at a mandate for change. This would best be achieved via a proactive recognition of theneed to reform, but change, most likely, will be triggered by another failure, such not keeping Cyprusor Greece in the Eurozone. However, we also need to learn that failing is a part of life and signalsnew beginnings. The Kingdom of Spain has been bankrupt 14 times in history and if we look atour own lives, it tells us that we are at our most rationale and logical when we have our backsup against the wall.And therein lies my optimism. As I like to say at the start of my speeches: “I’m the mostoptimistic I have been in 25 years, only because things cannot get any worse.”The free-riding spree for politicians is over. They now need to do something theyhave never excelled at: face facts and devise real solutions. As they are unlikely torise to the task, the micro economy will do it for them instead.Q2 InsightsHomedownload saxo bank’s mobile app hereYou can follow the effects of these macro events onthe financial markets by creating a personalized viewon Saxo Bank’s mobile app. go to Steen’sblog here
  • AnotherpositiveyearEquity InsightsHomeThe US remains our top pick among allthe developed equity markets simplybecause it has been by far the best innavigating the financial Peter Garnry, Head of Equity StrategyPhoto:SongquanDeng/
  • factors, global equities would have to rise an additional 12percent before reaching their average valuation. Given thatunderlying earnings and cash flows grow in nominal figuresin an expanding global economy, the equity return potentialis naturally much higher than 12 percent when you take theprogressoftimeintoaccount.Iftheglobaleconomyacceleratesto 3.8 percent real growth in 2014 – as our macro forecastcurrently suggests – then valuation could overshoot, takingvaluations above their average some time during 2014.The important price-to-cash-flow ratio is currently reading 8.8compared with 16.6 at the height of 2007. While equity priceshave more than doubled since the bottom in March 2009,this indicates that cash flows have ballooned during the pastfive years and highlights the corporate sector’s magnificentexercise in shoring up operations. Also adding support froma valuation point of view is the current dividend yield readingof 2.6 percent compared with 10-year government bond yieldsranging from 0.5 percent in Japan to 2.2 percent in Belgiumamong the safe-harbour countries.With the current data on hand, we are confident that globalequities will be higher over the next 12 months. While theItalian election and the rescue of Cyprus received massiveheadline attention, the market’s reaction has not significantlyaltered our confidence in global equities and we forecast thatthey will continue to rise. However, the second quarter mightbe less rosy relative to the first quarter as equity investors willhave to see whether the discounted improvement in economicdata materialises. But it is worth noting that global equitieshave seen positive returns in 66 percent of the quarters since1970; it can be costly to bet against the drift in equities.Equities opened the year by surging 10.6 percent (measuredin EUR), shrugging off the mass hysteria over the fiscal cliffand Italian elections, which were highlighted as the twomain events that could derail stock markets. While thesecond quarter might not be as good as the first, we expect2013 to be a good year for global equities and in particular,US equities.It is hard to be a bear in equitiesGlobal equities are still mean-reverting in terms of valuationand despite the impressive rally, they are still valued minusa half standard deviation below their average valuationin the period 1996 to 2013. Based on our model’s inputEquity InsightsHome
  • “With the current data on hand,we are confident that globalequities will be higher overthe next 12 months. While theItalian election and the rescue ofCyprus received massive headlineattention, the market’s reactionhas not significantly altered ourconfidence in global equitiesand we forecast that they willcontinue to rise.”Equity InsightsHomeUS equities head towards unknown territoryThe US remains our top pick among all the developed equitymarkets. The reasons are quite simple. The US economy hasbeen by far the best in navigating the financial crisis, withgood private sector growth in employment and profitswhile deleveraging households’ balance sheets. Additionally,the public sector has cut down on spending and workers,which, combined with nominal GDP growth, has significantlyhealed the fiscal budget over the past 12 months. Recently,more economic indicators are signalling that the economy isincreasing its horsepower. Based on current economic data,managements’ earnings guidance, rolling realised volatilityand valuations, we see a high probability that US equities willcontinue to rise.On March 28, the S&P 500 hit a new all-time high, eclipsingthe previous record set on October 9, 2007, when the indexclosed at 1,565.15. This is, of course, only the price index.Measured by total return, that is, reinvesting the dividends,the index reached an all-time high in the third quarter lastyear. The past couple of years have been a rollercoaster andthe 12-month forward P/E ratio, a good gauge of valuationand confidence, has bounced back from its lows of about 11times forward earnings during the high point of the Eurozonecrisis in 2011 to about 14 times as of late March 2013. In lateFebruary, we updated our year end mid-point forecast for theS&P 500 to 1,640 based on current 12-month forward earningsof 111.65, 5 percent growth in forward earnings in 2013 andforward P/E expansion to 14 times.
  • European equities discount a better futureWhile unemployment is still climbing, signalling recessionaryeconomiesthroughoutmostoftheEurozone,Europeanequitieshave surged by about 25 percent since late May last year.Equities are forward-looking and, as such, lagging indicatorslike unemployment are irrelevant. Only the future matters andhere, European equities are voting for an improving economyin Europe despite what the mainstream media wants us tobelieve. The real-time GDP tracker €-coin rose for the seventh-consecutive month to -0.12 in March, its highest reading sinceMay 2012 and a signal of overall improving conditions despitethe worse than expected PMI figures for March. Despite aweak Eurozone economy, European equities could still havea good year with positive returns as the major indices morethan ever reflect the global economy and not so much thedomestic economy.In our previous quarterly outlook, we courageously forecastthat peripheral European equities could be this year’s winnersbased on our mean-reversion theme. Our case was built ona stabilising Eurozone that would return to positive growthin late 2013. Despite a political vacuum following the Italianelection and the rescue of Cyprus with its controversial levyon deposits above EUR 100,000, European equities have heldup and the MSCI Euro index, capturing 90 percent of the totalEurozone market capitalisation, is up 1.7 percent this year.However, a basket invested equally in Greek, Irish, Portuguese,Spanish and Italian stocks would have returned 5 percent, withItalian stocks the biggest drag on performance.The current 12-week rolling realised volatility spread betweenhigh beta stocks and low volatility stocks is at very low levels,implying calm waters. As such, we expect a modest drawdownshould equities retreat in the second quarter. If we get asetback in US equities, we expect it to be triggered by someexternal shock to confidence from the Eurozone crisis, whichstill looms as the main downside risk.Some analysts have speculated recently that US equitieshave entered a bubble phase. Based on current valuations,specifically the price-to-cash-flow ratio and James Tobin’s QRatio, which was published by the Fed, our best judgement isthat US equities are far from being in a bubble.Equity InsightsHome
  • Neither Cyprus nor the Italian election has made us change ourforecast that peripheral European equities have a good chanceof being the best performing markets this year. Progress isevident in many of these countries with Ireland coming backto the bond market, Portugal ahead of its plan for fiscalconsolidation, Spain’s labour costs declining fast and thusimproving the country’s competitiveness, and Italy reachingrecord 12-month rolling exports in January. Such facts aretestament that these countries are coming back from the abyss.Are Japanese stocks leaving the shadows?Since mid-November last year, when it became evident thatJapanese Prime Minister Shinzo Abe would win the election ona platform to end deflation, the JPY has weakened. Its declinegathered more steam when the Bank of Japan in Januarylaunched its new monetary framework for the future includinga 2 percent inflation target. Starting in mid-November, theJPY is down 18.7 percent and 19.8 percent against the USDand EUR respectively. As a result, the Nikkei stock marketindex has taken off like a rocket, gaining 43 percent since mid-November and 19.3 percent this year. The six-month gain isthe biggest on record since the fourth quarter of 1972.What does the rally spell for the future of Japanese equities?Are they finally set for a secular bull market? That might betoo premature to expect. The problem for Japan is that theweakened JPY might be good for exporters, but the countryimports a lot of energy, which will now increase in price andhit both consumers and domestic-oriented businesses. Thereis no easy cure in economics and the weak JPY will not be therosy one-way road Japan thinks it might be.The Nikkei index is furthermore valued way above the MSCIWorld on multiple metrics including earnings, cash flows anddividends. Sell-side analysts also have very bullish estimates forearnings,whichtheyprojecttogrow30percentannualisedoverthe next two years. These estimates seem a bit overstretchedgiven that our estimate for Japan’s GDP growth in 2013 is1 percent and the global economy 3 percent. With globalinflation expected to be about 3 percent in 2013, analystsmust be forecasting big currency gains or significant marketshare gains for foreign-focused Japanese companies. This istoo optimistic in our view and we expect Japanese equities toenter a more modest phase, in which Japanese investors willanalyse the weak JPY’s real impact on earnings and sales.Equity InsightsHome
  • Equity InsightsHomeHow did our tactical calls from Q1 perform?In our first quarter outlook, we took a more tactical angleproviding some strategies for January. We argued thathistorically there has been a mean-reversion effect in the firstmonth of the year, with the biggest loser in the previous yearbeing the winners in the first month and vice versa.A basket of the five-worst performers in Europe and the USrespectively would have returned 11.6 percent measured inEUR compared with 2.1 percent for the MSCI TR World Euroindex in January. The opposite basket, selling the previousyear’s winners, would have gained 2.2 percent, so here thestrategy did not work in our favour.go to peter’sblog here
  • Trading in financial instruments carries risk and may not be suitable for you. Always ensure you understand allthese risks before trading. Please read Saxo Bank’s Full Disclaimer available at for a cool-headed bank.Saxo Bank is headquartered in Denmark with offices in 25 countries.Our clients enjoy one of the world’s best online trading platformswith 30,000+ instruments to trade and deposit in 22 currencies. Weare ready to serve you in our offices in Copenhagen, Singapore,Zürich, London, Paris and 20 other cities around the world.Open a free practice account online today and experienceScandinavian-style banking first hand. Visit us at Saxobank.comglobalunpredictability?100%
  • The risk appetite sentiment will likely falter in Q2.And this perhaps is due to three reasons:seasonality, worries over the US Federal Reserveslowing the liquidity gravy train and ongoingEuropean Union woes. In terms of seasonality,the past three Q2s in a row have been quarters oftransition to sideways markets or worse afterstrong Q1 rallies in risky John J. Hardy, Head of FX StrategyFX InsightsHomeTreesstilldon’tgrowto
  • In our Q1 outlook, I highlighted that multi-year lows in FXimplied volatility and opined that this simply could notcontinue given the macro backdrop. Indeed, we did see amoderate comeback in volatility in Q1, but not the broad-based comeback I envisioned. Rather, it was one that wasmostly limited to developments for the EUR, GBP and JPY. Inthe second quarter, look for the narrow rise in volatility tobegin to broaden with additional USD strength, a wild ridefor the JPY and commodity dollar weakness being the mainthemes.The weak and the strong in Q1The EUR topped out in January, as the European Central Bank’s(ECB) balance sheet was reduced by the early repayment ofsome of the vast three-year Long-Term Refinancing Operations(LTRO). The currency then quickly transitioned to pronouncedweakness for the balance of Q1 on the anticipation and thenreality of the Italian election. And then there was Cyprus, butmore on that later. The other big downers were the JPY andGBP. “Abenomics” in Japan, ugly UK numbers and Carney-anticipation saw two turbo-charged JPY and GBP carry tradesin January and February. Complacency in asset markets wasanother key driver for these trades.Now for the strong currencies of Q1: the all-important US dollarmanaged to rally despite the Fed having fired both barrelsof its monetary shotgun in late 2012, while the improvedUS economic environment also supported the greenback.Elsewhere, we saw standout strength in AUD, NZD and SEK– even to new outright long-term highs for AUD and NZD.Their extremes of strength were a celebration of global easy“As we enter Q2 amid widespreadcomplacency, the old ‘risk appetite’meme hasn’t only been playingsecond fiddle, it’s been entirelykicked out of the orchestra.The market appears dangerouslyconvinced that central bankswill simply not allow any riskto materialise for assetmarkets, so why evenbother to worry?”FX InsightsHome
  • JPY vs risk appetite: The JPY hasn’t just been about“Abenomics”, but also the market’s embrace of a new carrytrade opportunity: it’s been easy to sell the currency whenthe central bank (BoJ) is promising the most aggressive moneyprinting.JPY vs. interest rate spreads: Japanese longer yields havecollapsed as investors anticipate that the Bank of Japan (BoJ)will purchase debt at the long end of the curve, weakeningthe JPY from an interest rate spread perspective. From here,Japanese yields can hardly go lower and complacency canhardly get more extreme, so we’ll either need to see heavylifting from the BoJ and/or higher government bond yieldsoutside Japan to provide the fundamental drivers for moreJPY weakening in the short to medium term.FX InsightsHome
  • liquidity and continued complacency. In addition, the currencywar/competitive devaluation aggravated their strength as thecentral banks in these countries proved “hawkish”, whichthese days means simply declaring neutral policy outlooks,rather than any discussion of actual rate hikes.Q2: A quarter merely of transition or outrightreversal?So as we enter Q2 amid widespread complacency, the old “riskappetite” meme hasn’t only been playing second fiddle, it’sbeen entirely kicked out of the orchestra. The market appearsdangerously convinced that central banks will simply not allowany risk to materialise for asset markets, so why even botherto worry?That sentiment will likely falter in Q2. And this perhaps is dueto three reasons: seasonality, worries over the Fed slowing theliquidity gravy train and ongoing European Union woes. Interms of seasonality, the past three Q2s in a row have beenquartersoftransitiontosidewaysmarketsorworseafterstrongQ1 rallies in risky assets. This year’s Q1 run-up has been thelargest of them all and could also run into major headwindsdue to the second of our drivers: a transition in Fed policytowards a less accommodative stance. More on that in theUS dollar section below. Meanwhile, EU worries are nothingnew and they will remain on the table through the Germanelection in September.Overall in Q2, the G10 smalls that performed so well in Q1 willlikely begin to range trade in the best of circumstances andsell-off brutally in the worst. The US dollar should continueto do well – the outlook from here is win-win. The JPY is setto be the “G10’s Loki” for some time as we may see a veryrocky path for JPY crosses as Abenomics moves from theanticipation phase to the rubber-meets-the-road phase. Theoutlook for the EUR is perhaps the least certain, but a gooddeal of pessimism is already priced in for the single currency.In the background, the systemic nature of risk on/risk offseems to have been banished, but could be ready to emergeagain now that complacency has reached such remarkableextremes. The longer the risk bubble inflates, the higher thepotential magnitude of volatility when it does return.USD: Rally to extendThe macro environment offers a win-win set-up for the USDfrom here. In the optimistic scenario, the USD rises because theUS recovery continues to take hold in coming months, furtherencouraging anticipation that the Fed will begin to unwindsome of its accommodation as early as later this year, possiblyby reducing the rate of its mortgage-backed securities and UStreasury buying, established at USD 85 billion per month lastDecember. Fed chief Ben Bernanke himself has spelled out thisscenario. Thus, the Fed would be the first super-major centralbank to begin to unwind accommodation. Other supports forthe USD on this front are the incredible comeback in energyproduction, the ongoing reduction of the current accountdeficit from this and from the reshoring of some production.A potential dark horse support for the USD would be the returnof US foreign corporate wealth if the government launches anew Homeland Investment Act profit repatriation scheme.FX InsightsHome
  • The more pessimistic scenario for the near term also supportsthe USD. In this scenario, economic recovery hopes don’t panout, perhaps due to the accumulative effects of the tax cutexpiries and fiscal austerity in the wake of the sequestrationprocess and further budget austerity in the pipeline. So evenwith no change in Fed policy, this could hit asset marketsrather hard, which would tend to support the USD from asafe-haven angle. Alternatively, even if the economy merelystumbles along and slowly improves, if asset markets don’ttake a breather, the Fed may feel forced to finally back offsome of its open-ended QE programme in recognition that itspolicy has overheated credit markets and generated dangerous“reach for yield”. Any actual or anticipated real reduction inFed easing will apply pressure on global risk appetite via thereduction in liquidity.EUR: The tension mountsThe EUR was on a wild ride in Q1. It rose sharply as the ECB’sbalance sheet shrank due to LTRO early repayments, but thenfell on the uncertainty generated by Italy’s election resultsand the Cyprus solution, which saw the Troika going afterbank depositors to help fund the bailout due to the nation’sstatus as a tax haven with an over-sized banking sector. Fromhere, the EU will have a hard time restoring confidence in thecurrency as we have the interminable wait until the Germanelections in September and the unknown path for Italy toboot. As well, France’s economic trajectory is a growing worry,while tiny Slovenia will likely need a bailout. And don’t forgetSpain, where new bank scandals could hit at any momentand the social fabric is being sorely tested with every passingmonth. The most interesting thing going into Q2 is the adventof the Cyprus bailout/bail in. Will direct “wealth confiscation”develop as a meme from here as a way to fund the restructuringof our over-indebted economies going forward, rather thanon a tide of printed money?There is the possibility that Europe could limp along untilthe German election in September. If a new full-fledged EUcrisis hasn’t broken out before that critical event, we wouldexpect a rapid move towards whatever solution for Europeawaits in the months that follow – either with an AngelaMerkel mandate or more chaotically due to the potential forsplintering German politics.JPY: The Loki of the G10Market synergies favoured a weaker JPY to an overwhelmingdegree in the first quarter as rising complacency and theaggressive Japanese government and BoJ rhetoric on JPYweakening was a match made in heaven. The brutal movein the JPY bottomed out in early March in recognition thateverything thus far had been anticipation rather than reality.Just before we go to press, the BoJ unleashed a massiveeasing programme that is three times larger than the Fed’scurrent balance sheet expansion in domestic GDP terms, easilyoutstripping market expectations. At first blush, the marketis celebrating the liquidity generated by this move. But thisreaction pattern may change soon.InQ2,themarketmaystopplayingtheJPYweakeningasaboonto risk appetite and stimulus for a new carry trade and beginto worry that the Bank of Japan’s moves risk destabilization –whether in Japanese bond markets or trade relations. At somepoint, if the risk appetite/JPY weakening trade decouples, weFX InsightsHome
  • could see sharp wild two-way oscillations in the JPY within thecontext of overall JPY weakening as the market struggles tofind a new paradigm, and particularly if other Asian powers’grumblings over the BoJ’s new policy escalate to protectionistthreats.GBP: Down but not outThe pound simply fell apart in early Q1 as the market punishedthose currencies where central banks looked the most likelyto continue to print money and delve even deeper into themonetary policy toolbox. It’s anticipated that the arrival of newBankofEngland(BoE)governorMarkCarneythissummercouldbring even more extreme monetary policy accommodation orexperimentation – possibly even the untested Nominal GDPlevel targeting.Also weighing on sterling is the fact that the UK’s huge currentaccount deficit has somehow not even moved in the rightdirection despite the tremendous sterling devaluation sincethe global financial crisis. I think much of the GBP weaknesshas also been a result of strong risk appetite and carry tradingbehaviour. Going forward, I’m looking for a range to developagainst the EUR between perhaps 0.8500 and 0.9000, and Ihave revised down my GBPUSD forecasts due to the differencesin potential central bank policy and as the UK’s twin deficitsaren’t improving.CHF: Passive aggressiveThe Swiss franc appeared to be on the cusp of joining theJPY and GBP as a carry trade funding currency early in Q1 assafe havens were out of favour and some Swiss banks beganannouncing they would charge negative interest rates ondeposits. But renewed Euro zone troubles quickly scotched theEURCHF rally, as did the Swiss National Bank’s (SNB) failure toprovide any hint that a raising of the floor was imminent. EURuncertainty from here will likely also mean CHF uncertainty.The SNB will remain determined to defend the 1.20 floor inEURCHF and if it is under pressure, we can expect a new toolkit of options for discouraging capital accumulation in Swissbanks, whether punitive negative deposit rates, or capitalcontrols or the like. In the longer term, the franc remainswoefully overvalued, but determining the timing of a potentialweakening is fraught with uncertainty – perhaps we won’tget much movement until after the German elections.Commodity dollars: AUD, CAD and NZDThe Antipodeans, AUD and NZD, have done it again this year– posted new long-term highs versus a basket of the rest ofthe G10 currencies. But this strength will fade and we will seethese currencies weakening back into the range at best andfalling steeply at worst. That is based on assumptions that theChina recovery potential is overrated, that the Reserve Bankof Australia’s (RBA) self-congratulatory stance on its successin stabilising things with its rate accommodation thus faris premature, and that risky assets can hardly be expectedto repeat their strong Q1 performance (AUD and NZD arenormally positively correlated with risk appetite).In addition, the big Australian mining stocks are on thedefensive again and a worrying drought has settled over NewFX InsightsHome
  • Zealand which could threaten its milk exports. Besides, bothcountries’ central banks will push back very hard if marketcircumstances push their currencies stronger from here.CAD underperformed as the Bank of Canada (BoC) was forcedto recognise that Canadian fundamentals have weakenedsharply lately and as it backed off previously more hawkishrhetoric. The long bout near and below parity for USDCAD hashollowed out the Canadian economy. And because the BoC haslong been forced to keep an inappropriately accommodativestance to avoid an even stronger currency, a credit and housingbubble of scary proportions has inflated.A long and ugly post-bubble environment awaits Canada, aprocess that may finally be underway. This will see its currencyweaker.SEK and NOK: SEK overachievingFor SEK, the Riksbank is caught between the rock of a domesticcreditbubbleandthehardplaceofSEKstrengthfromlessdovishposturing in Q1. The latter must give and SEK will be summarilyknocked off its pedestal sometime in the next quarter ortwo. The SEK is NOT a safe haven, not when the currency isn’tparticularly liquid and the country faces a long hangover froma housing and credit bubble that may finally be cresting.The NOK is the currency to prefer of the two – also with adomestic credit bubble, but perhaps less dependent on externalfactors than Sweden. One important risk for NOK, however,is in energy markets if they continue to correct lower shouldglobal demand prove less robust from here.AUD is at it again. The above chart shows AUD indexed versusan evenly weighted basket of the rest of the G10 currencies.Since 2010, the AUD has been making peak after peak, but therallies always seem to slip. Look for a repeat of this behaviourthis time around – as well as the risk of a more significant sell-off if the expectations of Fed perma-easing supporting globalliquidity suffer a paradigm shift.FX InsightsHome
  • Trading themes in Q1 2013The ideas below are likely to do well if the general scenariooutlined above proves correct, and poorly if not – save perhapsfor the long USDJPY idea.Long USD versus a basket of AUD, CHF and SEK: The USDwill remain on the mend, the AUD will range trade at best,the Riksbank will be forced into the competitive devaluationgame, and CHF may either do nothing or weaken if globalcomplacency continues.LongGBP,NOKandEURagainstAUDandNZD:Acontrariancall – sticking our necks out here – but the motivation for thisis quite simply that the status quo of Q1 will not continue.Short CHFJPY: This is a short-term idea aimed at the 92.50-95.00 zone in CHFJPY on the possibility that the effects ofAbenomics are over-anticipated for the next quarter or so.Long USDJPY on dips: With a double underline under“on dips”. We’re likely to see wild swings in JPY crosses in thecoming months, USDJPY will likely be a lower beta trade thanother crosses and could present more attractive levels to getinvolved as the market tries to sort through the implicationsof what the BoJ has unleashed.Chart of forecastsDiscover more about FXFX InsightsHomeCurrency Pair 3 months 6 months 12 monthsEURUSD 1.23 1.18 1.12USDJPY 95 100 105EURJPY 117 118 118GBPUSD 1.48 1.46 1.40EURGBP 0.83 0.81 0.80EURCHF 1.22 1.25 1.30USDCHF 1.00 1.06 1.16AUDUSD 0.98 0.92 0.80USDCAD 1.05 1.10 1.16NZDUSD 0.77 0.72 0.64EURSEK 8.60 8.80 9.00EURNOK 7.40 7.50 7.60Saxo Bank has been the leader in the FX markets for the last 25years. The wide range of FX crosses allows you to execute a broadrange of strategies no matter where the markets move. go to john’sblog here
  • Trading in financial instruments carries risk and may not besuitable for you. Always ensure you understand all these risksbefore trading.TEAM SAXO-TINKOFF.We are proud to be sponsoring the cycling TeamSaxo-Tinkoff. Besides being one of the mostpopular sports in the world, cycling shares thesame values as the ones we stand for as a globalcompany: a winning mentality, teamwork,endurance and passion.Image ©TDWsport.comYou might share a tradingidea but not your liquidity.If you’re trading on shared liquidity, trading during peak hoursor moments of high volatility can result in frequent orderrejections. Saxo Bank understands all the variables in play fora successful trade, which is why we provide all our clients €25mdedicated liquidity for EURUSD trades. Put your risk in themarket not in your price.Open an account and start trading today on saxobank.comdedicatedliquidity foreveryeurusdtrade.€25m
  • The low-growthenvironment continuesin developed economiesand is not expected to bemuch stronger this year asseveral economies engage in fiscalconsolidation, notably in peripheralEuro area economies, but also in the Mads Koefoed, Head of Macro StrategyGlobal economic conditions continued to improve towards the end of lastyear and into the first few months of 2013. This was fuelled by robust activityin emerging markets and the US, which has shown remarkable resilience in theface of the looming sequestration. But while data continues to signal robust activityglobally, suggesting that slower growth is not in the cards, the evidence for a significantstrengthening of global demand also looks weak. We forecast a mild uptick in growth thisyear, rising to 3.4 percent from 3.2 percent last year.ModestuptickingrowthMacro InsightsHome
  • Developed economies battling fiscal consolidationThe low-growth environment continues in developedeconomies, which recorded growth of just 1.3 percent lastyear as the Eurozone fell back into recession. Growth is notexpected to be much stronger this year as several economiesengage in fiscal consolidation, notably in peripheral Euro areaeconomies, but also in the US. In fact, a comparison betweenthe major Eurozone economies, the UK and the US reveals thatthe latter ranked third behind Spain and Italy when it came toreducing public sector spending last year. Meanwhile, the UK,France and Germany all saw increased public consumption – inthat order.Public spending declined 1.8 percent in the US in 2012 andfurther retrenchment will take place this year due tosequestration. Nevertheless, we expect moderate growth tocontinue in 2013 to the tune of 2 percent, from 2.1 percent lastyear, before accelerating to 3 percent in 2014. Although theremoval of the payroll tax cut eats into private consumption,continued improvements in the labour market, which saw anaverage of 183,000 payrolls added per month last year, willaid private consumption. The position of US households is alsohelped by the improving housing market. Rising prices arelifting homeowners out of negative equity (1.8 million in 2012alone), helping to repair the battered private sector balancesheet. Add to this the activity in the housing sector, which onits own will add to GDP through residential investment. Lastyear’s contribution of 0.3 percentage points is expected to betopped in 2013.Macro InsightsHome
  • The US economy may not be exactly stellar, but at leastmoderate growth is on tap. The outlook is decidedly moredownbeat across the Atlantic, where the Eurozone must resignitself to the fact that the recession is destined to continue. Weexpecteconomicactivitytodecline0.3percentin2013afterlastyear’s drop of 0.5 percent, while the unemployment rate willrise throughout the year and average more than 12 percent.The resulting slack in the economy will keep inflation subdued.The economies of Italy and Spain will remain weak, but it is theFrench economy that concerns us most, particularly becauseof the French government’s failure to implement reforms. Thelabour market is too restrictive because of the co-existence ofpermanent and time-restricted employment. This threatensFrance’s competitiveness and has sent youth unemploymentthrough the roof with more than a one fourth now jobless.The lack of remedial action risks entrapping the Euro area’ssecond-largest economy into a low-growth environment forseveral years to come.Emerging economies pick up speedGrowth in emerging markets has remained robust due toresponsive policies, both fiscal and monetary, and the loss ofpace last year was mainly due to lower demand for producefrom developed economies. In particular, Eurozone importswere curtailed by fiscal consolidation, down 0.9 percent,while US import growth slowed to 2.4 percent. Althoughfiscal consolidation continues to affect private consumptionand imports, it is expected to lessen, which will aid growthin emerging markets. However, we keep growth expectationsbelow 2010-2011 levels as domestic growth policies this yearare expected to be less supportive across the spectrum ofdeveloping economies.The improved outlook for global trade will help China’seconomy return to growth above 8 percent this year. Lendinggrowth remains rapid at 15 percent and financing remainsrelatively loose, ensuring that domestic demand will supportthe economy over the coming quarters. In addition, the ratherprudent fiscal balance suggests that more can be done in termsof public spending to stimulate growth if deemed necessary bythe government. Looking further ahead, things look less rosy,however, and the transition from an export- and investment-led economy to one driven by private consumption is boundto be bumpy and will see annual growth rates decline steadily.Macro InsightsHome“The US economy may not beexactly stellar, but at leastmoderate growth is on tap.The outlook is decidedly moredownbeat across the Atlantic,where the Eurozone must resignitself to the fact that the recessionis destined to continue.”
  • Macro InsightsHome2012 2013 2014World 2.9 3.0 3.8Central bank policies have reduced tail risksand increased confidence. Stronger thanexpected global trade.Higher energy prices. Credit risks fromcontagion reappeared in Italy and Spain.Developing andemerging economies5.1 5.3 6.0A faster rebound in the Eurozone will boostexports to the region. Domestic demandremains strong.Competitive currency devaluations to causetrade disruptions. Renewed tension in theEurozone to curtail exports to the region.Policies likely to be less accommodative.United States 2.1 2.0 3.0Housing recovery, job growth to spurdemand. Higher house prices to help repairbalance sheets.Lingering uncertainty about fiscal policyto harm both spending and investment.Sequestration to cut into publicsector spending.Euro area -0.5 -0.3 0.7Softening of consolidation in Italy to aidprivate sector spending. Reforms take effectearlier than expected in Spain. StrongerGerman private consumption.Failure to reduce uncertainty surroundingCyprus and Italy to weigh on businesssentiment. Weaker French privateconsumption.United Kingdom 0.3 0.5 1.0Government and central bank policiesremain supportive, including support forhousing.Further cuts to the budget as targetsare missed.China 7.8 8.2 7.5Domestic demand to remain strong. Lendinggrowth, money supply growth supportivefor economy.Aggressive measures to curtail speculationto harm growth. Overly hawkish centralbank.Japan 2.0 1.0 1.0 Weak currency to boost exporters.Weak currency to weigh on localbusinesses needing foreign input goods.Higher (imported) energy prices tocurtail consumption.GDP Upside DownsideNotes: GDP (gross domestic product) is real, inflation-adjusted, year-on-year changes in percent. 2012 is actual, while 2013 and 2014 are forecasts.
  • the need arise. So, too, is the step of lowering the depositrate below zero, but that would land the ECB in even moreunconventional waters. Hence, our base scenario is for the ECBto keep rates unchanged as the Eurozone muddles througheconomic growth kicks in later this year. But should the refirate be lowered from 75 basis points (bp), we would look fora narrowing of the rate corridor (from plus/minus 75bp) ratherthan a lowering of the deposit rate into negative territory.Accommodative central bank policiesas far as the eye can seeLast year was a busy year for central banks, with the US FederalReserve introducing round three of its quantitative easingprogramme, the European Central Bank (ECB) doing “whateverit takes” in announcing the Outright Monetary Transactions(OMT) programme, while Japan laid the groundwork for“Abenomics”. This year will see supportive policies continue.In spite of moderate growth in the US, the target for theunemployment rate of 6.5 percent is not likely to be reachedfor several quarters, while core inflation will remain subdueddue to excess capacity, meaning that QE3 will continue thisyear and well into 2014, though the amount could be reducedlate this year or in 2014.The announcement of the ECB’s OMT programme hassucceeded in alleviating the imbalances in the monetarytransmission mechanism as is indicated by yield spreads toItaly and Spain. This has allowed the ECB to shrink its balancesheet because repayments of loans from the two LTRO’s(long-term refinancing operations) began earlier this year.However, turmoil is not far away as the Cypriot rescue missionand Italian elections prove. Cuts to both the ECB’s refinancing(refi) rate and a new round of LTRO are possible tools shouldMacro InsightsHomego to mads’blog here
  • Tail-end risksleaving littleroomtotheupsideThe exuberance of the New Year mayhave abated, with gold suffering itsfirst back-to-back quarter lossessince 2001, but commodities ingeneral could rise slightly in thesecond Ole S. Hansen, Head of Commodity StrategyElevated global growth expectations at the beginning of 2013resultedinastrongstarttotheyearinwhatwasalmostarepeatof what happened the previous two years. Investors jumpedonboard and in January helped to carry forward key growthdependent commodities such as oil and industrial metals. Onekey driver that has been absent is the geopolitical worries,which, in previous years, drove oil prices to unsustainablelevels before triggering major corrections during the secondquarters of both 2011 and 2012.As we enter the second quarter, some of the exuberance hasevaporated, with moderate growth in the United States andJapan and, to a certain extent, China being neutralised byanother round of European debt worries that kicked off withthe Italian election in February and the near collapse of theCyprus economy in late March. Going forward, the political riskand uncertainty related to both Spain and Italy will continueto create headlines and, at times, create bouts of risk adversity.Despite these concerns, one of the interesting features of theCommodity InsightsHome
  • first quarter was seeing the decade-long love affair betweeninvestors and precious metals begin to break down. ImprovedUS economic data raised speculation about an earlier-than-expected cessation of quantitative easing and with relativeweak physical demand, nominal bond yields became lessnegative and gold suffered, resulting in the first back-to-backquarter of losses since March 2001.We see a relative small chance of higher commodity pricesgoing into the second quarter, with tail-end risks, such as Euroarea problems, a potential sell-off/correction in stocks andthe near-term outlook for global growth, not being strongenough to alter the supply and demand situation. This willresult in energy sector looking balanced after being the onlysector showing positive performance in Q1 primarily due toa strong rise in Natural gas. Industrial metals are up againstoversupply, for example copper, in which increased productionin response to higher prices in recent years has seen moresupply becoming available.Agriculture markets are looking forward to a potentialbumper harvest this summer across the Northern Hemisphere.Combined with increased production in South America, thisshould help to rebuild depleted global stocks of key cropssuch as corn, soybeans and wheat. Any repeat of last year’sdrought can, of course, not be ruled out and it could trigger amajor rally in new crop prices. This is especially so for corn andsoybeans, where new crop prices are trading at a considerabledouble-digit discount to current old crop prices.Commodity InsightsHome“Continued focus on US economic data probably holds thenear-term key and any softness as seen recently could providegold with the catalyst that has been missed for months.”
  • Below, we have highlighted some of the general key driversthat commodity investors should be aware off going forward.Further down, we take a more detailed look at the energyand metal markets.Oil markets range bound with risk to the downsideBrent crude oil began the year copying its performance fromthe previous two years. The raised growth expectationstriggered a rally that lasted until mid-February before worriesthat the price had run ahead of fundamentals triggered areturn to the lower end of its established range between 105USD/barrel and 118 USD/barrel. The mid-price of this range co-incidentally corresponds with the average price seen over thepast two years.Commodity InsightsHomeThe spot market tightness in Brent crude oil and the oversupplyof WTI Crude oil has begun to ease, resulting in the spreadbetween these two important benchmarks contractingtowards 12 USD/ barrel. Increased North Sea production andthe high level of refinery maintenance combined with theEuro area recession and political crisis have seen the spreadbetween prompt and deferred futures prices contract.Meanwhile in the US, increased capability to transport oil fromthe mid-west to Gulf coast refineries has started to alleviatethe bottleneck issues that has seen WTI Crude oil disconnectfrom global prices over the past couple of years. The cost oftransporting oil away from the producing areas by pipeline,rail and river comes at a price, which, for now, should limitfurther contraction of the spread below 10 USD/barrel.Upside risks Downside risksGeopolitical events/worries Euro area debt crisis escalatingStrikes/labour disputes inkey production areasLack of credit for commodity transactionsExcessive global liquidity from QE Major stock market correctionAdverse weather in keygrowing regionsChina’s growth continues to slowWeaker dollarProduction has caught up with demand,resulting in inventory buildsRising marginal production costs Excessive speculative positioningCommodities
  • We believe that global oil markets are currently well supplied,but only because OPEC continues to produce at a rate aboveits stated target. US production continues to impress andgrow, while Venezuela, following the death of PresidentHugo Chavez, could again potentially become a key supplierto the global market provided it opens up for foreign-directinvestments, something that is currently not expected tohappen anytime soon. We expect Brent crude to continuebeing mostly range bound during the second quarter; withthe 105 USD/barrel to 115 USD/barrel range seeing most ofthe activity. The greatest risk, however, will be skewed to thedownside because of the ongoing concerns related to Europe.Precious metals missing a catalyst after tough quarterThe slide in gold prices, which began last October, continuedduring the first quarter before support once again wasestablished ahead of crucial support at 1,530 USD/oz. Silverperformed even worse with the cost of one ounce of goldrising to 57 ounces of silver, the highest since last August andtaking it close to its five-year average at 57.75. The industrialcredentials that goes with silver helped to attract additionalbuying, especially through Exchange Traded Products (ETPs),but as industrial metals went into reverse during March, asgrowth prospects faltered, so did silver.Commodity InsightsHomeUpside risks Downside risksOil producers need high prices to financerising government spendingDeteriorating investor sentiment causingadditional speculative long liquidationGeopolitical tensions from Syria andespecially Iran with nuclear issueunresolvedNon-OPEC supply growth continuingto surpriseNew production techniques such asshale oil and deep-water leads to higherproduction costSurging US shale productionreducing importsOPEC production remains elevated,leaving little room fordisappointment elsewhereFaltering Asian demand fromChina, South Korea and Japancausing destockingQE resulting in stronger-than-expectedGDP and demandEuropean economy deteriorating at atime of improve North Sea suppliesHigh level of refinery maintenanceEnergy
  • Gold investors who use ETPs to gain unleveraged exposureto precious metals have been net sellers all year, resulting inthe weakest quarter on record for gold ETP flows. During thequarter, some 181 tonnes were pulled compared with positiveflows of 87 and 138 tonnes during the previous two quarters(Bloomberg).This reduction, as seen below, has nevertheless only broughtholdings down to levels seen last August. It also shows somecontinued resilience among these investors, many of whomstill see gold as a natural inclusion in a balanced portfolio.Its use as a hedge against global tail-end risks created byexcessive money printing by central banks in recent years,adds to gold’s appeal.We see gold trapped within a 270 dollar range and believethat support from the physical market and central bankbuying should be enough to arrest any attempts on keysupport at 1,530 USD/oz. If this level is broken, it could signala much deeper correction than the one already witnessed.The current US economic expansion is running at a pacethat at this stage does not warrant any early exit from assetpurchases, something we believe the market has not yet fullytaken into account. The lack of strong political managementof the Eurozone debt crisis raises the risk of contagion, whichalso could provide renewed support.However, continued focus on US economic data probablyholds the near-term key and any softness, as seen recently,could provide gold with the catalyst that has been missing forCommodity InsightsHomeUpside risks Downside risksEuro area debt crisis escalates once againNominal bond yields becomingless negativeUS growth hits a soft patch –extended QESubdued inflation outlookStrong central bank buying Rising growth expectationsHedge Funds positioning halvedcompared with three-year average –room to punchContinued long liquidation fromExchange-Traded ProductsGeopolitical eventA stock market correction triggeringcross-asset reduction of riskPrecious Metals
  • months. Speculative positioning held by hedge funds in bothgold and silver are near the lowest levels since 2006 and anysigns of renewed life in the sector will leave many professionalinvestors underexposed, which should help both metals andsilver in particular to perform. We lower our average pricetarget for 2013 from 1,740 USD/oz to 1,640 USD/oz on the backof the weak price action during Q1. We see continued range-bound trading during the coming quarter at about 1650. Asmentioned before, we are acutely aware of the potentialdownside risk that gold poses because it has become anemotional trade for many investors. Further price weaknessbelow 1,500 USD/oz will increasingly make this a pain trade asit erodes confidence among many weak longs.Copper up against increased productionand rising inventoriesThe industrial metals sector is one of the worst performingsectors so far this year. The growth story, which has helped todrive global stocks higher in recent months, has so far failedto lend any support to industrial metals, with the negativeperformance being driven by lead, zinc and aluminium.Thisdislocationbetweenstocksandindustrialmetals,however,isnotanewoccurrence,withbothmetalandminingcompaniesand underlying commodities having been dislocated fromequity markets for more than a year now.Commodity InsightsHome
  • Record-high prices before the financial crisis triggered majorincentives for mining companies to increase production. Theresult of these investments is now beginning to translateinto bigger supply at a time when China, the world’s biggestconsumer of industrial metals, has seen growth slow to thelowest level in more than a decade. In recent months andgoing forward, its focus has been – and will be – dividedbetween the need for growth, but at the same time having tofight inflation, which has been picking up. Slowing demandfrom China has led to increased inventories in London MetalExchange and Shanghai Futures Exchange warehouses (seecopper example below) and this supply overhang is likely tokeep a lid on prices over the coming quarters.One of the best correlations out there considering thedislocation between stocks and metal prices is currently theone versus Chinese PMI. It shows the continued dependencyof demand growth in China, something that has proveddifficult to come by in recent months but which shouldbegin to improve given the recent signs of a pick-up in PMI.Worries about elevated inventories and the implementationof measures to contain house price inflation could, however,cause a near-term drag. We see a potential repeat of 2012with some second-quarter weakness testing the lows from lastyear, but that should probably be it before a recovery beginsafter the summer – not least helped by signs of a continuedimprovement in key economic indicators such as PMI.Copper Deliverable Stocks(Metric tonnes)LME Shanghai0150000300000450000600000750000900000 20003500500065008000950011000Apr-09Oct-09Apr-08Oct-08Apr-10Oct-10Apr-11Oct-11Apr-12Oct-12Copper, Inverse, RHSSource: Bloomberg and Saxo BankCommodity InsightsHomego to ole’sblog here
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