Miners lead the FTSE lower as last week’s fall in LME base metals and gold prices prompts equity sales.
• LME Base metals prices appear to have stabilised but this may be a brief lull before base metals prices stage lower again.
• Investors now appear to be looking for some further economic slowdown led by European austerity, its impact on consumer confidence and on Chinese exports. Add to this some measures to cool the Chinese property market and demand for metals and products may decline.
• The European banking crisis rumbles on with some 300 European banks applying for Eur243bn of ‘emergency’ short term funding. We do not know which banks have applied for this. The implication is that we are seeing a re-run of the banking system freeze which we saw two years ago in the US and UK where banks refuse to lend cash around the system. This time the crisis appears to be over exposure to sovereign debt issues.
• Earnings expectations for miners should remain relatively firm for now but if investors are looking six-months ahead then lower base metals prices may lead some forecasts lower, more on provisional pricing issues than on markedly lower revenue expectations.
Gold – Expect gold prices to rally as European banking crisis looks like a re-run of last banking crisis
• This time the banking crisis is led by sovereign debt issues.
• ECB lending of emergency Eur243bn of short term funding will rattle investors and cause the Euro to fall further.
• Demand for gold has appeared consistently firm from investors, jewellery manufacturers are likely to buy fresh stocks on sharp price dips to lend further support to the market.
• Further allocation of assets into gold may raise ETF demand.
• Demand can be seasonally weak in July but market uncertainty may well lift prices for an early run into the Autumn gold buying festivals.
FT – Lex column again – reports:
• “Bankers may be greedy, self-serving egomaniacs, but at least they are consistently greedy, self-serving and egotistical.”
• Thanks for that - am not sure which bankers Lex is referring to but we do generally agree with the comment.
• Bankers do what bankers do and its amazing if regulators think anything else.
US – Monthly employment data was released on Friday afternoon. Markets are closed today for the July 4th holiday. Summary of the data:
• Non farm payrolls declined by 125,000 in June and the unemployment rate edged down to 9.5% from 9.7% (NB Non farm payroll numbers will be slightly distorted this year as a reduction in federal census workers is implemented. As a result more emphasis should be placed on the Private Payrolls data that showed 83,000 were added to the work force from 41,000 in May)
• Manufacturing payrolls increased by 9,000 the smallest gain this year. This number is not surprising given that a report on Thursday July 1st indicated manufacturing expanded at the slowest pace this year with orders and exports decelerating in June
• Construction companies cut payrolls by 22,000 after a previous reduction of 30,000 in May.
• The number of temporary works increased by 20,500
• Average hourly earnings fell from 2 cent – or 0.1% to $22.53. Over the past 12 months, average hourly earnings have increased by 1.7%
• Factory orders fell 1.4%
• The slower pace of hiring implies recovery will take longer than previously expected with close to 8 million jobs having been lost during the recession.
Europe – The euro declined from near its strongest level in six weeks against the dollar on speculation the region’s central bank will keep interest rates at a record low.
• The results of European bank stress tests will be published "around July 23" and will show the banking sector is "solid and healthy” France’s finance minister Christine Lagarde is reported to have said over the weekend.
• Data released at the end of last week showed the unemployment rate fell slight in June to 8.7% from 8.9%.The number was slightly unexpected considering the ongoing uncertainty surrounding sovereign debt. (Germany was the main driver where numbers were boosted by short term work schemes, where companies are paid to retain workers by the authorities through the downturn rather than making them redundant. As a result companies are encouraged to use the supply of idle workers they have on their books rather than hiring new ones)
• In contrast unemployment is still on the rise in Spain
European commission rejects proposed ban on use of cyanide in extractive industries
UK – Construction PMI decreased by 0.1% in June.
Germany - Is experiencing a rise in orders for exports in machinery, cars and chemicals that is prompting companies to hire new staff. Output levels are almost back to the level they were before the crisis in the banking sector in 2008
China - China’s second biggest steelmaker, Baosteel said demand from automakers is declining as the market weakens. Passenger-car purchases rose 10.9% from a year earlier down from May’s 25% gain.
• A US geologist has been sentenced to 8 years in jail for apparently trying to buy data on the Chinese oil industry. He has been in Chinese custody for 3 years. This news will not help Chinese, American that have been strained of late on an economic level as President Obama accused the Chinese government of hindering global economic recovery through their currency peg actions.
Japan – Stocks rise boosted by consumer lenders as rumours circulated that restrictions on lending implemented by local authorities are to be lifter. The Nikkei 225 dropped 5.5% last week on the back of poor manufacturing growth in the US.
Currency: Euro falls in early trading from its strongest position in 6 weeks against the dollar on the speculation that the ECB will maintain interest rates at their record low when it meets on July the 8th. The Euro weakened against 14 of its 16 most actively traded peers as worries remained that austerity measures will hamper growth in the Euro Zone. The Euro has lost 12% against the dollar this year on the back of the ongoing sovereign debt crisis
Gold US$1,212/oz vs US$1,209/oz – Advances after 2 weeks of declines as attention refocuses on the fragility of the market. A lack of economic data releases this week will give investors the opportunity to refocus their worries on the health of the markets.
• A drop in the dollar is also leading to an increase in bargain hunters flocking to the yellow metal.
• SPDR gold holdings are down to 1,318.22t (42.404moz) Current value $50,9278bn.
Platinum US$1,507/oz vs US$1,513/oz yesterday
Silver US$17.88/oz vs US$18.00/oz yesterday
Rhodium US$ 2,475/oz vs US$2500/oz yesterday
Palladium US$429./oz vs US$437/oz yesterday
Copper US$6,516/t vs US$6,505t yesterday – Slight rise this morning after the US data released on Friday suggests that the economic slowdown is just that and not a double dip. Supplies remain tight in Asia and stock pile levels have fallen recently.
• A rise in export demand has been reported in China as importers are bringing forward orders in an attempt to lock down prices on the back of expectations of a stronger yuan later in the year.
• Prices will remain volatile as the outlook for the global economy remains uncertain.
Aluminium US$1,938/t vs US$ 1,954/t yesterday - Brazil increased smelting aluminum by 1.4% in May compared to the same period in 2009 to 130.9 thousand tons.
• Global stocks are healthy! Warehouses monitored by the LME hold 4.4m tones, 4 times the average amount for the last decade. Prices could experience a significant downward move if the economic growth concerns come to fruition coupled with rising stock piles.
Nickel US$19,233/t vs US$19,418/t yesterday - Brazilian mining giant Vale says it has struck a deal with unions at the
company's nickel and copper operations in Sudbury and Port Colborne, Ontario Canada. The strike has been ongoing since
August 2009. The Sudbury and Port Colborne operations produce near to 10% of the world’s nickel.
Zinc US$1,837/t vs US$1,809/t yesterday
Tin US$17,485/t vs US$17,300/t yesterday
Oil US$72.18bbl vs US$72.67bbl Friday – prices for crude oil rose in early trading for the first time in 6 days as investors bet the recent drop had made the commodity cheap. Concerns about economic growth were temporarily put on hold as investors digested the pros and cons of buying on the perceived cheap.
• BP is seeking a strategic investor to protect it from becoming the target of takeover speculation the Sunday Times reported.
Gas US$4.752/MBTU vs US$ 4.835/MBTU yesterday –
Coal – China may cut overseas purchases after the discount in shipments from South Africa compared to domestic supplies narrowed 47% in a year. Demand for coal fuelled power is declining and the government has implemented a number of price caps on local mines, keeping prices competitive and maintaining inflationary expectations. All this suggests that the Chinese government have been more successful than expected at cooling down the economy.
• Falling import demand is likely to hurt producers in South Africa, Colombia and North America. Colombia and South Africa supplied a combined 3.8 million metric tons of coal to China in the first five months of the year
Iron Ore – Over the counter swaps finished the week down further as interest for 2011 looked poor.
• China: Production increased by 27% in April, bringing the four months total up 25% to 213.9m tonnes.
China accounted for 46% of all global production in the same period.
China has reportedly been encouraging its state owned mills to increase use of scrap to help reduce Carbon emissions from furnaces. This task might not be so easy however if the US and European economies start to recover and demand outside of China rises to competitive levels. Scrap steel imports may fall to about 6 million tons this year from 14 million in 2009 because of higher international prices.
US crude steel production rose 79% in April and by 67% in the year to date, bringing the year to date total to 26.4 million tonnes.
Stainless steel – Huifu Stainless Steel Co. Ltd and Jinhai Stainless Steel Co. Ltd are to invest $25m in a new cold-rolled stainless steel sheet production facility.
• The new facility will produce some 140-150,000tpa
• The region of Wuzhou plans to attract investment to raise stainless steel production capacity to around 500,000tpa according to Interfax China news.
• MEPS reckon that global stainless steel production could reach 28.5mt this year.
Australia – stock sales relating to the end of the Australian tax year are pulling back some stocks.
• Weak volumes as buyers stand back are accentuating the fall
• Buyers are concerned by recent market volatility and the pullback in gold and base metals prices.
• Equity markets are generally volatile .
• Australia’s ‘Mineral Resources Rent Tax’ is seen as a better for the industry in general.
Ampella Mining+ (ASX:AMX) - End of Aussie tax year prompts some stock sales.
• Australian tax year end prompts some selling of Ampella stock
• Recent drilling at Kouglaga confirmed further mineralisation in a broad zone.
• We expect ongoing drill results to encourage investment.
• Fund raising: We expect Ampella to come to the market towards the year end for new cash. Existing investors are likely to get preference in the issue which we would expect to be oversubscribed. The last Ampella issue of new stock was around five times oversubscribed on day one of the issue.
+ Some members of Fairfax staff hold shares in Ampella Mining
Mining last week:
Medusa Mining* (LSE:MML) – Market weakness presents opportunity
Ampella+ (ASX:AMX) – Substantial increase to Konkera resource likely
Bellzone (LSE:BZM) – Update on binding MOU with CIF
Shanta Gold* (LSE:SHG) – Press speculation that African Barrick is taking a look
Mariana Resources (LSE:MARL) – Exploration JV signed with Cliffs Natural Resources
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