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MARKET HIGHLIGHTS COMMODITY WRAP
September 13, 2012
Crude finished flat, geopolitical risk supports prices
Gold steady, German ESM ruling mostly priced in
Metals down slightly, may rally on positive FOMC
Newc down, iron ore slips
– Markets rallied after the GermanConstitutional Court rejected complaints against the ESM bail-out fund and fiscal pact. The Court allowed the ratification of the ESM by the German parliament on 29 June to pass, butwith a couple of conditions. Euro zone officials quickly set astart date of 8 October for the ESM. The EuropeanCommission also presented proposals for euro-zone bankingunion. Equities ground higher and core European and US bondyields rose. The key event for offshore markets tonight is theFOMC meeting. We think the majority of voting members willwant to initiate a new Large Scale Asset Program (e.g. QE3).Asset buying is likely to be open-ended with sizeable monthlyflow (USD50-100bn), based on previous QE experience. TheFOMC is restricted to buying agency debt and US Treasuries.We expect the purchases will be tilted towards mortgage-backed securities but there might be some additional longer-duration US Treasury purchases as well.
OVERNIGHT RANKED PRICE MOVES (%)
(0.1)0.10.20.40.62.6(0.2)(0.2)(0.2)(2.1)(1.0)(0.6)(0.3)(0.2)(3.0) (2.0) (1.0) 0.0 1.0 2.0 3.0Iron oreNickelSilverCoal (NEWC)ZincUSD (DXY)WTI OilBaltic FreightLeadGoldCopperS&P 500AluminiumTinPlatinum(0.0
Note: Coal (NEWC) refers to front month futuresSources: Bloomberg, ANZ Commodity Strategy
Crude benchmarks ended the session flat after earlygains
. US crude touched its highest since August 23, whileBrent rose as high as USD116.67/bbl after the favourableGerman ruling. Mounting geopolitical risk also supportedprices after the US ambassador to Libya and other embassystaff were killed in an attack. However, prices retreatedtowards the end of the US session, on a mixture of profit-taking and in response to an unexpected build in weekly crudeoil inventories. EIA data showed weekly crude stocks rose1.994mbbls, compared to expectations for a 2.9mbbls draw,while refinery operating rates were down 1.4% to 84.7%, thelowest level since April. According to the IEA, global oildemand will remain depressed for the next 18 months, whilesupply remains at comfortable levels.
Gold rose to USD1,732.08/oz early Thursday fromUSD1,731.14 this time yesterday
. Prices surgedimmediately after Germany’s blessing of the ESM toUSD1,746.20, a six-month high. The German decision wasmostly prices in and the relatively low-key response was to beexpected. The more important risk event is the FOMC. Likethe German ruling, the market has priced in considerableexpectations of policy action, but should our scenario provecorrect, we would expect gold to rally back up to Wednesday’shighs and probably beyond. We also think that such a rallywould have greater longevity than yesterday’s, with an upsidetarget of USD1,768. Silver fell 23 cents to USD33.25/oz.
Base metals fell by 0.2% on average early on Thursday
,after failing to hold onto gains in the wake of the Germancourt ruling. Copper fell USD21 to USD8,075/t this morningafter touching our upside target of USD8,170 (highest sinceMay) overnight. We would not rule renewed rallies on apositive FOMC outcome, but our near term strategy remainsto sell into strength ahead of a more sustained uptrend weexpect to develop in the fourth quarter. Aluminium continuedto trade just below USD2,100 having closed on Wednesday atUSD2,086. Aluminium has risen 9.4% so far this month, andwe are becoming increasingly confident that the downtrendseen since March has broken. We view USD2,120 as the limiton the upside and expect the market to begin a period of consolidation from there down to around USD2,020.
Newcastle September coal futures slipped 0.3% toUSD90.70/t
, while coking coal shed 2.5% to USD148.75/t.Q4 coking coal contract negotiations have been completedbetween BMA and Nippon Steel, with the price settling atAUD170/t. Although this is an AUD55.00 decrease from Q3contract prices, the USD20 premium to spot prices was in linewith our expectations. Looking ahead, we believe coking coalprices may show signs of recovery in the coming weeks. Spotiron ore fell 2.1% to USD98.10/t, while the January Chineserebar contract was steady at RMB3,537/t. There have beenreports that China’s largest privately owned steelmaker,Jiangsu Shagang Group, has cut its rebar prices for theremainder of September – a sign that producers areresponding to market oversupply.