Quarterly Outlook

Ole Sloth Hansen Head of Commodity Strategy

October 22, 2013

Global industrial production is bouncing back

Inventory drawdown harmed 2013 production but is near its end Higher production going forward due to higher demand and rebuilding of stockpiles

China will continue to grow at moderate pace

China facing severe long term problems in its need to rebalance its economy towards a more sustainable path of higher personal consumption and less investment The near-term outlook growth should hold up
Investment spending will remain strong Limited fiscal stimulus, such as urban redevelopment will support growth in 2014 Fading austerity in the euro area will help Chinese exports

The big theme is the repricing between equities and bonds

US earnings season so far

Good start to US earnings season 71% positive EPS surprise Revenue growth better than expected Banks continue to improve, especially BofA Prefer cyclicals like financials, auto, industrials

European conviction list

Russian examples which are driven by high return and strong momentum: M Video / MegaFon / Sollers / Sistema / Magnit

Fed taper talk was de facto radical tightening.

Merely the mention of tapering hurt the bond market, liquidity and many emerging markets Big EM cleanup on the way current accounts must be repaired

Fed accidentally tightened mortgages.

US housing market will slow but remain a positive contributor
Rising mortgage rates are normal in an improving economy (sharp rises could disrupt)
7.0

6.5

6.0

US 30-year mortgage rate

5.5

5.0

4.5

4.0

3.5

3.0 2007

2008

2009

2010

2011

2012

Source: Bloomberg, Saxo Bank

Europe ECB not playing ball with other central banks

- ECB balance sheet shrinking as Feds balloons ever bigger

Broken BRICs

Source: blog.yardeni.com

10

Versus recovery in Developed Markets

Source: blog.yardeni.com

11

Long term issue: fiscal breakeven for crude oil?

Russian FX reserves stable to falling despite still relatively high price of oil (White line is Russian reserves and Yellow is Brent)

12

Remember the carry

Russian Ruble remains strong when carry taken into consideration

13

Ruble still vulnerable if Feds taper talk returns

Despite strong current account surplus, Ruble also hit by global tightening from US rate rises when US Federal Reserve talked tapering.

Ruble and US government bond yields

39.00 2 1.8 1.6 37.00 36.00 35.00 34.00 33.00 32.00 1.4 1.2 1

38.00

0.8 0.6
0.4 0.2 0

Ruble Basket (LHS)

Source: Bloomberg and Saxo Bank Strategy & Research

US 5-year yield (RHS)

14

Commodity prices still supported but runaway rallies are behind us

Upside risks Extreme weather events Geo-political events Labour disputes and strike actions Unexpected strong EM rebound Excessive global liquidity Inflation

1. 2. 3.

Prices already close to cost floors EM demand slowing after years of strong activity Supply growth constrained Positive skew to event risk DM growth less raw material intensive than EM

Downside risks Production catching up with demand Slowing growth rates in EM and China US economy hitting a soft patch Dollar appreciation Lack of credit for commodity transactions

4. 5.

High volatility = high risk/reward

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Year to date performance

16

Year to date sector performance

17

Different index different performance

Broadbased Commodity Fund Performances
(31/12/12=100) 105
Softs Meats 8% 5%

DJ-UBS
Energy 32%

Grain 23%

100
Indust. 17%

Precious 15%

95

Meats Softs 5% 4% Grain 11% Precious 3%

S&P GSCI

90

DB Opt Yield Div CI (DBC:arcx) ipath DJ-UBS CI (DJP:arcx) iShares S&P GSCI (GSG:arcx)

Indust. 7% Energy 70%

85 Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Commodities included:
Source: Bloomberg, Saxo Bank

DJ-UBS S&P GSCI DB CI

19 21 6

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Investment demand slowing due to significant reduction in gold

Total investments in commodities have fallen to $349 bn dollars from $427 bn in 2012

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Gold near term weakness as US interest rate cycle turns

Supporting gold
Surging physical demand from emerging economies Central Bank gold buying at a 40 year high Long liquidation from institutional investors slowing Low price resulting in less supply Tapering delayed well into 2014
1800 1700 1600 1500 0.0 1400 1300 1200 1100 May-12 -0.5

Gold and 10-year US real rates

-1.0

Gold, USD/oz
US 10-year real rates (rhs, inv)

0.5

1.0 Aug-12 Nov-12 Feb-13 May-13 Aug-13

Risk to gold
Rising real interest rates Lack of inflationary pressures despite massive stimulus Global growth continuing to improve Demand for safe-haven assets are slowing India raising import taxes Switch from risk on/off to growth on

Source: Bloomberg, Saxo Bank

3000 2500

Gold exposure in Futures and ETP's

Futures, MT ETP holdings, MT Spot Gold, USD/oz, right

2,000 1,800 1,600 1,400

2000
1500

1,200 1000 500 0 2008 1,000

800
600 2013

Source: Bloomberg and Saxo Bank

2009

2010

2011

2012

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Silver dependant of continued investment demand

Investment demand remains strong Strong link to gold industrial metals provides an additional driver Pick-up in global growth potentially outperforming gold into 2014 BUT the market is full of inventory so depending on continued investor support
70
65 60 55 50 45 40 Ratio

Gold / Silver Ratio

35 30

Source: Bloomberg and Saxo Bank

50 45 40 35 30

Silver

25 20
15 USD/ounce

Source: Bloomberg and Saxo Bank

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Copper Supply growing at a time of slowing EM demand

Improved growth prospects in DM pushing up real interest rates While putting EM assets, currencies and growth prospects under pressure Not good news for industrial metals demand in general Copper supply will rise in 2014 creating a surplus for a second year running HG Copper stuck in a 3.2 to 3.4 per lb range (LME Copper: 7000 to 7500 per tons range) Sell into rallies as upside looks limited

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Oil price remain sandwiched between 95 and 120 USD/barrel

Non-OPEC supply forecast to rise by 1.7 mmb/d in 2014 A key reason behind the limited impact from supply disruptions within OPEC WTI discount lower as Cushing inventories are falling Bottleneck potentially moving to the Gulf of Mexico

Near-term risk points towards lower prices

Weak refinery margins slowing demand Rising supply as outages are resolved

Producers need high prices so expect support at 100 USD/barrel

To balance budgets New production techniques uneconomical

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Geo-political risk premium in oil becoming a constant feature

Sectarian violence in Iraq with bombings and shootings are back on the rise. Syria conflict sharpening divide between Shiite (pro Assad) and Sunni (pro rebels) Parliament elections scheduled for April 10.6% of OPEC total production In Nigeria an estimated 100,000 barrels per day is stolen by criminals Ruined pipelines preventing output of another 400,000 b/d 7% of OPEC total production

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But some potential bright spots emerging.

Libyan oil production hard hit by strikes, militias and political activists 1% of OPEC production (5.4% in Jan-11) Raised hopes that Iranian sanctions may eventually be reduced 8.4% of OPEC production (12.6% in Jan-11)

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US has become the worlds largest producer of oil liquids

US now largest oil liquid supplier in the world (crude, ngl and biofuels) PIRA sees the gap to SA and Russia increase until 2020 and then retained until 2030. Texas the worlds top ten producing country. Could become a top five within the next five years

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US has a serious energy price advantage..

http://www.businessinsider.com/most-important-charts-in-the-world-q4-2013-10#francisco-blanch-bofa-merrill-lynch-101

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Forward prices reacting less to near-term risks

130 125 120 115 110 105 100 95 90 Brent Crude, 1-month

Arab Spring

Iran sanctions

Syria crisis

85
80

Brent Crude, 12-month Brent Crude, 36 month

Source: Bloomberg, Saxo Bank

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Forecast

Q4 2013 Brent Crude WTI Crude 108 102

Q1 2014 106 101

Av. 2014 105 100

Gold
Silver HG Copper

1325
22 3.25

1350
22.5 3.30

1300
22.5 3.20

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Finally - Keep an eye on the Big Boys

24-Sep-13 WTI Crude (CME) WTI Crude (ICE) RBOB Gasoline Heating Oil NatGas (4 contr.) Gold Silver Platinum Palladium HG Copper Soybeans Soybean Meal Soybean Oil Corn Wheat (CBOT) Wheat (KCBT) Sugar Cocoa Coffee Cotton Orange Juice Live Cattle Feeder Cattle Lean Hogs
111,170 24,175 34,609 23,570 29,218 160,835 76,122 50,466 192,454 97,825 41,431 176,462 84,184 33,215 50,121 2,827 85,478 8,838 115,934 1,953 -888 285 179 2,140 -13,367 193 1,266 391 4,820 1,013 6,059 1,306 -347 962 -1,072 7,071 2,161 978 32,516 11,977 5,507 1,528 23,934 25,583 14,824 75,047 318,799 132,825 25,762 114,094 15,848 56,165 5,729 1,755 46,323 1,229 17,982 -6,588 906 341 -621 -6,951 -868 2,285 3,074 22,525 -11,062 1 -27,926 916 -2,597 -658 720 -3,695 -788 -1,898

Long
302,446 57,893 49,471 39,973

Change
-13,648 -1,687 -7,549 -7,777

Short
27,348 10,739 7,697 17,943

Change
-7,787 333 -2,255 680

Net position
275,098 47,154 41,774 22,030 276,444 78,654 12,198 29,102 22,042 5,284 135,252 61,298 -24,581 -126,345 -35,000 15,669 62,368 68,336 -22,950 44,392 1,072 39,155 7,609 97,952

Net Change
-5,861 -2,020 -5,294 -8,457 -6,837 8,541 -1,794 -56 800 9,091 -12,499 -2,092 -1,808 -22,134 15,882 1,012 33,985 390 2,250 1,620 -1,792 10,766 2,949 2,876

1 yr high
334,094 49,174 90,542 52,961 456,475 198,194 38,618 42,559 25,742 24,531 176,907 69,890 7,419 282,849 55,269 51,666 75,479 68,336 -172 82,715 8,819 64,165 7,609 97,952

1 yr low
100,021 6,425 23,216 -21,336 56,050 31,197 -2,982 17,229 6,278 -38,951 43,580 16,421 -55,111 -126,345 -50,882 -7,866 -88,140 10,343 -30,162 -19,327 -1,798 1,947 -3,767 -11,446

Price change
-2.2%

-0.1% -1.2% -6.8% 0.5% -0.9% -0.3% 1.8% 1.0% -2.2% -3.4% -0.4% -1.2% 2.4% 2.1% 3.8% -0.4% 2.5% -0.5% -0.4% 1.7% 0.9% 1.7%

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Speculative positioning an important directional guide

WTI Crude
Long 350 Short Net Price (rhs) 250

120

110

100 150

90 50

-50

80

-150

70

Source: Saxo Bank, CFTC, Bloomberg

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Thank you!

European versus US equities

S&P 500 fwd. P/E 14.5 STOXX 600 fwd. P/E 13.6 S&P 500 EPS growth 6.0% YoY STOXX 600 EPS growth -3.3% YoY Prefer US equities over European However, peripheral European equities are the greatest opportunity around Expect European EPS growth to turn positive in 2014 on economy S&P 500 12-month target is 1,950

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