Commodity Research Report 14 November 2017 Ways2Capital .pdf
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` ✍ MCX DAILY LEVELS
Tuesday 14 November2017
✍ MCX WEEKLY LEVELS
✍ FOREX DAILY LEVELS
✍ FOREX WEEKLY LEVELS
MCX - WEEKLY NEWS LETTERS
Last week, spot gold prices traded 1.2 percent higher while MCX gold prices surged by 2 percent.
Weakness in the dollar index on account of the possible delays in the long awaited US Tax reforms, fall in
global equities were factors responsible for the rise in the yellow metal.
Gold prices were stuck in a small range last week with some gains coming in as uncertainty over US tax
reforms kept the dollar subdued. The US Senate and House version of the tax bill is different and
discussions will pan out over the next few weeks. The Senate bill proposes a delay in the implementation
of a corporate-tax cut until 2019. If tax reforms fail to move forward convincingly, precious metals could
find a solid floor around current levels. Gold prices however fell on Friday as the US bond yield curve
steepened slightly after touching its flattest level in a decade earlier. A December rate hike by the Fed is
largely factored in and appointment of Powell as the new Fed Chair is unlikely to change the path of US
monetary policy going ahead. The November Fed meeting was a non-event and the Fed continued to
emphasise the message from its last meeting while maintaining that growth remains solid. A December
rate hike is a done deal and therefore only the outlook for rates in 2018 will provide triggers to the market.
As per the last forecast by the Fed, most members expect 3 rate hikes next year. The new dot plot is
slightly more dovish in the long term with members expecting rates to settle around 2.75%, down from
3% in the previous forecasts. This suggests that rate hikes will be very gradual and may help gold prices
find support. Economic data in recent weeks has also showed strong growth momentum in the US
economy. The Q3 GDP data showed that the economy expanded by 3.0% and consumer spending jumped
by 2.4%. The ISM manufacturing index hit 60.1 in October, a 13 year high while the nonmanufacturing
PMI hit 58.7, slightly lower than the 13-year peak hit in September. The payrolls data showed that hiring
bounced back in October after falling in September due to the twin Hurricanes. The US economy added
261k jobs in October and previous readings were revised higher by a combined 90k. Wage growth was
disappointing at 2.4% y/y but the unemployment rate fell to a 17-year low of 4.1%. Lack of Inflation
however remains a challenge for the Fed as the latest inflation reading missed expectations once again.
The core CPI grew just 0.1% m/m and 1.7% y/y in September. The Fed’s preferred inflation measure, the
personal consumption expenditures (PCE) price index excluding food and energy, increased by 1.3% in
Q3 after 0.9% increase in Q2. The core PCE has been stuck around 1.3% for most part of this year and
suggests that inflationary pressures still remain low.
In this context, the October inflation data due this week will be very important as it is the only reading left
before the December Fed meeting. Disappointing data could lower possibilities of more rate hikes in 2018
and thereby end up providing support to precious metals. A better reading on the other hand could lead to
further correction in prices.
Gold prices fell sharply on Friday as a large sell order with an unclear catalyst jolted the market ahead of
the weekend.Gold futures for December delivery settled down 0.96% at $1,274.20 on the Comex division
of the New York Mercantile Exchange, the lowest level since November 7.Prices of the precious metal
rose to a three-week high on Thursday amid increased geopolitical risks, particularly in the Middle
East.The selloff in gold coincided with a move lower in the dollar, which was hit by growing doubts over
whether Republicans will be able to push through their tax overhaul this year.The U.S. dollar index,
which measures the greenback’s strength against a trade-weighted basket of six major currencies, was
down 0.13% to 94.30 in late trade. For the week, the index was down 0.61%, snapping three straight
weeks of gains.A stronger dollar tends to weigh on gold, which is priced in the U.S. currency and
becomes less affordable to foreign buyers when the dollar appreciates.Senate Republicans unveiled a tax
plan on Thursday that differed from the one crafted by House Republicans, highlighting the challenges to
reconciling the differences between the two plans with just a short time before the year-end deadline they
have set to pass it.Hopes of tax reform have helped boost the dollar since mid-September. Some traders
believe tax reforms could bolster growth, adding pressure on the Federal Reserve to raise interest rates,
known as the "Trumpflation" trade.Elsewhere in precious metals trading, silver was down 0.57% at
$16.87 a troy ounce late Friday, while platinum settled at $913.15, down 1.0% for the day.Among base
metals, copper was down 0.39% at $3.074 in late trade as lackluster Chinese demand data and increasing
copper stockpiles stored in metal warehouses weighed.
In the week ahead, inflation readings will matter most for global financial markets, with the U.S., UK,
euro zone and Canada all set to release CPI data.Investors will also be focusing on the Central Bank
Communications Conference hosted by the ECB, with a panel discussion including the heads of the
European, U.S., British and Japanese central banks in the spotlight.
✍ BASE METAL
Base metals traded mixed last week as electric car boom fizzled out earlier than expected since the rally
was deemed as unreasonable given demand from the sector is only going to be supportive in the long
term, thereby leading to a correction across the complex.Copper prices have been trading range bound
with much of the action in minor metals and nickel. There are no real fundamental triggers for copper at
the moment and dollar index movement and funds flow is what is driving the market at the moment.The
Indonesian unit of Freeport-McMoRan Inc has temporarily shut the main supply route to its Papua mine
after a shooting incident, amid escalating tensions between security forces and an armed rebel group in the
area. China’s producer prices were surprisingly strong in October, while consumer inflation picked up
pace, suggesting the economy remains robust despite expected curbs on factory output as the government
pursues a war on smog. Chinese data this month is expected to show the economy cooled further in
October as policy makers harden efforts to reduce financial risks and foster long term sustainable
growth.Lead was the only metal on track for a weekly gain, of near 3%, as prices hit their highest since
October. LME stocks have fallen to their lowest in almost two years at less than 150,000 tons. Global
demand for refined lead will exceed supply by 125,000 tons this year, while a deficit of 45,000 tons is
expected in 2018, as per the latest ILZSG.
China will raise foreign ownership limits in financial firms in a step granting access to a tantalizing
multitrillion dollar financial services market, as the country seeks to position itself as a major global
finance hub. Hedge funds and money managers reduced their net long position in COMEX copper
contracts in the week to Oct. 31, U.S. CFTC data showed. Noncommercial net longs turned lower from
what had been the strongest since February. Nickel prices corrected last week, slipping further from the
more than two-year high it hit last week on speculation that an expected electric vehicle boom would
drive up demand. Nickel prices surged almost 10% during the annual LME Week industry gathering on
expectations that nickel demand for use in lithium ion batteries would increase as electric car buying
ramped up. Fundamentals for nickel are sound, though stocks are relatively high. The market expects
annual nickel demand from the electric vehicle sector to grow to 200,000 tons by 2020, but had been
ignoring downside risks from policy developments in Indonesia, which recently lifted curbs on ore
exports, and the Philippines,
where the end of a ban on open-pit mining has been mooted. Aluminum was under pressure adding some
gains before the end of the week, but was still on track for its worst week since May 2016 as speculative
investment flows receded on caution over the scale of expected Chinese capacity cuts. The world’s
biggest producer of aluminium is expected to cut millions of tonnes of aluminium capacity during the
winter to combat air pollution, helping to push prices to five-year highs last month. Stocks in LMEapproved warehouses fell to their lowest since September 2008, down to 1.2 million tonnes, but stocks in
Shanghai inched higher this week to a record 666,581 tonnes.
The Indonesian unit of Freeport-McMoRan Inc has reopened the main supply route to its huge copper mine
in Papua, the company said on Monday, after the road was closed on Sunday following a shooting
incident in the area. No one was reported injured when shots were fired at an escort vehicle traveling from
the lowlands, but Freeport canceled all convoys along the road on Sunday afternoon while the security
situation was assessed.
WTI and MCX oil prices traded higher by 2.7 and 4.4 percent last week on account of commitment by the
OPEC nations to cut oil output. Brent crude hit $64.65, its highest since mid-2015, as political tensions in
the Middle East escalated after a sweeping anti-corruption purge in top crude exporter Saudi Arabia,
which in turn has confronted Iran over the conflict in Yemen
Oil prices have jumped almost 23% from their lows in June with both WTI and Brent trading near twoyear highs as fundamentals continue to improve. The global oil market has seen a small deficit over the
last three months as the growth in global supply has slowed and as OPEC compliance to cuts has
improved. OPEC oil output fell by 80,000 bpd to 32.78 mbpd in October and overall compliance touched
92%. Saudi continues to be the biggest contributor to the supply cuts but the drop in Iraq’s output by
120,000 bpd helped improve the overall compliance. Nigerian output slipped by 70,000 bpd as some of its
exports were under force majeure while Libya pumped an extra 70,000 bpd due to more stable output
from the Sharara oilfield. Russia has also reduced its oil output by around 317,000 bpd from 11.24 million
bpd in Oct 2016. On the whole, we believe overall OPEC’s compliance would remain high going forward
and help continue the rebalancing process. Importantly, both Libya and Nigeria have reached the upper
end of their production range and hence incremental supply growth from these two will be limited. The
upcoming OPEC meeting on Nov. 30 will now be closely watched for further developments on supply.
There are likely to be preliminary discussions about extending the output cuts after they expire in March
2018. Another ninemonth extension could set the stage for another leg-up in oil prices. US output on the
other hand touched a record 9.62 mbpd last week and remains elevated in y/y comparisons. US oil rig
count fell for a third month in a row in October with rig count down by 13, the biggest decline since May
2016. Drillers however added nine oil rigs last week, the most since June, bringing the total count up to
738. This indicated that higher prices could incentivize drilling further and US shale will continue to cap
upside in oil prices. On the inventory side, US oil inventories fell by 10 million barrels last month and are
now 6.2% lower compared to the same period last year. US oil stocks have declined by 80 million barrels
since March this year. Estimates from the IEA suggest that global oil stocks likely decreased in Q3 for
only the second time since oil prices crashed in the middle of 2014. Crude inventory drawdown totalled
53 million barrels in Q3 but OECD stocks are still ~150 million barrels above the five-year average.
Gasoline and Distillate stocks in the US were also at a two-year low in October while product stocks at
the ARA hub in Europe were down 8.3% compared to September. From the demand perspective, Crude
oil demand has outstripped supply since the start of 2016 and this year has continued to show robust
demand. While supply grew 1.47% y/y on average in the first nine months, demand has grown by 2.75%.
Asia, Europe and the US have been the biggest contributors to demand this year as global economic
recovery has taken a strong foothold. Considering that inventories are edging lower, demand remains
strong and supply flat, we expect the medium term outlook for oil to remain positive. The oil forward
curve now is reflecting a tightening market as WTI has started moving into backwardation while Brent is
already in small backwardation. For natural gas, inventories ended the injection/refill season at 3784 Bcf,
which is 2% lower compared to five year average and 5% lower compared to last year. Expected growth
in natural gas exports and domestic natural gas consumption during winter will keep the bias positive for
gas in the coming weeks.
Crude prices were a bit lower to start the week on Monday, slipping from their strongest level in more
than two years amid indications that U.S. producers will ramp up output to take advantage of the recent
Oilfield services firm Baker Hughes said Friday that the number of active U.S. rigs drilling for oil rose by
nine to 738 last week. It was the biggest jump since June, sparking concern that U.S. shale producers will
ramp up output with prices holding near 28-month highs.