The first trading day of June got off to a bit of a wobbly start in commodities as investors awaited US economic and employment data before making any large-scale bets in the complex. Overnight news from the global economic front was not all that auspicious for speculators to augment their level of betting on the long-side in precious metals.
All of this was taking place even as the US dollar remained locked under the 74.5 level on the trade-weighted index and crude oil still hovered at the $102.50 per barrel mark, apparently unwilling to get going into either direction from that price-point. Most hedge funds lost money in May amid the wacky volatility on display in many a market. Commodity-focused funds took some real hits on the chin as a result of the gyrations in various metals and agriculturals. They will have to pedal that much harder this month. If only the global economy would cooperate, darn it.
There is something of a soft-patch being detected out there in the global economy these days. For example, the hitherto seemingly invincible Aussie economy saw its GDP contract by the most in two decades in the first quarter of this year. The devastating floods in Queensland took their toll on the country’s output pushing the national GDP down by 1.2% while exports fell by nearly 9%.
The fact that China’s manufacturing activity grew at the slowest rate in nine months last month certainly did not help matters for the Land Down Under. China, India, and Japan’s demand constitute more than half of Australia’s exports. All three trading partners showed weak or weaker than anticipated growth during various months of the year-to-date.
China is also still grappling with its pesky inflation bogey. Economists suggest that Premier Wen’s anti-inflation combat may well have received a small dose of “encouragement” from the figures related to the country’s manufacturing slowdown, but that the decline was mild enough to leave room for yet another interest rate hike by the PBOC (its fifth since last October) to take place, perhaps as early as this coming weekend.
India’s economic growth rate also slowed during Q1 of 2011 while inflation continued to present an annoyance even after nine hikes in key interest rates by the RBI. The combination of such trends underway in China and in India has raised the levels of caution among commodity bulls whose on-going profitability in speculating has largely been predicated on levels of “Chindian” growth that were formerly the “norm.”
Over in Europe, the 17-nation euro area showed a fall in its gauge of manufacturing activity in May. While the reading came in at 54.6 (versus 58 in April) and it still indicates “growth” the fact that there is a slowing has raised nervousness levels among investors. Stocks in Frankfurt fell on the news.
As things stood this morning, the ISM figures for the US’ own manufacturing activity levels were also expected to point toward a slowing in economic growth. Median estimates placed the ISM’s numbers at around the 57 level (down from over 60 in April). Most of the slowdown will be chalked up to the ripple-effects of the March Japanese quake and the dip is expected to be transitory and not result in a Fed panic of some type.
Spot gold dealings opened with at $0.40 per ounce rise and were quoted at $1,534.70 the ounce following another overnight session of range-trading that was as exciting as watching a knitting contest in the Pyrenees. The yellow metal turned away from the $1,540.00 resistance area for the second time in one week and appeared to be looking for a source (any source) of news that might embolden the bulls into a third attempt towards the mid-$1,500 value zone. Thus far, no news of such an ilk was present. Yesterday, gold was the lone decliner in the precious metals’ complex.
Silver dropped about half-a-dollar on the open, showing a bid-side quote of $38.05 per ounce, as it too appeared to back slowly away from the strong barrier that the $39.00 level has presented up to this point. Platinum and palladium opened with mixed results for the midweek session; the former fell $1 after quite a flight on Tuesday, while the latter rose $2 seemingly still energized by yesterday’s deficit projections.
Rhodium paused at the $2,300 mark following a hefty pop in prices on the last day of May. In the background, the US dollar was marking time in and around the 74.50 level ahead of the ADP employment and the ISM’s manufacturing data. Automotive analysts are looking for car sales data from other regions to keep supporting the PGM complex in the wake of news that China’s car sales did in fact drop by 11% in April, following the expiration of government car-purchasing-oriented stimulus programs.
The private payrolls number did not lift trading spirits (at least for equities players) as it gained only a skinny number in May: 38,000 positions. Economists had expected more like 175,000 jobs to have been added to the US economy’s payrolls in the month just passed. The ISM data, due later this morning, along with light vehicle sales figures and construction spending figures for the month of April might shed some additional light on the current temperature of the US economy. As things stand right now, and based on certain recent readings of said thermometer, the school of thought that sports the “QE3” banner above its “frat house” remains in relatively good spirits.
Actually, it smells more like open warfare in QE3-related prediction-land, these days. Citigroup, for one, notes that “markets are bracing for QE3” in a fashion most reminiscent of when they were pricing in QE2 last fall. Meanwhile, JP Morgan Chase asserts that the Fed is “very, very unlikely to launch another round of asset purchases.”
JPM Chase feels that the potential political fallout (of the worst kind) that would follow the announcement of any such stimulus would make last fall’s display of anger aimed at the Fed on Capitol Hill seem like a 1967-vintage love-in. Not only are lawmakers spooked by the rising spectre of inflation but the approaching date of the US debt limit’s ceiling will have most of them turn reluctant to sanction such further monetary largesse. As Fed policy has gone, so has the greenback, that’s an open & shut case.
Don’t look now, but the detestable dollar turned in a stock-and-commodity-beating performance last month. The US currency’s first monthly gain since the implementation of QE2 was the result of not only bettors scaling back on their expectations of additional decline in its value, but also the outcome of the turmoil that has once again affected the euro and the emergent signs that a mid-cycle slowdown is possibly underway in the global economy. The net result was a 2.2% climb in the greenback, to be computed against the 2.45% loss in the index of world equities (MXWO) and a 6.9% decline in the GSCI commodity index.
In the interim, the very thing that has helped gold climb on safe-haven bids during the past couple of weeks – the second act of the Greek debt tragedy – now appears to be the factor that is tempering its attempts at advancing past the $1,540 mark. The closer speculators feel that the EU is drawing to a resolution of some kind to the reignited crisis, the less they are apparently willing to remain over-weighted in the currency/commodity, at least for the time being.
Exactly how the situation will be resolved remains to be ascertained; however, by the end of this month, the eurozone’s leaders will have made a decision on the what/how/how much and when of the Greek aid package. The EU is certainly not expected to let the country slowly sink into the Aegean Sea following the Santorini-like debt event that exploded last spring.
What does one do in the event of someone (the EU, the IMF, the ECB or the Greek government) dropping the bailout “ball” and inadvertently squashing the euro in the process? Well, you guessed it. Buy…the “other” currency. The one with George Washington’s smiling countenance on it. The original GW may not have much to smile about, fundamentally, but, in this case, “one [currency] from many [others that have bigger problems]” applies rather well in terms of possible choices, anyway.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America