The Commodity Bloodbath

Ladies & Gentlemen,

As we begin to make sense of the shocking lows in Commodities across the board, we must turn our eyes onto the Macro picture to find reasoning for the short-term and also look to consider the worst-cases for the coming years.

The "Demand-Destruction" story begins in China. The Chinese Economy is slowing down and the demand for commodities forming from the Chinese manufacturing sector is also on it's way down south - with the fall led by Material/Energy companies in the Asia Pacific (falling this year circa 13%).    This Market slump has shown the World how strong the in-elasticity of demand on price from China actually is.

Key Chart 1

Copper is trading at 6-year lows (chart below) & Nickel (the biggest loser on the LME) is at 12-year lows.

Key Chart 2

$BHP & $RIO all fell yesterday to 10-year lows as producers continued to slump across the global equities amid the bloodbath. $BHP is now looking at the prospect of having its credit rating downgraded in the next 12 months in response to further possible falls in Iron Ore & Oil prices. 

Another major reason behind the Commodity-glut is due to the Market concerns about further USD strength, starting with the first hike in December. Countries who do not use the USD as their primary currency will feel further heat as their currency begins to weaken amid prospective USD rallies. This will then make is cheaper to produce and create further over-supplies!

Will OPEC do anything about the Over-Supply in Oil? Well, further to comments made by the Saudi's yesterday - they are keen to work with other OPEC countries in stabilizing the market - however the facts remain & there is no quick fix! We will find out more on Dec 4th, when the OPEC heads all get together.... Meanwhile, the Glut continues as people talk about the biggest decline since the fall of the Soviet Union.

Can we really find a bottom?.. Let's take it back a notch. If we look at some charts, we can see stability over the last few weeks. and it is important to remember that the Commodity business is extremely cash intensive and producers will not be looking to cut supply but rather costs. Major Commodity producers still need the revenue.

I personally think, the actual effect of this fall will truly depend on how fast the US Economy can accelerate & how long the FED Rate Hike cycle will last for.

Take out your 3D Glasses and watch the rest of 2015 unfold.

Best of luck

Anish8FX @Atom8.com www.atom8.com

The 2015 Oil Price Conundrum

Ladies & Gentlemen, 

Over the past year Oil has "started" its biggest price decline since the Financial Crisis. Today the price of Oil went below $40.00 and the Markets are currently sitting on this level (3 month low), to me - waiting only for the next break lower. This move lower was supported by yesterdays data from the US showing that Crude Stock Piles have been expanding for the past 8 weeks now. 

Here is where the trouble lies.. Demand is at record highs, especially from India and is expected to rise by 1 million barrels per day every year in this decade. But the issue is with Supply. The Supply-side is controlling the Market and it does not seem to be slowing! We have way too much Oil & OPEC led by Saudi Arabia have been more focused on targeting Market share, rather than price stability. 

How much Supply do we actually have? Well have a look at the Chart below and you can see from the "Surveillance Map" the Orange Line mapping out 530 km (about 3 billion barrels of oil). If you were to put these in Oil Tankers and line them up together, that is the route... From London to the south of Glasgow. 

Chart of the Day

Source : @JavierBias2

What about Geo-Politics? Well the Oil prices spiked up as an immediate reaction from the Paris attacks. To me, that could just be a panic trade and the Fundamentals are clearly running the Oil Market here. Syria, in reality is not a big Oil producer but is in the neighborhood. I think you would need to see a real Geo-political shock in a large Oil producing country to have a sustained effect on Oil Prices. 

Could we see $30? - Yes!  I think the markets will tick away to $30 during the course of 2016 and perhaps even lower into 2017. Ultimately, it is the refiners that buy the Crude Oil and if they are not making any money anymore... heading into winter... they want to keep their margins growing. They would definitely be in for a hard time for the next few years to come. 

As always, Trade smarter. 

Anish8FX @Atom8.com

The Future Is Bright - The Future Is Silver!

Ladies & Gentlemen, 

As we tick closer to "Lift-Off" from the FED, the Precious Metals continue to remain cursed by the USD bulls. But what will happen after the initial FED fiasco? Will the Markets quickly learn to appreciate reality of US Debt? Will investors flock into the Metals?... I'm not too sure, but I do make a good case to stay long Silver (XAGUSD) for the next 5-10 years. 

Commissioned from Mr. Hague (SocGen), he has created a propriety model on measuring a move in the commodities in relation to Macro factors, the Strength of the USD, Interest Rates & Market Fundamental (Variables) & from his analysis, it is clear that Fundamentals have taken a back-seat over the past 12 months. The Macro variables are the driving force behind the Markets, covering the environment for Risk Attitude, the Volatility Index & Equities.... This is what (according to Mr. Hague) is moving Silver (chart below): 

Over the past 2-3 years, Silver has been trading more like Gold & recent moves have been primarily driven by the strong USD and all-round been a strong head-wind for the Metals.  With Silver being 60% Demand driven, more for Industrial uses (mainly Electronics).. we begin to see Silver evolve from a Precious Metal to a Base Metal. 

The long-term outlook for Silver is bright, and a big part could be due to the anticipated exponential use of Solar. According to the IEA's growth forecasts (on a mass scale) over the next 5-years, they would be using nearly 1 Billion ounces of Silver! 

This bodes very well for Investors looking at today's chart, as you finally have (after 12-13 years) Silver Supply declining, especially when you think about the 2011 peak. The longer term Demand sets to pick up and it looks to be setting itself up for a Constructive move. 

Silver is absolutely everywhere! In your computers, in your phones... & as Emerging Market demand picks up over the next 10 years for Electronics, only naturally should this Market increase in value. 

So Anish, how do you see the Market shaping for the end of the year?... Well there is not much left for this year as we remain merciful to the FED's hiking plans but I do expect Fundamentals adding more promise to the Metals market in the Longer term & hope to prove the doubters wrong, as I am personally a big fan of Silver. 

Best of Luck

Anish8FX @ Atom8.Com 

How To Make A Camel Vomit Gold

Ladies and Gentlemen, 

Has Gold lost it's shine? Gold traded near a 5-year low as investors continued to short bullion-backed equities pricing in expectations for the US to increase interest rates this year, further Rusting the Metals Market. 

Gold is heading for a thirds year on year decline as investors now brace themselves for a first interest rate increase since 2006 and according to the "theory" - Higher Rates = Less competitive metals. But Why? It is simple, as the Metals offer no dividend, hence investors naturally flock to other assets that pay interest or offer dividends.

Can we head below $1000?
(Figure Below) Source : CNBC

What is now known as the "Vomiting Camel" (from the formation of the two humps [yearly highs]) - we now have the camel resting on a rhombus, indicating that a break below current levels =  free-fall! 

The Splat Zone indicated on the char signals towards the $700-$800 for possible areas that Gold could fall into post December hikes. 

But what about Central Banks, The Russians & Chinese - are they still buying? - Yes! Gold purchasing (And Demand) is at record highs, as both Russia and China still maintain a policy to hedge against their currency & they will probably remain net buyers. China for example, added an extra 14 tons in October. 

So what happened to Economics? Well, we have to remember that XAU is backed by the USD and experts point to a "Bear-Market" cycle driven by the FED. But in my view, if we do see a hit of $700-$800 we could see a spark in the bulls.

Absolutely a fascinating time to be watching the markets. 

Trade Smarter,

Anish8FX@Atom8.com

Will 2016 Mark The Fall Of The Emerging Markets?

Ladies & Gentlemen, 

Brace yourself for a complete change in dynamics for 2016 and of course, the FED hiking cycle will become the catalyst. 

So should I still stay long the USD in 2016? Well in theory - Yes! In practice however, as the FED raises interest rates the USD will strengthen but these persistent increases (during the proposed cycle) will worry investors - especially for companies with Overseas Investment & for Industrial corporates (with the continued decline of commodities). It could be very expensive! 

A stronger USD now becomes a touchy situation. Mainly because the majority of Emerging Market Countries hold USD debt and this puts a stranglehold on the USD rallies. The probabilities of larger outflows from Countries like China, India is likely and will be the epicentre of pressure. It will be interesting to see how these Push/Pull Economic factors react next year.. Will it help their continued debt? 

The stage for 2016 has been set. 

China is an almost perfect author to this story. With recent trade numbers declining (6.9% yoy) and a staggering 18.8% decline in imports - Other Asian nations who once so heavily relied on China could now look elsewhere.  As the commodity boom slows, the GDP growth required for China to maintain its growth pattern could also fall off the charts! Instead we see a Global Deflationary Threat.

How will the USD react to each FED Rate Hike? - Looking at the past 11 Rate Cycles and in particular more recently when the FED moved from neutral to tightening, the USD fell 7% and to tell the way the USD could react now - one would have to look at the yield curves. Whenever it has been steep (and right now it is steep) it falls over double digits! But again, that would also depend on the forecasted tightening cycle... but really how long could it be? 

What about the Equity Markets? You want to be really focusing on Industrial, Tech & Energy stocks, because they will benefit from the inflationary cycle of the US Economy. But really does the public trust equities anymore? There are currently huge disparities in the major US indexes as during the past 5 years the Public have not really put any money into the equities, it has all been primarily driven by the FED & a lot of these position builders could effectively price in the first hike. 

Next stop... December 17. 

Trade Smarter
Anish8FX @ Atom8.com 

The Exaggerated Importance Of Today's NFP

Ladies & Gentlemen, 

One piece of Data that the Markets have been hanging onto (for the last fortnight now) is today's US Jobs Report. But has the Data release been overblown? Will this Data release really decide if the FED will hike in December or not? 

I think it is bizzare that we come to this point, after such a long time of FED Rate Hike talk and in fairness, we should of really started hiking back in September. In fairness to the FED, they have been transparent and the bar has been pushed lower - if yesterday's ADP result was considerably weaker the Markets would of considered changing direction, but it remains firm.

In my view, anything above 142K will be enough. My call is for 230K plus, but Markets may be focused on revisions, as it is about the "Nirvana" of finding a "Full Employment" level & Yellen more recently has stated that the "Excess" employment number has been diminished. 

So how strong is the USD? Well if you look at the Labor Participation Rate, which points to the strength of an Economy it has not really been up to par. However, these could come down to more structural demographic issues, which the FED could not really be judged on... but more-so on the "Excess capacity" of the market. 

The fact is the USD is on a tear and investors are still building more positions.. Looking at the chart, don't really see any stop in the way? Especially as Consumer Spending (which makes up 70% of GDP) is on the rise & this is also translated into incomes. The problem may come from mixed data, especially on the Manufacturing side, but if you strip this out the USD is the most bullish I have ever seen.

Best of luck today

Anish8FX @ Atom8.com

The "Long $" Play Over The Medium Term

Ladies and Gentlemen,

Tomorrow at 13:30 GMT we get the October Non-Farm Payroll number, the September figure was a disappointing 142k. A bounce to 182k is the Bloomberg survey consensus.

The FOMC members believe the chance of ‘lift off’ in December is still ‘live’, needing a reason not to hike is the new sentiment.

Tomorrow will give us further insight into the decision making process on 16^th December.

The Fed has maintained that the appropriate time to raise rates is when the sustained improvement in the labour market is attained, combined with confidence that inflation will move back to its 2% target over the medium term. These are the exact words from the press on 28^th October ‘the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate’. The dual mandate of Fed has been talked about in previous Event Risk updates.

I see the divergence in Central Bank policy as an opportunity to express ‘Long $’ plays over the medium term.

$/Jpy sits above the 200 day moving average at 121.10 and just below the 100 day moving average at 121.70, a daily close above 122 will see momentum accounts add to existing long positions. The first Friday of the month is always interesting.

Good Luck

Anish8FX @Atom8.Com