Friday October 14th 2016

Brexit?

Friday October 14^th  2016

Overview

Last week we saw a sharp decline in the British pound as PM Theresa May announced that actual Brexit may come as soon as March 2017. GBP/USD reacted touching a 30 years low at 1.1807 (EUR/GBP touched 0,9430) as investors feared the so called “hard-Brexit”. This week is not going any better and global banks have warned that they will be forced to move some operations and staff out of London to other EU cities if May fails to secure a deal that allows them to continue to provide services across the remaining 27 nations. The U.K.’s exit negotiations with the European Union will be controlled by a select group of 12 ministers that includes all of the most Euroskeptic members of Theresa May’s cabinet, a further sign that the premier may be planning a clean break with the EU. The committee will “oversee the negotiations on the withdrawal from the European Union and formation of a new relationship between the United Kingdom and the European Union; and policy on international trade,” according to an unpublished U.K. government document obtained by Bloomberg. British pound is trading 1.12187, we shall see.

The oil market is holding up pretty well so far even though more and more analysts are always more skeptical about the OPEC deal. Saudi Arabia said on Monday that a global deal to cut supplies could be reached at the group's next formal meeting in November, when non-OPEC nations such as Russia could be invited to join in the pact. Russian President Vladimir Putin told an energy congress on Monday that Russia was ready to join a proposed cap on oil output by OPEC members. On the other hand we have comments  like Ian Taylor, head of Vitol stating that the oil market remains “way oversupplied” and may not tighten until 2018.  “I cannot see a good reason for a major increase in the price of oil” he said. Goldman said that even if OPEC producers and Russia implemented strict cuts, higher prices would allow U.S. shale drillers to raise output. "Higher production from Libya, Nigeria and Iraq are reducing the odds of such a deal rebalancing the oil market in 2017," Goldman analysts said in a note to clients dated Oct. 10. At the moment we are trading at $49.95 for WTI and $51.53 for Brent. My personal view tend to agree on the downside story even though we may see some more upside on the short term. Nevertheless the worst should be over and we should definitely not see again the worse levels of early January.

The EUR/USD finally after weeks of inactivity finally decided to take a direction. It was not much about the Euro but more about a general Dollar strength due to the sharp decline in the British pound, the increased odds for a December rate hike and some trading desks cited also the consensus decline for Mr. Trump on his run for the White House. The level at 1.1050 is clearly broken and we are now looking at the first good support around 1,0915/1,0950 whereas on the upside the first good resistance is the 1.1100. Surely the Brexit issue as soon as March 2017 was rather unexpected but yet I do not see the Euro going back to 1,05 or parity. I may be wrong but, unless exceptional events, anything below 1.10 I still think is a good medium/long term buy.

Metals

The base metals complex did get a boost of volatility only after the Chinese trade balance which spurred new concerns over Chinese growth. The disappointing trade figures pointed to weaker demand both at home and aboard, and deepened concerns over the latest depreciation in China's yuan currency, which hit a fresh six-year low against a firming U.S. dollar on Thursday. China’s trade surplus was at $41.99 billion for the month, the lowest in six months, the General Administration of Customs said on Thursday. Analysts had expected it to expand slightly to $53 billion. The weaker trade readings could raise concerns about the other September data and third-quarter GDP due next week. Economists had expected that data to show the economy was stabilizing and perhaps even slowly picking up. We will know more next week when the GDP data will be released.

Trading ideas

Let’s now switch to the technical side of the market with some trading ideas for next week:

Aluminium: Aluminium is in the key area right now and has been there for the whole week to be fair. We did not end the week above 1,700$ but we came back at 1,670$. We did not break the strong down-trend line almost everyone is looking at and given today’s close we should not go further next week either. For sellers the first profit taking level is 1,650$. After that we could go straight back to 1,600/1,590$ where would be good to set up a long trade.

The copper is not doing much at all and the range is always the same. On the upside it couldn’t get higher than 4’850$ and new is set to get back to the 4’600$ area where could be worth a try to buy but with a very tight stop loss. The range is getting tighter and sooner this market will have to pick a direction. Below 4’600$ we could go straight back to 4’480$.

Lead did literally too much arriving as high as 2’150$. As a matter of fact in two weeks we are back to 2000$. I feel it could go a bit lower but definitely not below 1’900$ where would be good to set up a long trade. If sellers did sell 2070$ and also around 2’100$ maybe now is the time to take something out and wait for a further push lower to close-up everything.

Nickel snapped back below 10’000$ on the Indonesian news: <<Any revision to the Indonesian ban on exports of nickel ore will have to be well-thought-out so as not to discourage downstream investment>>. This was only for a very short period of time as we are already back trading around 10’500$ and the market looks well positioned to challenge the 11’000 again. Anything below 10’000 should be a good buy while sellers should wait around the 11’000 level.

Zinc: the Zinc market finally did have a good pull-back after having touched the strong level set around 2’410/20$. Yesterday we touched the 2210$ which should provide support in the near term. I do not see the Zinc market below 2’200 for now but more oriented around the 2’300$ again. If you managed to sell 2400$ now is the time to take profit. Buyers could buy around these levels (2260$ at the moment) but keep in mind that stop loss is below 2’200$.

Tin also finally had its first decent pull-back in ages. After a 2016 high at 20’135$ we are now back at 19’500$. Given LME availability and yet the strong fundamentals if it does go back to 18’800 is highly suggested a buy. Careful selling it.

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