Friday October 21st 2016

Mario Draghi

Friday October 21^th  2016

Overview

The ECB policy meeting Thursday did not discuss changes to QE, Mario Draghi said. The ECB left rates and monthly asset purchase program of €80 bn unchanged. Draghi said no discussion of possible tapering of QE or its extension beyond March 2017. Stimulus measures to be removed once inflation target met in “self-sustained” manner. The ECB chief also ruled out an “abrupt” end to asset-purchase program and that the bank's low-interest policy was working. The euro has taken a leg lower this month, sliding about 3 percent -- a change from the third quarter, when it traded in its narrowest range ever. The declines came as speculation faded that central bankers back a sudden end to QE after March, which is the latest date that they’ve so far committed to. Pacific Investment Management Co. predicts the ECB will actually ease further in December and that it won’t remove stimulus until inflation is “solidly on track” for its goal of close to 2 percent.

At the moment EUR/USD is trading around 1,0880 after having destroyed a very good level at 1,0917. Now the first good support lies at 1,0800/1,0820 where we should definitely stop and see some profit taking in the short term. I have to say that it did quite surprised me as I was expecting a bit more of sideway trading. The move was quite fast (after a long period of small range trading) and it has been exacerbated by the break of few technical levels. Nevertheless, I would not yet take a big medium/long term short position but I would be looking for some good point to buy instead. I feel like the real fundamental catalyst of the move to the downside is the Brexit issue as the market started to sell-off after PM May announced the U.K. leaving the EU as soon as March 2017. On the other hand though we still have Mario Draghi, the FED expected to hike rates on December 2016 and the US presidential elections. To this regard, for selling a short-term move the first good resistance is now around 1,0920/1,0950.

The oil market remains skewed to the upside even though this week was capped by a substantially stronger US dollar. A stronger dollar means dollar-denominated commodities become more expensive to hold, making it less attractive for investors to buy them. The Organization of the Petroleum Exporting Countries will hold a meeting on Nov. 30 to find common ground on capping oil production. This is expected to work out how each member country will contribute to a freeze. "The near term fundamentals in the oil market have turned positive. Demand is stabilizing, OPEC production has peaked (and will fall if cuts are implemented), and global inventory declines imply that the market is more balanced than many believe," Neil Beveridge of Bernstein Energy said in a note to clients.But Olivier Jakob, oil analyst at Petromatrix said: "We have been cautious in the current (oil) flat price rally, based on our forecast of an OPEC supply surge in the fourth quarter and a widening of the Brent contango."

Metals

Moving to the base metals complex we saw a negative week all across the board with exception of Tin. Chinese data out this week pointed again at stabilization and it looks like the government will be able to maintain a growth range between  6,5% and 7% as forecasted. The third quarter GDP came out at 6.7% vs exp. 6.7% in line as it was for the fixed asset investment at 8.2% vs exp. 8.2% (Sep). Industrial production was lower at 6.1% vs exp. at 6.4% and retail sales ticked higher at 10.7% vs exp.10.6%. The stronger dollar and higher stocks did sink the Copper while Aluminium pays again a strong supply side that is China grows faster than the actual real demand.

Trading ideas

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

Aluminium: After last’s Friday closure below 1700$ this week we came off rather sharply; another perfect move. We also broke through the 1650$ and now the first target is around 1600/1590$ where some buyers will surely step in. If we go below here next level is 1550$. For sellers the first good level stands at 1650$. I am fairly bearish on Ali but keep in mind that we are coming off from 1694$ in only one week time.

The copper is yet not doing much and after such a long sideway trading I fear a sharp directional move. If we break through the 4620$ area which we managed to hold so far, we could see the 4500/4480$ very quickly and after that we go back to the 2016 lows in the 4350$ area. Given the stronger dollar and high LME stock I’ll tend to play it on the short side; careful buying it! On the upside the first good level is the 4700/4750$ but could be also worth to sell the break-out of the 4620$.

Lead did go back a bit more actually but now we are again above 2000$. Given the dollar strength and the general negative sentiment of the complex we may expect a bit of range trading for next week. First good level to buy are the 1900/1920$; sellers need to wait the 2050$.

Nickel is back again below the $10000 without any real fundamental reason I would say: <<After rumours that Indonesia might change its export rules on nickel ore, the country’s mining minister reassured the market by saying this is unlikely. Given the ammount of NPI capacity under development, we very much doubt authorities will allow a broad restart of ore exports.>> a trader said. The Filipino government has decided to suspend a total of 30 mining firms so far, representing 55.5% of domestic output or 230,000 tonnes of contained nickel per year. This should have a significant impact on the global supply/demand balance and therefore support strong pricing in the medium-to-long term, all else being equal. Technically speaking though we broke through the shorter-term trend line and next week we could see some more weakness. It is likely a come back to 9700/9500$ where I think would be again a good level to step in on the long side. Sellers should be short already today and look for a 500$ dollars move.

Zinc: the market is trading a sideways which I think is fair enough after the strong 2016 rally. 2400$ was a strong level and it will take some time to go back there and break it; surely not with such a strong US dollar. China's refined zinc production rose 2.8% year-on-year and 6.6% month-on-month to 551,000 tonnes in September, according to data from the country's National Bureau of Statistics published on Friday, October 21. Yet everyone still agree on the concentrate tightness which will start to apparent in the 1H 2017. I would be careful being overexposed on the long side as market is yet overbought.

Tin confirms the “buy the dip” strategy week after week. No reason to give up now; stocks are VERY low and fundamentals remain strong. Careful selling it.

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