Macquarie Metals Report at close of business on Tuesday, 17 June 2008

Commentary
Precious Metals
Base Metals
Currencies
Interest Rates
Gold and Silver Forwards
Gold USD ATM Option Vols
Latest Economic Data
Terms and Conditions

Commentary

Metals

• Asia ticking higher in quiet conditions on the back of light HK buying, as well as  a stronger Euro in the morning session on FT and WSJ articles claiming there is little case to be made for US rate hikes just yet. Market stuck in 883/884 range for most of the afternoon, before short covering and early European buying took gold to 885 into the close.
• London opened to ECB comments that 25bp hike would be sufficient to contain inflation and Euro immediately under pressure trading back towards 1.55 figure. Gold at the same time largely ignored the move and made a few attempts at 888.50, but couldn’t break given the receding crude and Euro. Euro Zew data then disappointed and gold finally eased lower with HK names notable sellers taking gold back to 882.00.
• NY immediately took gold lower to session lows at 875 as Euro continued to pare gains. However, the momentum stalled in a strange moment after US PPI which printed higher than expected. Weak housing starts at the same time saw the PPI data neutralised and Bonds rallied helping the Euro to grind higher. Gold played lap dog once more, following currency markets around, moving back to 886.50 and remaining choppy for the remainder of the session.
• Increasing warnings in the press that the US cannot fight the inflation front ahead of economic concerns had the market ignoring what should have been bullish PPI data on Tuesday. Instead the market took the inflation data combined with continued weak housing data as further concerns for a stagflation type scenario brewing in the US . And whilst the markets are confused as to the next direction regarding the USD, these growing concerns have done enough to stall the rallying USD momentum for the moment. For gold, there is nothing to suggest we are about to break out of the current range just yet, but would expect continued bids on the downside for the moment. 873/5 support, 895 resistance. Medium term, if the stagflation scenario does grow some legs and the market is disappointed with a lack of US interest rate hikes, gold would prove a strong beneficiary and could be the impetus to see gold break onto new highs.
• Copper steady throughout the Asian session, as Shanghai moved higher throughout the day in what looked to be Arb related buying. Consumer buying largely absent given the move higher and with a 1500mt stock increase this saw London offer the red metal lower on the open. From here copper pushed back towards 8000 level before settling largely unchanged by the close. As we mentioned yesterday, without consumer buying at these levels, copper will struggle to move significantly higher from here. Look for continued resistance into 8200, with a commodity surge required to keep the red metal moving higher here. 8000 support.
• Ali the standout metal in the complex on Tuesday, with a solid $50 rally despite a flatlining Euro throughout the session. With the break up through the down trend line from March highs, the market surged through 3000 on solid buying on the range breakout. Look for support at 2890 now, with further gains expected on a break through 3050.
• Lead was a surprising gainer on Tuesday despite a 11.5k mt stock increase in LME warehouses. The initial reaction was to sell, but repeated bids at 1800 saw the opportunistic sellers off quite easily. With little firepower left for the shorts given their already large position, the market quickly short covered from here and put in a strong performance to close up $70. Again we continue to highlight the value prospects for zinc and lead here on a medium to long term trade.

FX and general

• ECB's Bini Smaghi, in a piece of candour to an Italian newspaper, indicates that the ECB will be "one and done". Feels a 25bp hike should be enough to haul inflation below the 2% target over the next 18-24 months. Euro falls 60 points from its 1.5552 highs, and gave USD some confidence.
• Aud lost 30 points to 0.9400, as option interest snuffed out a squeeze.  Usd/Yen bounced out of 107.61 lows, initially to Y108, later to Y108.40 as NY sat down. Yen crosses were buoyed as European stocks chalked up 1.0% - 2.0% gains.  Euro/Yen on its highs of Y167.84 as NY sat down, Aud/Yen also 50 points stronger to Y101.80 levels.
• UK May CPI rose 0.6% m/m, and 3.3% y/y to a record annual pace, prompting a letter from BoE Governor King.    Sterling spiked 30 points to 1.9700 on the release, but was friendless after this as King's letter looked through the inflation spike. By NY open, as others stood still, Sterling fell 230 points to 1.9470 .
• German investor sentiment slumps in June, as the ZEW drops 11 points to minus 52.4, its worst result since December 1992. Current conditions only fractionally softer.  Euro only lost another 25 points to 1.5465 , and returned towards 1.5500 soon after.  The crutch for Euro was a 50 point rally in Euro/Sterling to above 0.7950 as the Pound was clobbered.
• US data failed to excite:  housing starts fell 3.3% in May [and downwardly revised in April], building permits fell 1.3%, while PPI rose 1.4% in May [exp 1.0%], to cap a 7.2% annual increase. Core PPI rose 0.2% m/m and 3.0% annualised.  Goldman Sachs Q2 earnings exceed analyst forecasts as gains in prime brokerage, asset management and commodities lifted results as other divisions slump. The numbers show a decline on Q1, but remain firmly in the black with EPS at $4.58. Credit products included losses of about $775m.
• US May Industrial Output falls 0.2% [exp +0.1%] and Capacity Use Rate prints its lowest since September 2005 with 79.4%. Usd/Jpy holding above Y108. Euro climbs above 1.55 again. Aud holds 94 cents. Wall Street opens in the black. Oil offering the US Dollar some reprieve, down 1%. Gold too holding the greenback in the game, falling under $880.
• Reports a forthcoming US Senate bill will boost GSE loan size.
• Both the Nzd and Aud markets see unusual price action going into NY option expiry. Nzd falls from 0.7545 to 0.7510 and then returns in minutes. Aud covers 0.9415 to 0.9390 and back.
• US Dollar remains under pressure as Europe leaves for the day. Wall Street trading lower with weaker financials. US Bonds bought as some question the surety of the priced in rate tightening from the Fed later this year.
• Interest rate futures markets begin lowering their implied probabilities for more serious tightening from the Fed this year. With Housing Starts worst in 17 years and contained Core PPI the chances of no rate change at the next two FOMC meetings increase to 86% and 50.4% (up from 74% and 32% respectively). USD weakens and this, in extremely quiet NY afternoon trade, sees it grind higher to 0.9455.
• ECB's Mersch says inflation may stay at a higher level for longer than originally thought. He then offers this clanger "There is a possible certainty of a rate move at the next meeting". Euro looks on.
• US Treasuries more attractive with the weaker data, leaving 2y and 5y yields 11bps lower. Oil still comfortable above $132 bbl.
• Paulson is upbeat and frank about Sino-American relations. They don't agree on all economic issues but must keep talking. Energy, environment , economic liberalisation and FX as always on the agenda.

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