Base and precious metals may trade lower as dollar gathers strength
Naveen Mathur July 27, 2015On a fortnightly basis, global equity markets traded on a positive note. After 17 gruelling hours of discussions, both the European leaders and the Greece government reached on an agreement on a unanimous deal to avert GREXIT.
The ECB rescued Greek banks by providing €900 million of emergency funding, thereby helping the cash-starved banks to reopen for the first time in three weeks. Moreover, the Greek parliament has approved the latest legislation that will enable European leaders including Greece to start talks on a multibillion euro rescue package.
With respect to China, a major correction in Chinese shares which caused jitters in the global markets prompted the Chinese government to relax lending rules to motivate people to borrow money for investment.
This move helped the Asian markets bounce back. Hawkish comment by the Federal Reserve Chairwoman, which hinted on the possibility of a rate hike at some point this year witnessed huge demand for the DX.
The Indian rupee depreciated more than 1 per cent in the last fortnight owing to hawkish comment by the Federal Reserve that on the possibility of a rate hike along with robust release of earnings data from the US companies that boosted the demand for the DX and weakened the Indian rupee in the process. Moreover, weak domestic markets owing to the release of quarterly results of Indian companies kept the markets and rupee volatile. However, state-owned banks on behalf of RBI kept the rupee stable considerably. WPI data from the nation raised the hopes of an interest rate cut by the central bank in the near future along with fresh selling of the US currency by exporters along with weak dollar supported gains.
In the past fortnight, spot gold prices plunged 5.6 per cent to close below $1,000/oz levels while MCX gold prices declined 5.1 per cent to close at Rs 24,731/10 gms. The sharp fall was witnessed owing to strength in the DX on anticipation of US rate hike this year after repeated admissions by the Fed members that the US economy and labour market are improving.
Also, SPDR holdings plunged to the lowest since Aug'08 and CFTC data showed that the net bullish bets are at the weakest since the index began in 2006. Further, Greece concerns have eased following Parliament approval of a second set of reforms to secure a €86 billion bailout, thereby hurting the safe haven status of the yellow metal.
International silver prices lost its value more than 6 per cent to close at $14.64/oz while MCX silver prices fell 5.4 per cent in the past fortnight. Weak gold prices coupled with strengthening dollar acted as negative factors Also, declining base metals pack exerted downside pressure.
LME Copper prices plunged 5.6 per cent for the sixth fortnight in a row as investors moved away from dollar denominated commodities in anticipation of US rate hike. Also, latest data by ICSG showed copper balance for the first four months of the year ended in production surplus of 60,000 metric tonnes as compared with a deficit of 436,000 tonnes during the corresponding period last year.
The report also stated that global copper production capacity at mine level through 2018 is expected to grow at an average annual rate of 6 per cent to reach 27.4 million tonnes (mt) a year in 2018. Further, China's manufacturing PMI dropped to a 15-month low in July owing to the recent stock market crash and weak export demand. MCX copper prices fell 5.1 per cent in the last fifteen days in line with international trends.
In the past fortnight, WTI and Brent crude oil prices lost its value by 8.7 per cent and 7 per cent respectively to close at $48.14 and $54.62/bbl. MCX crude oil prices lost its value by around 7 per cent to close at Rs 3,098/bbl. Continued concerns that global crude-oil supplies are overwhelming demand after the recent Iranian nuclear deal added to concerns that more crude oil could be produced in the coming months.
Also, the US Commodity Futures Trading Commission data shows money managers now hold short positions in WTI futures and options contracts equivalent to almost 110m barrels of US crude, more than a day of global oil demand. Further, delegates from members of the Organization of the Petroleum Exporting Countries (OPEC) indicated this week they expected the price drop to be short-lived and that they would not defer from a strategy of keeping output high to maintain market share. Outlook
We expect precious metals to trade lower as strength in the DX on expectations of rate hike in the US for the first time in nearly a decade will continue to bother gold. Also, investor interest seems to be declining in the metal as indicated by falling SPDR and CFTC holdings.
Reluctance by the OPEC to cut output at time of supply glut coupled with rising crude oil stockpiles in the US will exert pressure on prices. Also, strength in the DX along with sluggish Chinese economic activity will act as a negative factor.
We expect base metal prices to trade lower as rising expectations of US rate hike will be the major cause of concern for dollar denominated metals. Also, weak manufacturing data from China indicates towards failure of stimulus measures by the PBoC.
The south-west monsoon has revived in last week after weak progress during first half of July, dragging down the kharif agri-commodities prices in the futures market. Still, the quantum of average monsoon rainfall across the country during current monsoon has been 7 per cent less than the normal. On the regional distribution, the north-west region has received 6 per cent excess rainfall than normal while the central India and southern peninsula region has received 13 per cent and 12 per cent less rainfall respectively than normal.
The area under various kharif crops reported higher by 26 per cent according to the latest government data up tp 24 July 2015, aided by good monsoon during last month. Areas under pulses, oilseeds and cotton increased 50.6 per cent, 32.6 per cent and 30.7 per cent respectively, from a year earlier, while those under coarse cereals marked a 55.7 per cent rise over last year.
During the last fortnight, the most active chana Aug NCDEX contract surged 4.2 per cent to close at Rs 4,640 per quintal. The surge is due to higher demand against limited supplies as there were rains in important chana arrival centres.
During the chana off-season, government has taken strict steps against the hoarders to cool down the prices but relaxation for the WDRA registered warehouses from stock limit support the prices at higher levels. According to the govt data, country has imported more than 4.2 lakh tonnes of chana in 2014-15, which is 51.8 per cent higher than the quantity imported last year.
During the last fortnight, Soybean and RM seeds closed lower on satisfactory monsoon progress and weak international market. Bumper-sowing progress in soybean and subdued demand for crushing were negative for soybean while RM seeds dropped mainly due to speculative selling by the market participants. The active NCDEX Soybean Aug'15 touched high of Rs 3,565 per quintal and dropped 5.5 per cent to close at Rs 3,309 per quintal. In CBOT, the soybean prices dropped more than 5 per cent to close at $9.91 per bushels on good weather conditions and export demand worries as sales for 2015/16 U.S. soybeans crop are running well behind last year's pace.
The NCDEX Aug'15 RMseed, the prices increased to high of Rs 4,252 per quintal and closed at Rs 4,151, a decline of 2.4 per cent from high last fortnight. According to latest USDA report, global rapeseed production forecast to decline 4.5 million tons in 2015/16 to 67.2 million tons compared to last year on lower crop estimates from EU, China, Russia and Canada.
Veg oils also traded down during the last fortnight mainly due to subdued demand and record exports. During last fortnight, NCDEX soy oil Aug 2015 contract declined 2.3 per cent to close at Rs 569.95 per 10 kg. As per latest SEA data, soybean oil imports during Jun reduced 154,090 tonnes m-o-m compared to 289,266 tonnes in May. Meanwhile, during November-June period, soy oils imports increased by 66 per cent to 15.04 lt compared with 9.15 lt. Meanwhile, SOPA requested the government to increase customs duty to 25 per cent on crude edible oil and 30 per cent on refined oil.
The CPO prices during the last fortnight mostly traded sideways and close down by 0.8 per cent due to subdued demand and taking clues from the dropping prices in Malaysia palm oil. The palm oil prices in Malaysia declined is due to lower export data and higher stock levels. There is also concern over the Russia's limits of palm oil uses and China slow down.
Among softs, Cotton prices during last fortnight traded negative and closed down 1.8 per cent to close at Rs 16,350 mainly due to good progress of cotton sowing this season touching about 100 lakh hectares till 24 Jul 2015 against 76 lakh have planted same time last year. Demand from the ginners and millers are regular with CCI auctions supplying the cotton. In the USDA report, the production of the year 2015/16 was unchanged from the last month's forecast at 24.3 million tonnes. Meanwhile, the benchmark ICE cotton remained largely sideways to positive on stronger-than-expected export sales and weaker dollar, but concerns over increase global stockpiles coupled with lower exports and consumptions in China due to strong competition from polyester and other products capped further gains.
The sugar NCDEX October 15 contract during the last fortnight traded negative and recovered about 1.7 per cent from its low in last two trading session to close down 0.6 per cent at Rs 2,198 per quintal. The decline in price is due to heavy supplies by millers against regular demand. Meanwhile, ISMA, in its preliminary estimates has projected about 280 lakh tons of sugar for the season 2015/16, which is about 3 lakh tons less than last year. India's total sugar consumption is estimated at 25.2 million tonnes. Internationally, the prices were down last fortnight on ample supplies from India and Thailand despite heavy rains in key growing regions of Brazil have threatened to delay harvesting.
In the, spices
complex, turmeric and cardamom traded on negative note while jeera and
coriander were quite volatile. Turmeric prices declined mainly due to
good monsoon and higher supplies for the medium quality turmeric while
cardamom prices plunged due to higher arrivals of new season crops
against subdued export demand. Meanwhile, during the last fortnight
Jeera NCDEX Aug'15 contract, made a high of Rs 16,455 per quintal and
closed at 15,935 levels, down 3.2 per cent from its high. The decline is
due to higher supplies of sub standard quality. Coriander traded on
positive note and closed 2.9 per cent higher at Rs 11,986 per quintal on
production concern and good demand.
In the coming fortnight, Chana prices may trade sideways to positive on limited supply, higher imports, and monsoon revival however government intervention in hoarding and import may be negative for the prices.
We expect soybean and Ref soy oil to trade sideways to negative on subdued demand for crushing on ample oil supplies from import and limited meal exports. Reports of lower mustard production and anticipation of good demand for mustard meal may keep prices over Rs 4000.
CPO is expected to trade sideways to negative on reports on lesser export demand and higher supplies coupled with expectations of low output in July and El Niño threat during the year. However, Bio diesel policy and Indonesia levy on palm oil exports may be positive for the prices in medium to long term.
We expect cotton and sugar to trade sideways to negative on good sowing progress coupled with supply glut in international market. However, effect of El Nino, which can affect sugarcane crops around the world, can be a factor for price surge.
Jeera and coriander may trade sideways to positive due to revival of demand on dwindling supplies but quality may be an issue for the prices where as turmeric may trade sideways as there expectation of good supplies from the new harvest after good rainfall. Cardamom may trade sideways to negative on good arrivals of new season crop against low demand.