Copper Spread Tightens on Inventory Withdrawals

Commodity

Summary:

Oil prices are trading under pressure this morning on demand side uncertainties. Saudi Arabia increased the official selling price for July deliveries for all regions. LME copper continues to see inventory withdrawals as demand in Asia picks up.

Energy – Saudi increases the official selling price for oil

Saudi Arabia increased its official selling price for all regions for July, a day after the nation pledged an additional oil supply cut for the same month. Saudi Aramco will sell the Arab Light crude for buyers in Asia at a US$3/bbl premium for July deliveries, an increase of US¢45/bbl compared to June 2023.

The premium for the US and European deliveries has increased by US¢90/bbl, while buyers in the Mediterranean region will see an increase of US¢60/bbl. The hike in premium comes as a surprise considering ongoing demand concerns and that Saudi Arabia has been pushing for supply cuts to bring the oil market into balance.

Metals – Declining copper on-warrant stocks tighten LME spread

Recent LME data shows that total on-warrant stocks for copper dropped by 17,750 tonnes – the biggest daily decline since October 2021 – for a second consecutive session to 71,575 tonnes (the lowest level in almost a month) as of yesterday. The majority of the outflows were reported from South Korea's Busan warehouses. Meanwhile, cancelled warrants for copper rose by 18,025 tonnes after declining for three consecutive sessions to 27,375 tonnes yesterday, signalling potential further outflows. The cash/3m for copper stood at a contango of just US$4/t as of yesterday – compared to YTD highs of a contango of US$66.26/t from 23 May – indicating supply tightness in the physical market.

In mine supply, Peru's latest official numbers show that copper output in the country rose 30.5% year-on-year (+1.2% month-on-month) to 222kt in April. The majority of the annual production gains came from the higher output levels from mines like Southern Peru Copper, the Las Bambas and Cerro. Cumulatively, copper production grew 15.7% YoY to 837.5kt in the first four months of the year. Among other metals, zinc production in the nation increased 31.4% YoY to 130.6kt in April.

In ferrous metals, the most active contract of iron ore trading at the Singapore Exchange extended its upward rally for a fifth consecutive session and traded above US$108/t this morning on speculations of more supportive steps from China to accelerate its economic growth. The recent market reports suggest that the People's Bank of China is likely to cut the reserve-requirement ratio for banks and might also lower interest rates in the second half of the year. Meanwhile, BBG also reported that the Chinese government is preparing a new batch of measures to push growth in the property market.

Agriculture – US crop planting maintains the pace

The USDA's latest crop progress report shows that US corn plantings continue to rise with 96% of plantings completed as on 4 June, compared to 93% of planting done at this point in the season last year and the 5-year average of 91%. Similarly, soybean plantings are also growing, with 91% planted as of 4 June – well above the 76% seen at the same stage last year and the 5-year average of 76%. Meanwhile, spring wheat plantings are 93% complete. This is above the 81% planted at the same stage last season and in line with the 5-year average. Meanwhile, the agency rated around 36% of the winter wheat crop in good-to-excellent condition, up from 34% a week ago and 30% seen last year.

The USDA's weekly export inspection data for the week ending 1 June indicated a drop in demand for US grains over last week. The agency stated that US corn export inspections stood at 1,181kt, lower from 1,346.4kt in the previous week and 1,458.5kt reported a year ago. For wheat, export inspections stood at 291.6kt, down from 391.3kt from the previous week and 355.3kt reported a year ago. Similarly, soybean export inspections fell to 214.2kt, compared to 243.1kt from a week ago and 370kt from a year ago.

The director general of the Ivory Coast's cocoa regulator, Conseil Café Cacao, stated that the domestic cocoa crop is expected to improve in 2022-23 (compared to the previous year) despite intensifying concerns about a potential outbreak of the swollen shoot virus. Ivory Coast cocoa production is stabilizing despite a slow start, taking the season's harvest projections between 2mt-2.2mt. Last week, the International Cocoa Organization (ICCO) projected an increase of 4% in Ivory Coast's cocoa output this season, reaching 2.20mt.

Source: ING

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Alex

Central Bank

After staying inactive for two consecutive meetings, the BoC is now expected by a decent percentage of market participants to raise interest rates when it meets on Wednesday at 14:00 GMT. The hype of another rate hike was bolstered by the much-better-than-expected GDP data for Q1. Will policymakers indeed press the button, or will they stay patient and wait for more incoming data before deciding whether raising interest rates further is appropriate?

Data keeps the hike door open

At its latest gathering, the Bank of Canada decided to stand pat for the second meeting in a row as it was largely anticipated. However, it did not satisfy those expecting a rate cut later this year, with the statement revealing that policymakers are still prepared to raise rates further if deemed necessary.

Data after the meeting have been adding credence to the Bank's choice to leave the door to more hikes open. The April jobs report revealed that the unemployment rate held steady at 5.0%, just a tick above its lowest level in more than five decades, while the inflation data for the month showed that headline inflation accelerated in April, and although all the underlying metrics slowed, both the Trimmed mean and Common CPI rates slid by less than expected.

Will the BoC Resume Interest Rate Hhikes?_1

Most importantly, the economy grew by double the estimated pace during the first three months of the year after stagnating at the end of 2022, resulting in a skyrocketing quarter-on-quarter annualized rate to 3.1% from -0.1%.

But a hike more likely in July

Having said all that though, although market participants are convinced that another hike may be firmly on the table, they don't see a high probability of this happening at this week's gathering. They are assigning a 40% probability to the hike scenario, with the remaining 60% pointing to no action. They believe that a hike is more likely to be delivered in July and nearly another one by December.

Will the BoC Resume Interest Rate Hhikes?_2

Therefore, should policymakers stay sidelined and stick to their guns that they remain prepared to hike more if needed, the loonie is likely to slide but not much. For a noteworthy and sustained tumble in the Canadian currency, officials may need to stand pat and officially announce the end of this tightening crusade, which according to the aforementioned data appears to be the least likely scenario.

The former looks the wisest choice as it is too early to describe the latest rebound in the headline CPI rate as inflation getting out of control, and thus, officials may prefer to wait for more data before they hike again. They could do so at the July meeting, where updated macroeconomic projections will be available. Now, in the case of the Bank pressing the hike button this week and appearing willing to deliver more, the loonie could rally.

Dollar/loonie stays trapped within a wide range

Dollar/loonie has been trading in a trendless mode since November, with most of the price action being contained between the 1.3230 and 1.3650 barriers. Thus, the medium-term picture, at least from a technical perspective, looks neutral.

Will the BoC Resume Interest Rate Hhikes?_3

Currently, the pair is sitting slightly above the 1.3400 zone. If the BoC appears less hawkish than expected on Wednesday, dollar/loonie is likely to rebound and perhaps aim for another test at the upper bound of the range, at around 1.3650.

On the other hand, a potential hike could extend last week's retreat, with a potential break below 1.3400 perhaps paving the way towards the lower bound of the aforementioned range, at around 1.3230.

Employment report also on tap

Having said all that though, apart from the BoC decision and the related market reaction, loonie traders will also have to evaluate the Canadian employment report for May, due out on Friday. Even if policymakers stay on hold, conditional upon leaving the door open to another hike, a strong employment report could prompt investors to add to their hike bets, adding more basis points worth of increments by the end of the year.

Source: XM.Com

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Owen Li

Central Bank

Australia's central bank on Tuesday raised interest rates by a quarter-point to an 11-year high, and warned that further tightening may be required to ensure that inflation returns to target.

The hawkish message sent the local dollar surging and bond yields spiking, as markets quickly moved to price in an above even chance of a further rate increase next month.

Wrapping up its June policy meeting, the Reserve Bank of Australia (RBA) hiked the cash rate to 4.1%, saying inflation is still too high and removed a reference that stated "medium-term inflation expectations remain well anchored," which had been in policy statements since July last year.

"We think the Bank is no longer as confident as it was before on the trajectory of medium-term inflation expectations given that it dropped the sentence," said TD Securities' Asia-Pacific rates strategist Prashant Newnaha.

"The omission of this sentence reads hawkish in our view and may spell further rate hikes ahead from the RBA."

The Australian dollar jumped 0.8% to $0.6667, the highest in 2-1/2 weeks after the policy statement, while three-year government bond yields advanced 12 basis points to 3.660%, the highest since February.

Markets have also moved to price in a 60% chance of another hike in July.

Adam Boyton, head of Australian economics at ANZ, expects the RBA to raise interest rates by another quarter-point in August.

"The Bank could well move ahead of that... Risks are likely skewed toward the RBA needing to move more than just once more," said Boyton.

In the policy statement, Lowe said the latest rate increase will "provide greater confidence that inflation will return to target within a reasonable timeframe."

"The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment."

Inflation Challenge

Markets had been leaning towards a pause, although they had priced in a sizeable 40% chance that the RBA would hike by 25 basis points. Many economists had seen the June meeting outcome as a tight call.

The RBA has increased interest rates by a whopping 400 basis points since May last year, the most aggressive tightening cycle in its modern history. It had surprised markets by hiking again in May after pausing for just a month to assess its earlier tightening. Australia Cenbank Warns of More Hikes Ahead After Raising Rates To 11-Yr High_1

Australia Cenbank Warns of More Hikes Ahead After Raising Rates To 11-Yr High_1

Global policymakers are grappling with still-high inflation despite sharp increases in borrowing costs over the past 12-18 months, with some already pausing and others set to do so as their economies teeter on the brink of recessions.

The Federal Reserve is expected to end a run of 10 straight rate increases next week while leaving the door open to a future rise in borrowing costs.

Recession Risks

The RBA currently forecasts headline inflation - which was running at 7% last quarter - to return to the top of its target range of 2-3% by mid-2025, a slower path than many other economies as Lowe wants to preserve strong gains in the labour market.

The economy has started to show signs of slowing, but inflation for April surprised on the upside and a large bump to minimum wages led many economists to predict higher rates for longer.

Australia will report the first-quarter gross domestic product figures on Wednesday, which is expected to show growth slowed to 0.3% from the previous quarter when the economy expanded by 0.5%.

On Tuesday, Lowe acknowledged the risks of a more pronounced downturn in the economy, saying the path to "achieving a soft landing remains a narrow one", as the RBA walks a tight policy rope between tamping down on price pressures and keeping the economy growing at a steady pace.

"As the RBA takes rates higher, the risk of a greater slowing in the economy is rising," said Tapas Strickland, head of market economics at NAB.

Source: Yahoo

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Alex

Economic

A drop-off in spending by inflation-hit consumers was one of the main reasons Germany fell into recession in the first quarter, even as other countries in the region managed to avoid it.

What's more, even with inflation starting to ease across Europe, the signs are that Germany's famously thrifty shoppers are not ready to spend their way out of recession - meaning the region's largest economy will have to look elsewhere for growth.

"Germans are cautious by nature," said Stephan Fetsch, Germany's head of consumer goods at KPMG. "Unless they feel safe about the future, they remain reluctant to spend."

German output shrank 0.3% in the first three months of the year to mark a second straight quarter of negative growth, notably weighed down by a 1.2% fall in household spending that contrasted with modest gains in France and Italy.

Its economy - described in a Sentix survey on Monday as "the biggest problem child in the euro zone" - is at a crossroads. Economists polled by Reuters are split on its second quarter fortunes: views ranged from a 0.3% GDP fall to a 0.5% gain, with a median forecast of 0.2% growth.

Household consumption, which like elsewhere accounts for broadly half of GDP in Germany, will be key to the outcome.

However, German consumer sentiment remains below its pandemic low in the spring of 2020 and the consumer barometer from the German Retail Association (HDE) shows a similar picture.

"A significant boost in private consumption is not expected in the coming months," the retail association said on Monday in the presentation of the barometer for June.

A number of factors are behind the subdued mood.

German consumers were hit particularly hard by high energy prices, being more dependent on Russia gas. Yet the government package wasn't as generous as in other countries, said Holger Schmieding, chief economist at Berenberg.

Carsten Brzeski, Global Head of Macro at ING, further noted that Berlin introduced policies to cap energy price rises later than those introduced in France and Italy, predicting that private consumption would continue to stagnate this year.

Despite inflation easing, German consumers remain extremely cautious and, used to years of access to low prices thanks to discount retailers, remain reluctant to spend at what many perceive as excessively high prices.

"Germany is the big retailers nation and the discount was born here," KPMG's Fetsch said. "The general hunt for the best value is a very German trait."

Now, an additional factor is starting to make itself felt: 375 basis points' worth of European Central Bank interest rate hikes since July 2022 which are making borrowing more expensive and saving more profitable.

Commerzbank's senior economist Joerg Kraemer calculates that on average, five quarters pass between the first interest rate hike and the hit to the economy, suggesting a further contraction in the economy in the second half of this year.

"The German consumer has reasons to be scared and the result of all the economic uncertainty is usually an increase in precautionary savings," said Michael Burda, economics professor at Humboldt University Berlin.

The German government still hopes the economy can turn itself around this year.

For ING's Brzeski, the decisive factor will be Germany's exporting performance - a longstanding strength which is nonetheless often subject to sharp swings.

While latest trade data on Monday showed a surprise 1.2% rise in German exports in April, boosted by deliveries to a re-opening China, that far from made up for the sharp 6% plunge the previous month.

Source: ZAWYA

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Traders' Opinions

Central Bank

In an unexpected move, the Reserve Bank of Australia (RBA) raised its cash rate by 25 basis points to 4.1% in June, marking the second consecutive rate hike after a similar increase in May. The decision caught many analysts off guard, defying market expectations for a pause. This article delves into the implications of the rate hike, its impact on various sectors, and the subsequent market reactions.

RBA's Inflation Concerns and Tightening Measures

The RBA's decision to raise interest rates stems from concerns over persistently high inflation in Australia. With the country's consumer inflation reaching 7% in the first quarter of 2023, albeit down from the previous quarter's 7.8%, inflation remains above forecasts. The central bank aims to curb rising price expectations, prevent inflation from becoming ingrained in the economy, and ultimately steer inflation back within its target range of 2-3%. Australia's Surprising Rate Hike Sends Ripples Through Financial Markets_2

Australia's Surprising Rate Hike Sends Ripples Through Financial Markets_2

Market Reactions and Currency Impact

Australia's Surprising Rate Hike Sends Ripples Through Financial Markets_3

The Australian dollar (AUD) experienced a significant surge following the RBA's rate hike announcement. Appreciating nearly 1% against major currencies, the AUD rose above $0.665, reaching its highest level in three weeks. This rally reflects the market's positive response to the central bank's efforts to address inflationary pressures and restore confidence in the economy.

Bond Yields Hit Three-Month High

In response to the rate hike, the yield on Australian 10-year government bonds spiked above the 3.8% mark, reaching its highest level since early March. This surge indicates market expectations of further tightening measures by the RBA to rein in inflation. The central bank's aggressive monetary policy tightening, with a total of 400 basis points rate increases since May 2022, demonstrates its commitment to achieving its inflation target.

Stock Market Dips Amid Rate Hike

Following the RBA's decision, Australia's stock market experienced a setback, with the S&P/ASX 200 Index falling 1.2% and closing at 7,130. The decline came after a three-day advance and affected various sectors, including finance, mining, energy, technology, and consumer-related stocks. Notable losses were seen among index heavyweights such as Westpac Banking, Newcrest Mining, Woodside Energy, Block Inc, and Wesfarmers.

Current Account Surplus Falls Short

Australia's Surprising Rate Hike Sends Ripples Through Financial Markets_6

Australia's Q1 current account surplus came in lower than expected, reaching AUD 12.3 billion, compared to market expectations of AUD 15 billion. While the goods and services account surplus widened due to lower import prices, a rise in the net primary income deficit offset some gains. The net primary income gap expanded to AUD 28.5 billion, reflecting a decrease in income credits following a record high in the previous quarter.

Private House Approvals Continue to Decline

Australia's Surprising Rate Hike Sends Ripples Through Financial Markets_7

Private house approvals in Australia registered a third consecutive decline in April 2023. On a seasonally adjusted basis, approvals fell by 3.8% month-on-month to 7,939 units. Notably, Victoria, Queensland, and New South Wales witnessed declines, while South Australia and Western Australia experienced modest growth.

The RBA's unexpected decision to raise interest rates by 25 basis points reflects its determination to tackle persistently high inflation in Australia. While the rate hike has bolstered the Australian dollar and bond yields, it has prompted a decline in the stock market. Going forward, the RBA's actions will be closely monitored as it aims to steer inflation back within its target range and ensure a balanced economic recovery.

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Thomas

Russia-Ukraine Conflict

Millions of litres of water burst through a gaping hole in a Russian-controlled dam on Tuesday, flooding a swathe of the war zone in southern Ukraine, threatening scores of villages and cutting off water supplies.

Ukrainian and Russian forces blamed each other for the breach.

The Nova Kakhovka dam, which holds water equal to that in the Great Salt Lake in the U.S. state of Utah, supplies water to Ukraine's Crimean peninsula, annexed by Russia in 2014, and to the Zaporizhzhia nuclear plant, also under Russian control.

The U.N. nuclear watchdog, the International Atomic Energy Agency, said on Twitter it was closely monitoring the situation but that there was "no immediate nuclear safety risk at (the) plant" which is also in southern Ukraine.

However, Ukraine's state atomic power agency Energoatom said the water level of the Kakhovka Reservoir was rapidly lowering, posing an "additional threat" to the facility, Europe's largest nuclear power plant.

Some 22,000 people living across 14 settlements in Ukraine's southern Kherson region are at risk of flooding, Russia's RIA news agency quoted the Moscow-installed head of the region as saying. Kherson is one of five regions, including Crimea, that Moscow claims to have annexed.

Unverified videos on social media showed water surging through the remains of the dam with bystanders expressing their shock. Water levels raced up by metres in a matter of hours.

A Russian-installed official in the town of Nova Kakhovka said on Tuesday residents of around 300 houses had been evacuated, state-owned news agency TASS reported. He said it would likely be impossible to repair the dam.

Counter-Offensive

The dam breach came as Ukraine prepares to launch its long-awaited counter-offensive to drive Russian forces from territory they have seized during more than 15 months of fighting.

Russia said it had thwarted another Ukrainian offensive in eastern Donetsk and inflicted heavy losses. It also launched a fresh wave of overnight air strikes on Kyiv. Ukraine said its air defence systems had downed more than 20 cruise missiles on their approach to the capital.

Reuters could not independently verify the reports and it was unclear whether any of the latest fighting marked the beginning of Ukraine's long-anticipated counter-offensive.

The Southern Command of Ukraine's military accused Russian forces of blowing up the Nova Kakhovka dam, which is 30 metres (yards) tall and 3.2 km (2 miles) long. It was built in 1956 on the Dnipro River.

"The scale of the destruction, the speed and volumes of water, and the likely areas of inundation are being clarified," the Ukrainian military said on Facebook.

Ukraine's military intelligence agency later said on Telegram that Russian forces had blown up the dam "in a panic", in what it said was "an obvious act of terrorism and a war crime, which will be evidence in an international tribunal".

Russian news agencies said the dam had been destroyed in shelling while the mayor of Russia-controlled Nova Kahhovka city was quoted as blaming an act of terrorism - Russian shorthand for an attack by Ukraine.

The Russian installed head of the Kherson region said evacuation near the dam had begun and that water would reach critical levels within five hours.

The Kakhovka Hydroelectric Power Plant has been "totally destroyed" and cannot be restored after a detonation inside the engine room, Ukraine's state hydroelectric company said.

Ukraine's President Volodymyr Zelenskiy will hold an emergency meeting over the dam blast, Oleksiy Danilov, secretary of Ukraine's National Security and Defence Council, said on Twitter on Tuesday.

Ukrainian Attacks

Russian President Vladimir Putin sent troops into Ukraine on Feb. 24 last year in what the Kremlin expected to be a swift operation, but its forces suffered a series of defeats and regrouped in the country's east.

Tens of thousands of Russian troops dug in over the winter, besieging Bakhmut for months and bracing for an expected Ukrainian counter-attack to try to cut Russia's so-called land bridge to the Crimean Peninsula.

Ukrainian officials have made no mention of any broad, significant new campaign, although in his nightly address on Monday, Ukrainian President Volodymyr Zelenskiy was enigmatic, hailing "the news we have been waiting for" and forward moves in Bakhmut in Donetsk.

Russia says it thwarted a major Ukrainian attack in the Donetsk region over the weekend and on Tuesday the defence ministry said a fresh Ukrainian assault had also been repelled.

Russian forces inflicted huge personnel losses on attacking Ukrainian forces and destroyed 28 tanks, including eight Leopard main battle tanks and 109 armoured vehicles, it said. Total Ukrainian losses amounted to 1,500 troops.

There was no immediate comment from Kyiv about Russia's assertions. Russia and Ukraine have often made claims of inflicting heavy human losses on each other which could not be verified.

Writing on Telegram, Russia's Wagner militia leader Yevgeny Prigozhin said Moscow's claims of huge Ukrainian losses were "simply wild and absurd science fiction."

The Washington Post reported that some U.S. officials thought Ukraine's counter-offensive was underway, but White House national security spokesperson John Kirby declined to comment on whether this was the case.

"I'm not going to be talking for the Ukrainian military," he told a briefing, adding that the United States had done "everything we could ... to make sure that they had all the equipment, the training, the capabilities to be successful."

The success or failure of a counter-offensive, expected to be waged with billions of dollars worth of advanced Western weaponry, is likely to influence the shape of future Western diplomatic and military support for Ukraine.

In its evening report on Monday, Ukraine's General Staff made no mention of any large-scale offensive, nor did it suggest any deviation from the usual tempo or scope of fighting along front lines that have not changed significantly for months.

Source: The Japan Times

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Damon

Commodity

Crude oil fully pared post-OPEC gains yesterday, as Saudi's lonely production cuts and the quota transfer from African countries to UAE raised question about the hit-power and the health of the cartel.

As a result, the barrel of American crude fell below the $72pb mark. The risks are now tilted to the downside because the OPEC meeting was the major upside risk for oil bears and it's cleared for now.

Oil stocks kicked off the week on a depressed note. Exxon tested the 200-DMA yesterday but failed to clear resistance amid the very short-lived post-OPEC oil rally. Exxon closed Monday's session 0.44% lower, and Chevron lost 0.48%. Still, it's more interesting to have a positive exposure to oil stocks than to oil itself, as oil companies accumulated a big amount of cash during the post-pandemic and Ukrainian war months, and they can simply acquire smaller rivals to boost revenue and growth.

$3500 per headset

Apple revealed its much-expected VR headset yesterday, just after its stock price hit a record, but the $3500 headset failed to convince investors that it will be the next big thing. It's too expensive to democratize and rivals' efforts haven't paid much so far. Giving a fancy design to a product of little-interest may not be the next big thing for Apple.

Elsewhere in tech, Nasdaq 100 is up by more than 35% since the start of this year, and according to a Deutsche Bank report the volume of call-option buying in tech and Mega Cap Growth stocks is now approaching the highest levels of the pandemic era – despite the Federal Reserve's (Fed) 500bp rate hike, and its pledge to do more. For now, there is no major sign of a reversal in appetite for Big Tech.

But we have signs that the major central banks are not done surprising to the hawkish side just yet. The Reserve Bank of Australia (RBA) hiked the interest rates by 25bp to 4.10% at today's meeting, defying economists' expectations of status quo. 'Fighting inflation' remains the primary focus, the bank said. The AUDUSD jumped past the minor 23.6% retracement on February-May retreat and cleared the 50-DMA at 0.6660. The surprise hawkish move, along with a rebound in iron ore price could further support the positive move and send the pair above its 200-DMA, which stands a touch below the 67 cents level.

Another scandal?

Bitcoin fell more than 5% yesterday after the SEC accused Binance and its CEO Zhao of being 'engaged in an extensive web of deception, conflicts of interest, lack of disclosure and calculated evasion of the law'. Big cryptocurrency institutions' misfortune could shake the market, but the cryptocurrencies, themselves, remain impressively resistant to scandals in crypto exchanges, and price dips could be interesting opportunities to buy the assets.

In the medium run, rising interest rates pause a higher risk to cryptocurrency valuations than another crypto-exchange scandal.