MORNING BID – Losses continue, and other concerns

Mar 14, 2014 12:27 UTC

The ructions in China have had an interesting effect on commodities prices – good for gold, crappy for copper. And more developments in this area should be expected as the market deals with growing weakness and the threat of a deflating credit bubble coming from the massive lending to various sectors in the world’s second-largest economy. Copper has been rather weak of late, but the broader CRB commodities index is actually much higher on the year. This is the biggest divergence since the eurozone debt crisis in 2011, points out Ashraf Laidi, the chief global strategist at City Index in London.

Again, the recent selling has had to do with the Chinese companies using the metal (and iron ore, too) as collateral for cheap dollar financing. So we’ve hit a weird storm here – weak yuan that makes those loans more expensive, and copper falling too, and again, that also messes with those loans. Put that together and you have a few markets moving in directions that are not beneficial to a major counterparty in several of them, for one, and resulting in the kind of activity that tends to turn into a vicious cycle.

More copper weakness, more yuan weakness, wash, rinse, repeat. Add a slowing macro economy and it’s a recipe for some more problems down the line. It’s also not good for other risk assets, even U.S. stocks, and part of the reason bonds rallied on Thursday. The growing problems there may be a reason why the Fed’s custody holdings data on Thursday afternoon showed foreign central banks dumped more Treasuries this past week than at any time – $104 billion, almost triple the previous record – as banks prepare for liquidity problems.

And it’s why things look like they’re going to be a bit ugly on Friday following more losses in Russia (down 5 percent) and in Asian markets. That’s not all, though. More defaults on trust products in China are expected. These started earlier in the year, where these big trusts that were sold to investors guaranteeing big returns backed by loans to coal producers didn’t repay investors on time. “The number of defaults are likely to accelerate in coming weeks as more Trust funds are expected to mature starting in April,” wrote Robbert van Batenburg, strategist at Newedge. He points out how intertwined these companies are in differing industries, with the common link being that they’ve all promised big returns for investors that now seem like they’re not going to come to fruition. Sound familiar? “If these problems in China escalate, a flight in gold and Treasuries is likely to ensue,” van Batenburg wrote. Well, that’s what we’re seeing again on Friday; the safe havens get the benefit while other markets suffer.

A bit of the reverse is happening in gold, which is predictably benefiting from the safe-haven allure of the yellow metal at a time when tensions are also rising between Russia and Ukraine and as a possible response from the West looms if Russia annexes the Crimean region of Ukraine (even if they want to go).

MORNING BID – Copper, China and currencies

Mar 12, 2014 12:58 UTC

Markets start on the back foot this morning, with weakness overseas – and particularly in emerging markets – feeding through to a bit of strain on U.S. futures and a bit of flight to quality to the U.S. bond market.

The outlook for China once again comes into play, with the most recent fears being more corporate defaults in the world’s second-largest economy and the way in which copper imports are used in China as collateral to raise funds. So it’s all nicely intertwined here and has had a detrimental effect on both China’s stocks, stocks in various exchanges around the world, and of course the price of copper, which was down 5 percent in Shanghai.

What that’s done is hit the currencies more sensitive to the commodity complex – the Aussie dollar in particular – and the outlook has both worsened for that and commodity prices, while we see improvement in the dollar, Swiss franc and the yen. “Yesterday’s price action warns investors with broad commodity exposure of increased risks of a downside, and a possibly sharp correction is likely,” wrote strategists at Brown Brothers Harriman this morning.

This would also seem to undercut demand from commodity-sensitive economies of which China, to some extent, is one, but U.S. strategists still see a favorable outlook for the capital spending trend among big companies. Indeed, both Bank of America and Citigroup have noted, of late, how capex has been stronger than expected and spending plans are looking favorable right now.

One word: aluminium

Jul 22, 2013 22:07 UTC

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Goldman Sachs, helpful as ever, has stepped up to do its part in implementing a discrete soda tax. Over the weekend, David Kocieniewski wrote about the complex of metal-storage warehouses in Detroit owned by Goldman, where about a quarter of the world’s aluminium available for delivery is stored.

The tl;dr version of the story is, to quote Kevin Drum, “if you control the inventory of a commodity, you can make a lot of money”. Once Goldman bought the warehouses in 2010, it created a “a merry-go-round of metal”, in which aluminium gets moved from building to building and kept as “dark inventory” instead of being delivered. While waiting around (for over a year, on average), Goldman makes money on the futures and derivatives contracts tied to the underlying asset, while still collecting rent on the metal being stored, according to Izabella Kaminska.

In doing so, the bank has succeeded in pushing up the price of aluminium, to the tune of $5 billion over the last three years, or a cent and a half per American per day. This isn’t enough to be the driving factor behind the spike in PBR prices, but it is enough to spur industry giants including Coca-Cola into action. Both beer and soda companies are unhappy — even as they have moved away from using the Goldman warehouses, they still have to pay the higher prices for raw materials, which will cut into their healthy profit margins (Coca-Cola’s second quarter gross margin was 61%).

This particular issue isn’t actually all that new: the WSJ reported the backlog in Goldman’s Detroit warehouses back in 2011, and Kaminska has been on the story from the beginning. It’s of interest again now because it came out last week that the Federal Reserve is mulling a move to ban big banks from physical commodity markets, which they have only been allowed to operate in since 2003. The Senate banking committee is also set to take up the subject this week.

Goldman isn’t the only one vulnerable to a shift in regulations: JPMorgan and Morgan Stanley also have operations that would be affected. – Shane Ferro   

On to today’s links:

Secular Declines
The end of big law’s assured profitability and stability – Noam Scheiber
“The comparison to winning the lottery is apt: many lottery winners don’t live happily ever after” - Above the Law

Regulations
If Dodd-Frank doesn’t work, here’s what might – Mike Konczal
Wall Street’s new DC strategy: we’re here to help – Reuters

Delaying The Inevitable
Your password will eventually be stolen – Matt Buchanan

Must Read
Mapping economic mobility across the US – David Leonhardt

Felix
The SEC’s important case against Stevie Cohen – Reuters

The Fed
Why Janet Yellen should succeed Bernanke – Sheila Bair
Without policy uncertainty, unemployment would have been 6.5% last year – The Fed

Real Talk
“No significant electoral faction… demands the joint reduction of government and corporate power” –  Will Wilkinson

Spurious Correlations
Country-level data can’t tell you anything about smoking and healthcare costs – Worthwhile Canadian Initiative

Wisdom
“Indolence requires patience” – NYRB

Oxpeckers
“You can publish any old crap nowadays as long as it’s well-targeted” – Slate

Your Retirement Plans
The actuarial change that could cause America’s pension obligations to balloon – DealBook

Legalese
Does the Detroit bankruptcy really violate the Michigan state constitution? – Credit Slips

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