Agricultural Commodities Mixed amid Concerns over the Weather Conditions

Market Highlights

ASIA-PACIFIC REGION

China’s manufacturing sector grows; Japan’s trade gap widens

The preliminary data from China’s manufacturing industry showed that factory activity of the world second largest economy expanded more than expected in July. Flash HSBC manufacturing PMI came at 52 compared to a forecast of 51.2 and previous month’s reading of 50.7. A reading above 50 indicates growth of the sector. Meanwhile, another large Asian economy, Japan, released trade data last week. The country’s trade deficit widened less than expected in June – the deficit widened from 860 billion yen to 1.08 trillion yen, while analysts predicted the trade gap to reach 1.1 trillion yen.

EUROPE

European manufacturing activity on the rise

European manufacturing sector continued to expand in July as suggested by flash PMI reading. Eurozone’s flash PMI came at 51.9 in July higher than 51.8 in June but slightly less than market consensus of 52. Considering separate countries, German flash manufacturing PMI was at 52.9 compared to forecast of 52.2, while French manufacturing activity posted an unexpected contraction, with PMI falling to 47.6 in July from 48.2 in June. Dwelling on German data releases, German Ifo business climate index, dropped to 108 in July from 109.7 in June, posting a third consecutive monthly decline.

NORTH AMERICA

U.S. data mixed; core CPI edges up; core durable goods jump

Consumer prices in the U.S. rose at slower pace in June compared to May, with CPI adding 0.3% after a 0.4% gain the preceding month. Meanwhile, core CPI, which excludes volatile items as food and fuel, inched up 0.1%, less than a forecast of a 0.2% gain and May’s reading of 0.3%. Housing market data was mixed – new home sales missed estimates last month, while existing home sales exceeded forecast. At the same time, jobless claims numbers and core durable goods orders beat estimates, boosting optimism over the world's largest economy.

Industrial Metals Rally as China’s Data Improves Demand Prospects

Aluminum prolonged its rally after surging to a 16-month high in the week ended Jul 20. The lightweight metal drew strength from global deficit concerns. Output cuts across the globe, including China, the biggest producer and consumer of the metal, coupled with solid demand are likely to create a shortage of 136,000 metric tonnes this year and 504,000 tonnes in 2015, according to Bank of America Corp. forecast. Confirming the demand outlook, LME inventories stood circa 10% lower year-to-date.

Copper traded sideways in the first days of the week but shot up on Wednesday after upbeat reading of China’s HSBC flash manufacturing PMI. However, the rally appeared to be short-lived as investors considered the biggest climb in three weeks excessive at a time when global markets are expected to register surplus. According to the latest Goldman Sachs estimates, supply may exceed demand by around 353,000 tonnes this year and by 494,000 tonnes next year amid an increase in production and weakening housing market in China, the largest user of the red metal.

Nickel faced a strong headwind for a rise last week and but was strong enough not to succumb to pressure and end the week with almost a 3% gain. Despite a mild gain last week, the metal, which was the top performer in the beginning of the year when Indonesia eventually imposed a ban on metal ore exports, now is mostly headed downwards as global inventories remain high despite restricted supplies.

Zinc managed to return to gains, moving closer to a 35-month high on bright demand prospects and falling LME inventories. Demand for the metal is likely to be underpinned by a rapid recovery of the global automobile industry. For example, total vehicle sales in the U.S. attained pre-crisis levels this summer.

Energy Futures Mixed on Supply Concerns; Natural Gas Plunges After EIA Data

WTI and Brent oil traded mixed, rising in the beginning of the week and falling in the end. Energy futures were in the up-trend on Monday as a 7.5-million-barrel decline in the U.S. inventories’ in the week ended Jul 11 continued to lend support. Moreover, a re-escalation of tensions in Ukraine where fighting between the government and rebel forces notably intensified, boosted prices as unrest in Ukraine is likely to be translated into new sanctions against Russia, top energy producer. Fresh clashes in Tripoli, Libya that have already weighted on a hard-won rise in output also added to supply risk-premium.

The EIA data sent mixed signals. On the one hand, U.S. crude oil inventories dropped four million barrels in the week ended Jul 18 that more than an expected 2.1-million barrel decline. On the other hand, U.S. gasoline inventories rose more than predicted. Consequently, WTI lost 1%, while Brent oil added 1%.

Natural gas dipped to a seven-month low in the first part of the week amid mild weather forecasts across the most U.S. territory. Mild weather usually reduces demand for the commodity dependent on air conditioning use. Nevertheless, natural gas reversed its trend after the EIA weekly inventory update. U.S. natural gas storage rose 90 billion cubic feet in the week ended Jul 18, while experts called for an increase of 95 billion cubic feet. Total natural gas inventories stood at 2.219 trillion cubic feet, more than 650 billion cubic feet below the five-year average.

Heating oil tracked gains and losses of WTI and Brent oil. The EIA report was on the positive side – distillate fuel inventories, which include heating oil and diesel, climbed 1.64 million barrels in the week ended July 18 versus a prediction of a two-million-barrel rise thus pushing the commodity 2.5% higher on a weekly basis.

Precious Metals End Lower Despite Friday’s Gains

Gold started the week on a positive note, yet heading lower for the next three trading days. The yellow metal fell to its lowest level in a month on Thursday when it closed the session at $1,290.80, as upbeat data on the U.S. economy and stronger greenback curbed demand for the safe-haven asset. Ideas that improving labor market figures might signal an early rate increase by the Fed also remained in the forefront of investors’ view. The precious metal managed to snap some of its losses on Friday but still gold was 0.4% down on week, extending its preceding week’s loss of 2%.

Silver was declining over the first four trading days of the week ending Jul 25 as safer assets lost their favor among investors. Nevertheless, the grey metal managed to rebound on Friday, closing at $20.64 that reduced weekly drop to 1.2%. The chief reason behind Friday’s rally were growing geopolitical tensions in Eastern Europe and Middle East that boosted precious metals’ appeal. Considering the overall trend, silver was bearish throughout last month, falling 2.5%, the most among its peers.

Platinum and Palladium traded lower last week, finishing Friday’s trading session at $1,485.8 and $883.15, respectively. The two precious metals reversed part of their losses on Jul 25 amid easing fears over political turmoil in Ukraine. However, the metals used for automobile catalytic converters are not likely to witness notable losses in the months to come given bright demand prospects and tough supplies. Car demand across the globe is gaining momentum, with total vehicle sales in the U.S. attaining pre-crisis levels. Meanwhile, multiple-week long stoppage in South Africa that ended only late June is expected to result in a long-lasting deficit on the global markets. According to the CPM Group, platinum deficit may hit 814,000 ounces, while HSBC expects palladium shortage to reach 1.06 million in 2014.

Agricultural Commodities Mixed amid Concerns over the Weather Conditions

Wheat traded 1.1% higher over the last week, closing the Friday’s session at $538, its highest since 17 July. The commodity price was pushed higher on Friday by growing concerns that the new sanctions on Russia could limit the country’s commodity trade. Moreover, a study published in Environmental Research Letters revealed that wheat yields are expected to decline in the following 10-20 years amid rising temperatures and dry climate.

Corn fell in Chicago on Friday, extending weekly decline on speculations supplies from the next harvest in the U.S. will be abundant. U.S. Department of Agriculture recently reported that 76% of corn in America’s main growing areas was in a decent condition as of Jul 21. The grain lost as much as 1.8% on week to finish at $371.75. Meanwhile, corn prices have dropped almost 30% in the last three months to their lowest level in more than four years, making it possible for the agricultural economy to face its first downturn in ten years.

Soybeans inched slightly lower over the last week. On Monday, investors were focusing on the US weather outlook when the soybeans dipped 1.2% lower at $10.72 a bushel. In the end of the week, demand outlook for soybeans improved after China bought 360,000 tonnes of US oilseed. The soybeans closed the week 0.2% down at $1083.5.

Coffee rebounded the last week, with Arabica coffee closing Friday’s session at 179.15 cents a pound for September delivery as fears on Brazil’s crop sent the soft commodity’s price higher.

EXPLANATIONS

Commodities

• Gold - COMEX active contracted (USD/t o.z.)

• Silver - COMEX active contract (USD/t o.z.)

• Platinum - New York Mercantile Exchange active contract (USD/t o.z.)

• Palladium - New York Mercantile Exchange active contract (USD/t o.z.)

• Aluminum-Active contract of primary aluminum of minimum 99.2% purity at the LME (USD/MT)

• Copper –Active contact of electrolytic copper at the LME (USD/MT)

• Zinc - Active contract of zinc od minimum 99.995% purity at the LME (USD/MT)

• Nickel– Active contract of nickel of 99.8% purity at the LME (USD/MT) Crude oil - light, sweet crude oil active contract on the New York

• Mercantile Exchange (USD/bbl.)

• Brent oil - Brent oil active contract on the ICE Futures Europe (USD/bbl.)

• Natural Gas - natural gas active contract on the New York Mercantile Exchange (USD/MMBtu)

• Heating oil - heating oil active contract on the New York Mercantile Exchange (USD/gal.)

• Wheat - wheat active contract on the Chicago Board of Trade (cents/bu)

• Corn - corn active contract on the Chicago Board of Trade (cents/bu)

• Coffee - benchmark Arabica coffee active contract on the NYB-ICE Futures Exchange

• Soybeans -active contract on the Chicago Board of Trade (cents/bu)

Indices

• S&P GSCI Precious Metals Total Return Index - commodity group subindex composed of gold and silver; the index reflects return on underlying commodity futures price movement

• S&P GSCI Industrial Metals Total Return Index - commodity group subindex composed of futures contracts on aluminium, copper, lead, nickel and zinc

• S&P GSCI Energy Total Return Index - commodity group subindex composed of futures contracts on crude oil, Brent oil, RBOB gas, heating oil, gas oil and natural gas

• S&P GSCI Agriculture Total Return Index - commodity group subindex composed of futures contracts on wheat, red wheat, corn, soybeans, cotton, sugar, coffee and cocoa

Indicators

Long-term price forecasts-aggregated price forecasts based on predictions of 20 international banks forecasts

USDA Wasde Total Estimated Inventories (Today)-current level of inventories of wheat in 1000 MT, corn in 1000 MT, soybeans in million bushels and green coffee in 1000 bags