SP Angel – Morning View – Monday 07 01 19

Spot gold climbs as Fed signals pause in interest rates

MiFID II exempt information – see disclaimer below

 

Rio Tinto (RIO LN) – Power framework agreed for Oyu Tolgoi

 

US-China meeting to focus on trade deal resolution

  • China and the United States have expressed a desire to work together to implement the consensus of their presidents as trade talks between the world’s two largest economies resumed, according to the Chinese foreign minister. US officials are meeting with their counterparts in Beijing this week for the first face-to-face talks since US President Donald Trump and China’s Xi Jinping in December agreed to a 90-day truce.
  • China is willing to resolve its trade disputes with the US on an equal footing, reported Lu Kang.
  • Trump imposed import tariffs on hundreds of billions of dollars of Chinese goods to pressure Beijing to change its practices on issues ranging from industrial subsidies to hacking. China retaliated with tariffs of its own.
  • Trump said on Sunday that trade talks with China were going very well and that weakness in the Chinese economy gave Beijing a reason to work toward a deal.

 

Dow Jones Industrials

 

+3.29%

at

  23,433

Nikkei 225

 

+2.44%

at

  20,039

HK Hang Seng

 

+0.80%

at

  25,832

Shanghai Composite

 

+0.72%

at

   2,533

FTSE 350 Mining

 

+1.53%

at

  17,422

AIM Basic Resources

 

+1.40%

at

   2,087

 

 

Economics

US – US stock indices posted >3% gains on Friday helped by good employment numbers and dovish Fed Chairman comments while China/US agreed to restart trade talks this week.

  • New jobs climbed 312k in December beating expectations by a wide margin with labour earnings also performing strongly.
  • Unemployment rate edged higher on the back of an increase in participation rate as previously discouraged workers entered the workforce.
  • Later on Friday, Jerome Powell offered a dovish take on the future of the US monetary policy arguing that the Fed would be “patient” in deciding on any more interest rate increases, and “wouldn’t hesitate” in pausing its balance sheet reduction if it was necessary.
  • The minutes of the latest December FOMC meeting when the Fed raised rates for a fourth time are out on Wednesday.
  • Powell is also scheduled to speak at the Economic Club of Washington, DC, on Thursday, which is likely to attract the most market attention.
  • NFPs: 312k v 176k (revised from 155k) in November and 184k forecast.
  • Unemployment Rate: 3.9% v 3.7% in November and 3.7% forecast.
  • Av Hourly Earnings (%mom/yoy): 0.4/3.2 v 0.2/3.1 in November and 0.3/3.0 forecast.
  • Participation Rate: 63.1% v 62.9%.

 

China – The PBOC decides to ease liquidity ahead of the Chinese New Year celebrations (Feb 4-10) in an effort to prop up weakening growth outlook.

  • A 1pp cut to the required reserve requirement is equivalent to a release of a net CNY 800bn ($117bn) as lenders are set to use of CNY 1.5tn in liquidity released to pay back maturing medium-term loans.
  • RRRs currently 14.5% and 12.5% for large and smaller banks will be lowered by a total of 100bp in two stages.
  • The size of the cut was at the upper end of market expectations, and the net funds released would be the largest amount in the five cuts since last January.
  • “With economic activity likely to weaken further over the coming months ahead and liquidity conditions set to tighten due to maturing loans, we expect further policy easing before long,” Capital Economics commented on the news.

 

Germany – Factory orders contracted in November with previous month’s numbers having been revised downwards.

  • Poor numbers reflect a sharp decline in foreign orders from the Eurozone.
  • The single currency zone has been losing growth momentum through last year with latest economic surveys pointing to the lowest level of activity in four years.
  • Investor expectations over Germany’s economy slumped to the weakest reading since Aug/12 with sources of caution mentioned including US/China trade war, a potential for hard Brexit and the impact of protests in France, according to Sentix data.
  • Factory Orders (%mom/yoy): -1.0/-4.3 v 0.2/-3.0 in October and -0.1/-2.7 forecast.

 

DRC – The election commission delayed the announcement of preliminary presidential elections past Sunday’s deadline saying only slightly under 50% of vote tally sheets of 30 December vote had been received as of Saturday.

  • Opposition leaders argued the delay could be part of a scheme by the Congolese government to rig the election.
  • President Joseph Kabila who has been in power since 2001 and served constitutionally mandated two terms could not participate.
  • However, Emmanuel Ramazani Shadary, his handpicked successor, is widely considered as a man to hold the role until 2023 when Kabila may run again.
  • DRC’s Catholic church body, CENCO, said this week that it had identified the victor based on its own tallies collected by 40,000 observers signalling (though not saying outright) that Shadary had lost.

 

Gabon – Military are reported to have seized the state radio station early on Monday morning in a coup attempt against President Ali Bongo.

  • President is currently recovering in Morocco following a stroke suffered during Saudi Arabia’s “Davos in the Desert” summit two months ago.
  • The soldiers said they represented the Patriotic Movement of the Defence and Security Forces of Gabon.
  • Current President family has ruled the country for fifty years and Mr Bongo took office in 2009 following the death of his father Omar.
  • The latest 2016 re-election is reported to have been disputed by claims of rigging and involved a violent state crackdown on protests, FT reports.

 

Currencies

US$1.1435/eur vs 1.1409/eur last week  Yen 108.11/$ vs 107.94/$  SAr 13.929/$ vs 14.164/$  $1.275/gbp vs $1.266/gbp  0.714/aud vs 0.703/aud  CNY 6.851/$ vs 6.864/$

 

Commodity News

Precious metals:         

Gold US$1,294/oz vs US$1,294/oz last week

  • Precious metals received stimulus as investors weighed signals from the Federal Reserve that it could pause interest-rate increases if the US economy signs weakness, against Friday’s standout jobs report for December. Speaking following the release of data showing that US employers added the most workers in 10 months as wage gains accelerates, Fed Chairman Jerome Powell said policy is flexible and he’s ‘listening sensitively to the message that markets are sending’ about downside risk.
  • “Two things that worked against gold for most of last year – one was rising real interest rates, and the second was a strong dollar – and those were a function of the Fed consistently raising US rates”, according to Blackrock portfolio manager, Russ Koesterich. “If there’s a pause in that trend, that will remove or mitigate two of the headwinds that hurt gold during the first nine months of the year”.
  • The outlook for gold remains strong as global growth slows, equity market volatility remains elevated and the Fed is expected to ease back on the pace of policy tightening this year, according to Blackrock money manager, who says the precious metal offers an effective hedge. “Recession fears are probably overblown, but I do think we’re experiencing a slowdown”, according to Russ Koesterich. Blackrock have been raising their bullion holdings since the third-quarter through exchange-traded funds.
  • Bullion surged in December as global stocks capped their worst annual performance since the financial crisis. Investors took fright at signs of economic weakness in the world’s largest economies, with China grappling against the U.S. trade war. Other political uncertainties, such as Brexit and the partial U.S. government shutdown, have also buttressed demand for havens.
  • Investors are paying close attention to the partial government shutdown, which is now into its third week as President Donald Trump and Republicans remain at an impasse with Democrats over border security funding.
  • Global holdings in bullion-backed ETFs rose to a 7-month high as of Friday, with China increasing its gold reserves for the first time since Oct. 2016 to 59.56m troy ounces.

   Gold ETFs 71.7moz vs US$71.5moz last week

Platinum US$827/oz vs US$803/oz last week

Palladium US$1,308/oz vs US$1,271/oz last week

Silver US$15.78/oz vs US$15.72/oz last week

           

Base metals:   

Copper US$ 5,942/t vs US$5,842/t last week

Aluminium US$ 1,878/t vs US$1,860/t last week

Nickel US$ 11,165/t vs US$11,000/t last week

Zinc US$ 2,466/t vs US$2,427/t last week

Lead US$ 1,955/t vs US$1,955/t last week

Tin US$ 19,700/t vs US$19,550/t last week

           

Energy:           

Oil US$58.1/bbl vs US$56.8/bbl last week

Natural Gas US$2.957/mmbtu vs US$2.963/mmbtu last week

Uranium US$28.80/lb vs US$28.85/lb last week

           

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$70.6/t vs US$70.6/t

Chinese steel rebar 25mm US$584.6/t vs US$581.5/t

Thermal coal (1st year forward cif ARA) US$79.9/t vs US$80.5/t

Coking coal futures Dalian Exchange US$209.1/t vs US$208.8/t

           

Other:  

Cobalt LME 3m US$47,000/t vs US$47,000/t

China NdPr Rare Earth Oxide US$46,268/t vs US$46,180/t

China Lithium carbonate 99% US$9,998/t vs US$9,979/t

China Ferro Vanadium 80% FOB US$71./kg vs US$71./kg

China Antimony Trioxide 99.5% EU US$7./kg vs US$7./kg

 

Battery News

Next-generation battery race has an early leader in solid state

  • Solid-state technology promises to deliver cheaper, safer batteries to boost adoption of EV’s, although scientists across development hubs in Japan, China and the US are struggling to crack the code. To bring EV’s driving range into line with a full tank of gas, an overhaul of the battery’s internal architecture focuses on solid materials instead of flammable liquids to enable charging and discharging.
  • Solid-state technology overcomes the practicality of current lithium-ion packs, which are hitting the limits of storage capacities, offering charge times of about 10 minutes from as much as several hours.
  • Currently, the best prototype with solid-state batteries is only powerful enough to propel a one-person vehicle across a Toyota Motor Corp.
  • Car companies such as Daimler AG and Fisker Inc. are working on the task, as are a Chinese lithium giant, the French oil company Total SA, and spinoffs from the Massachusetts Institute of Technology and Stanford University. Fisker may conduct vehicle tests as early as this year, while Toyota and Daimler timelines extend into the 2020s.
  • Solid-state batteries offer huge market potential, with viable technologies giving the upper hand in a market for all EV batteries totaling $84bn by 2025, according to Bloomberg NEF.
  • Replacement of flammable liquid electrolyte with solid materials such as ceramic, glass or a polymer also significant enhance the safety of batteries.
  • Japan’s Consortium for Lithium Ion Battery Technology and Evaluation Centre (LIBTEC), a group of more than 25 companies including Toyota, Panasonic Corp., and Nissan Motors, is backed by ~US$90m in government funding to accelerate a solution.
  • China's Qingtao New Energy Research Institute will experiment with cars within two years and considers a commercial product possible by 2025.
  • “It’s a brutal battlefield actually making these batteries work, and nobody is anywhere close,” said Sam Jaffe, managing director at Boulder, Colorado-based Cairn Energy Research Advisors.
  • The biggest hope for a breakthrough rests on Toyota, according to rivals, academics and patent data.
  • Asia’s largest automaker has at least 233 patents or applications concerning the technology—almost triple the number of its closest competitor, according to an analysis by Bloomberg Law’s Tommy Shen. The company is investing 1.5tr yen ($13.9bn) in its battery business and plans to commercialise solid-state technology by the early 2020s, according to its annual report released in October.

 

Company News

Rio Tinto (RIO LN) 3815p, Mkt cap £65.1bn – Power framework agreed for Oyu Tolgoi

  • Rio Tinto reports that it has signed the Power Source Framework Agreement for the planned 300MW power plant for its $5.3bn underground expansion of the Oyu Tolgoi copper/gold mine in Mongolia.
  • The power plant “will be situated close to the Tavan Tolgoi coalfields. Construction is scheduled to start in 2020 … with the commissioning of the plant by mid-2023”.
  • The “agreement sets out an amended timetable for Oyu Tolgoi to meet its obligation to source power domestically”.
  • The published probable underground ore reserves estimate for Oyu Tolgoi amounts to 464mt at an average grade of 0.34% copper for the Hugo Dunnett North orebody with an additional 35mt at an average grade of 0.55% copper in the Hugo Dunnett North Extension orebody.
  • The combined open-pit and underground mine is expected to produce an average of 560,000tpa of copper between 2025 and 2030 and the company has previously indicated, in a presentation delivered in June 2015, that the mine life could potentially extend beyond 2100.

Conclusion: The Power Source Framework Agreement is one of the key aspects underpinning the long-life underground development at Oyu Tolgoi

 

Analysts

John Meyer – 0203 470 0490

Simon Beardsmore – 0203 470 0484

Sergey Raevskiy – 0203 470 0474

Phil Smith (Technology) – 0203 470 0475

Zac Phillips (Oil & Gas) – 0203 470 0481

 

Sales

Richard Parlons – 0203 470 0472

Jonathan Williams – 0203 470 0471

 

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