property sector

The Commodities Feed: Supply risks vs demand concerns Commodity markets largely shrugged off developments in Russia over the weekend, with the focus now back on China demand concerns and the US Federal Reserve.   Energy – Rangebound crude Energy markets largely shrugged off events over the weekend in Russia. Oil opened strongly yesterday, but gave back a lot of these gains as the day progressed. As a result, ICE Brent settled just 0.45% higher on the day. The more hawkish tone from the US Fed appears to be capping oil prices and the broader commodities complex, while there remain broader concerns over China’s economic recovery. Up until now, oil demand indicators for China have been good, with stronger crude oil imports and higher apparent domestic demand. The concern is whether this can continue as there are clearly still some weak spots within the Chinese economy – specifically with industrial production and the property sector. For the oil market, there is little on the calendar for today. ICE Brent August options expire today, which will be followed by the August futures expiring on Friday. The latest open interest data (which is up until Friday) shows that there is still open interest of more than 17k lots at the $75 strike for August call options. Meanwhile, we will also get US inventory numbers from the American Petroleum Institute (API) later in the day. The European natural gas market had a volatile trading session yesterday with TTF trading in a range of EUR5.40/MWh over the day. Obviously, there would have been concerns over the remaining Russian pipeline flows to Europe following developments in Russia over the weekend. However, fundamentals for the European gas market are still bearish in the short term. EU gas storage continues to fill up and is now more than 76% full, well above the 57% seen at the same stage last year and also higher than the five-year average of 60%. In the absence of any significant supply shocks, EU gas storage will hit the European Commission’s target of 90% full well before 1 November. This suggests that later in the summer we could see further pressure on prices and a deeper contango along the forward curve – there is already an almost €20/MWh contango between the August 2023 and December 2023 TTF contract.  

Asia Morning Bites Politburo pledges support for China's economy - we await detailed plans.   Global Macro and Markets Global markets:  US equity markets made small gains yesterday, though the price action was far from conclusive. The S&P settled 0.4% higher than the previous day while the NASDAQ rose just 0.19%. Chinese stocks fell. The Hang Seng was down 2.13% and the CSI 300 fell 0.44%. That might change today after a Chinese Politburo meeting yesterday vowed to provide more aid for the property sector as well as boost consumption and tackle local government debt issues. Equity futures are positive, but we will reserve judgement until we hear some details. We have had plenty of vague promises already, which don’t amount to a great deal so far. US Treasury yields seem to have decided that this week’s FOMC meeting will be hawkish, and 2Y yields jumped up 8.2bp to 4.919% yesterday. The yield on 10Y bonds rose just 3.8bp to 3.872%. EURUSD fell again yesterday, dropping to 1.1063. The AUD was flat at 0.6734, Cable dipped to 1.2816, and the JPY remained stable at 141.59. Asian FX didn’t move much yesterday. The TWD fell 0.39% after industrial production fell slightly more than expected. At the other end of the spectrum, the KRW made gains of 0.28%. The CNY was unchanged. G-7 macro:  PMI data yesterday was weaker across much of the Eurozone, and the aggregate composite PMI dropped a full point to 48.9, with very weak manufacturing (42.7 from 43.4) and a slowdown in service sector growth (51.5 from 53.7). The equivalent US series showed a smaller manufacturing contraction (49.0) but also showed service sector growth slowing (52.4 from 54.4). Today, Germany’s Ifo survey will add more detail on the German situation. The US releases house price data (S&P CoreLogic numbers as well as FHFA data). And the US Conference Board releases its July confidence data. South Korea: Korea’s real GDP rose 0.6% QoQ sa in 2Q23 (vs 0.3% in 1Q23, 0.5% market consensus). 2QGDP was up from the previous quarter and slightly higher than the market consensus, but the details were quite disappointing. Net exports contributed to the growth (+1.3pt) but it was mainly because the contraction of imports (-4.2%) was deeper than that of exports (-1.8%). Looking ahead, we think that GDP in 2H23 will slow down again, as forward-looking data for domestic demand indicates a further deterioration. Please see our 2H23 outlook details here.  We think today’s data should be a concern for the Bank of Korea as exports remain sluggish amid expectations of a further worsening of domestic growth. Also, this year’s fiscal support is likely to remain weak, considering the tax revenue deficit and normalization of covid related fiscal spending. Thus, the BoK’s policy focus will gradually shift from inflation to growth over the next few months as we expect inflation to stay in the 2% range most of the time in 2H23. Indonesia:  Bank Indonesia meets today to decide on policy.  BI is widely expected to keep rates untouched at 5.75% to help shore up the IDR and ensure FX stability.  Previous dovish comments from BI Governor Warjiyo suggesting rate cuts could be considered have been set aside for now and we could see an extended pause from BI with any rate cut only considered later on.     What to look out for: Central bank decisions Bank Indonesia policy meeting (25 July) Hong Kong trade (25 July) US Conference board consumer confidence (25 July) Australia CPI (26 July) Singapore industrial production (26 July) US new home sales (26 July) US FOMC decision (27 July) China industrial profits (27 July) ECB policy decision (27 July) US personal consumption, durable goods orders initial jobless claims (27 July) South Korea industrial production (28 July) Japan Tokyo CPI and BoJ policy (28 July) Australia PPI (28 July) US personal spending, core PCE, University of Michigan sentiment (28 July)

Korea: 2Q23 GDP improved but with disappointing details South Korea’s real GDP accelerated to 0.6% QoQ (sa) in 2Q23 from 0.3% in 1Q23, which was slightly higher than the market consensus of 0.5%. However, the details were quite disappointing with exports, consumption, and investment all shrinking. We expect growth to slow in 2H23.   Net exports contributed positively to overall growth The upside surprise mainly came from a positive contribution from net exports (+1.3pt). However, we do not interpret this in a positive light, because it was not driven by an improvement in exports, but rather by a contraction of imports (-4.2%), which was deeper than that of exports (-1.8%). By major item, exports of vehicles and semiconductors rose as global supply conditions improved and global demand remained solid. But, exports of petroleum/chemicals and shipping services declined further with unfavourable price effects weighing. Falling commodity prices have had a positive impact on Korea's overall terms of trade, having a greater impact on imports, but "processed" exports such as petroleum/chemicals and shipping took more of a hit.   Net exports led growth but due to sharper decline of imports than exports   Meanwhile, domestic demand dragged down overall growth by -0.6pt As monthly activity and sentiment data already suggested, private consumption was down -0.1% with declining service consumption, while investment – both construction (-0.3%) and facilities (-0.2%) – contracted. Also, government expenditure dropped quite sharply (-1.9%) as spending on social security declined. We believe that the reopening boost effects on consumption have finally faded away, while tight credit conditions have also dampened investment. R&D investment (0.4%) was an exception, rising for the second consecutive quarter on the back of continued investment in new technologies.   GDP in 2H23 will likely decelerate again Forward-looking data on domestic demand indicates a further deterioration in domestic growth. Construction orders, permits, and starts have been declining for several months, while capital goods imports and machinery orders have also trended down recently. With continued market noise surrounding project financing and growing uncertainty over global demand conditions, business sentiment for new investment is very weak. This year’s fiscal spending will also not support the economy meaningfully, considering the tax revenue deficit and normalization of covid related spending. However, we think trade will take the lead in a modest recovery. We believe that exports will rebound by the end of the third quarter with support from improved vehicle demand, semiconductors, and machinery (despite the global headwinds). Please see our 2H23 outlook details here.   Korea's GDP is expected to slow down in 2H23     Although 2Q23 GDP was higher than expected, the details suggest a weaker-than-expected recovery in 2H23, together with weak forward-looking data, thus we keep our current annual GDP forecast for 2023 unchanged at 0.9% YoY.   The Bank of Korea watch We think today’s data should be a concern for the Bank of Korea (BoK). The BoK forecast growth to accelerate in 2H23 on the back of better exports. We agree that export conditions will improve, but we don't think they will be strong enough to dominate weak domestic growth, and today’s data also suggests that growth will slow down in the near future. Thus, the BoK’s policy focus will probably gradually shift from inflation to growth in 4Q23. In 3Q23, we believe that the BoK will continue to keep its hawkish stance while keeping a close eye on other major central banks’ monetary policies. Also, inflation may fluctuate a bit over the Summer season due to soaring fresh food prices amid continued severe weather conditions. However, if inflation stays in the 2% range for most of 2H23, then the BoK’s tone should shift to neutral and eventually revert to an easing cycle.

The Commodities Feed: Supply risks grow Russia’s bombing of port infrastructure along the Danube river in Ukraine has pushed grain prices significantly higher. This escalation risks spilling over into other parts of the commodities complex, particularly energy.   Energy – Oil marches higher Having struggled to break convincingly above US$80/bbl over the last week or so, Brent settled above US$82/bbl yesterday and in doing so broke above the 200-day moving average. The market would have taken comfort from China’s Politburo meeting where the government said it would provide further support to the property sector, stimulate consumption and tackle local government debt. China is key for global oil demand growth this year and the market has been getting increasingly concerned over the weaker-than-expected economic recovery, so any support measures will be helpful in easing some of these concerns. On the supply side, whilst remote for now, risks are growing following Russia’s escalation and bombing of Ukrainian port infrastructure along the Danube River. Whilst this is not a direct threat to energy markets, there are worries that this could spill over into other markets, particularly after Ukraine last week said that any ships heading to Russian Black Sea ports could be treated as potential military targets (in response to a similar statement from Russia). Russia ships almost 500Mbbls/d from the Black Sea port of Novorossiysk, while the CPC terminal in the port exports around 1.2MMbbls/d of Kazakh oil. Therefore, it is not too surprising that the market is starting to become a little nervous over a potential supply disruption, even if it is a remote risk for now.   In addition, stronger refinery margins are likely adding to some optimism over demand, although the strength in refinery margins appears to be more supply-driven than demand-driven at the moment. The strength has been driven predominantly by gasoline and middle distillate cracks, while fuel oil cracks are also holding relatively firm. European gasoline cracks have hit US$30/bbl, the highest levels since July last year. The strength in the gasoline market has been blamed on several factors, including tightness in the octane market, while hot weather in parts of Europe also appears to have led to some refinery disruptions. The initial strength in margins was driven by middle distillates, which would have led to some yield switching (gasoline to gasoil), however the more recent relative strength in gasoline could now see yields switching back (gasoil to gasoline). As a result, this is also offering continued support to middle distillate cracks. In addition, in the US, an unplanned outage at Exxon’s 540Mbbls/d Baton Rouge refinery, the fifth largest refinery in the US, is also providing some strength to margins. European natural gas prices also rallied significantly yesterday with TTF settling 8.5% higher on the day, taking it back above EUR30/MWh. There will be concerns over what further escalation in Ukraine could mean for the small but still important amount of Russian pipeline gas that runs through Ukraine into the EU. Fundamentally though, the European market remains in a very comfortable position with storge almost 84% full. While uncertainty may provide support to prices in the near term, we expect prices to come under pressure over much of the third quarter, given storage will be full well ahead of the next heating season (assuming no significant supply disruptions).  

Metals – Further Chinese support measures China’s Politburo meeting brought some optimism back into metal markets with the promise of additional support measures for the property sector. However, a stronger dollar capped the rally, while the market still needs to see what actual policies the government announces. Signs of weakening in European manufacturing further weighed on market sentiment yesterday. Nickel output at Nornickel fell 4% quarter-on-quarter to 45kt in the second quarter, while cumulative production was down 9% year-on-year at 91kt in the first half of the year. The decline in output was primarily due to planned repair work at the Nadezhda metallurgical plant and a grinding mill at the Talnakh concentrator in the first quarter. The company expects production guidance for nickel at 204kt-214kt for 2023. Among other metals, copper output fell by 13% QoQ to 94.89kt, while palladium production increased by 6% QoQ to 761koz in the second quarter of the year.

The press release of the recently concluded China’s Politburo meeting consisted of a more expansionary tone such as the implementation of “counter-cyclical” measures. A dovish tilt is now being priced in by interest rates futures after yesterday’s FOMC meeting. Based on the CME FedWatch tool, the odds have increased to bring forward the expected first Fed Funds rate cut to March 2024 from May/June 2024. This latest set of dovish expectations on the future path of the Fed’s monetary policy has negated the prior steep depreciation of the yuan against the US dollar. Short-term positive animal spirits have been revived in China equities, and its proxies (the Hang Seng Indices) ex-post Politburo & FOMC.   The market’s reaction so far has been positive in terms of risk-on behaviour toward China equities and their proxies (Hang Seng Index, Hang Seng TECH Index & Hang Seng China Enterprises Index) ex-post press release on the outcome of the July’s Politburo meeting that concluded on Monday, 24 July after the close of the Asian session as well as yesterday’s ex-post US central bank, Federal Reserve’s FOMC meeting on its interest rate policy. The Politburo is a top decision-making body led by President Xi that set key economic policy agenda for China, and Monday’s meeting set the agenda for the coming months to implement expansionary policies to address the current weak internal demand environment. It vowed to implement a counter-cyclical policy to boost consumption, more support for the property market, and ease local government debt. The share prices of China ADR listed in the US stock exchanges have a remarkable intraday performance on Monday, 24 July US session. China’s Big Tech such as Alibaba (BABA), and Baidu (BIDU) ended the US session with gains of around 5%. A basket of China stocks listed as exchange-traded funds in the US soared as well, the KranShares CSI China Internet ETF (KWEB), and Invesco Golden Dragon China ETF (PGJ) rallied by +4.5% and +4% respectively, notched their best single day return since May 2023. Even though the press release lacks the details of the implementation of upcoming fiscal stimulus measures (again), and refrains from enacting major stimulus measures that increase the risk of debt overhang in the property sector, it is the choice of words, and tonality used that sparked the risk-on behaviour. Firstly, President Xi’s key phrase on China’s housing market, houses are for living, not for speculation” has been omitted for the first since mid-2019” which suggests that more leeway to negate the ongoing weakness in houses prices such as easing home buying restrictions in major cities such as Shanghai and Beijing. Secondly, the term “counter-cyclical” measures are being emphasized which suggests that boosting domestic demand takes priority over infrastructure spending. Given the heightened risk of a deflationary spiral taking shape in China and a “liquidity trap” situation where more accommodative monetary policy may lead to lesser marginal economic growth, the key solution to break the adverse deflationary spiral and its liquidity trap aftereffects is to shore up consumer confidence via expanding domestic demand actively.     Outperformance of China ADR exchange-traded funds supported by a stronger yuan     Fig 1: Relative momentum of China ADRs ETFs vs. MSCI All Country World ETF of 26 Jul 2023 (Source: TradingView, click to enlarge chart) Overall, short-term sentiment seems to have turned bullish for China equities where China ADR ETFs have outperformed major US benchmark US stock indices on a month-to-date horizon as of yesterday, 26 July 2023; the KranShares CSI China Internet ETF (KWEB), and Invesco Golden Dragon China ETF (PGJ) gained by +12% and +13.14% respectively over S&P 500 (+2.61%), and MSCI All Country World Index ETF (+2.97%). Also, yesterday’s Fed Chair Powell ex-post FOMC press conference indicated that the Fed will be data-dependent in deciding whether to pause or hike the Fed Funds rate at its next FOMC meeting on 20 September. This implies that the Fed is likely not in a mode of raising interest rates at every other meeting after yesterday’s expected 25 basis points hike to bring the Fed Funds rate to a 22-year high at 5.25% to 5.50%. Markets seem to be pricing in a more dovish tilt on the expected start of the first Fed Funds rate cut. Based on the CME FedWatch tool derived from the 30-day Fed Funds futures pricing data, the odds have increased for the first expected cut to occur on the 20 March 2024 FOMC meeting with a combined probability of 56.07%. Previously, before yesterday’s FOMC, higher odds for the expected first-rate cut were clustered between the 1 May and 19 June 2024 FOMC meetings. The current dovish tilt on the expected future trajectory of the Fed Funds rate has negated further upside yield premium of the US’s 2-year Treasury note over China’s 2-year sovereign bond. Since Monday, 24 Jul, the yield premium has narrowed by 11 bps to 2.75% from 2.86% as of today at this time of the writing which in turn supported the yuan from a further deprecation against the US dollar. USD/CNH (offshore yuan) remained below its 20-day moving average     Fig 2: USD/CNH medium-term trend as of 27 Jul 2023 (Source: TradingView, click to enlarge chart) The yuan has started to strengthen against the US dollar in the short-term horizon since last Thursday, 20 July which in turn created a positive feedback loop back that reinforces the bullish sentiment towards China equities. The USD/CNH (offshore yuan) has failed to break above its 20-day moving average, acting as a key intermediate resistance at 7.2160 with a bearish momentum reading seen on its daily RSI oscillator. Hence, further potential weakness in the USD/CNH is likely to be able to kickstart short-term uptrend phases for China equities and its proxies.

Any steel output cut would add to bearish risks for the iron ore market, while the seaborne supply side is showing signs of strength with major producers reporting robust production numbers and exports from Australia and Brazil remaining elevated. We believe the outlook for iron ore remains bearish in the short term amid sluggish demand from China’s steel-intensive property sector. The pledges from Beijing to support the economy are underwhelming for now and support for the real estate sector is not likely to translate into large-scale property development that would revitalise steel demand in the country and lift iron ore prices. We believe prices will remain volatile as the market continues to be responsive to any policy change from Beijing.   Copper warehouse stocks remain historically low   Like iron ore, copper prices are driven by economic policies from China and other major economies. LME copper prices had a strong start to the year as China's reopening boosted the outlook for demand. Copper was one the biggest winners following China’s reopening amid expectations that China’s support for the property market would kickstart demand for industrial metals. But prices quickly turned as that optimism faded, remaining mostly rangebound since February. Copper prices ended the first half of the year flat from where they started the year. Since May, prices have mostly been on an upward trend. Copper was lifted in the first half of July by the US dollar dropping to a one-year low on the release of a positive June inflation number and prices remained elevated throughout the month trading mostly above $8,400/t. However, in recent weeks, copper has been struggling for direction amid an uncertain path of US rate hikes and China’s lacklustre economic recovery. LME prices dropped to a one-month low following worse-than-expected July trade data from China. However, the supply side remains supportive of copper prices – total warehouse stocks at the LME, COMEX and SHFE remain historically low. Refined copper exchange inventories are now at the equivalent of just two-and-a-half days of global consumption. This sets up the market for squeezes and spikes in prices if we see demand improving sooner than expected. For example, weekly copper stockpiles reported by the SHFE dropped by 15% last week and remain below the seasonal average. These critically low levels of Chinese inventories could be partially explained by weaker supply out of Chile, the biggest producing nation. The country saw its July copper exports come in at the lowest level since January, suggesting that Chilean operations continue to suffer project delays and mine setbacks. Chilean state copper producer Codelco has reduced production guidance to between 1.31 Mt and 1.35 Mt for 2023, from a previous 1.35 Mt and 1.45 Mt. Codelco's production drop has been systematic for the last three years. We remain cautious about the short term for copper, with sluggish demand from China pointing to lower prices. We believe in the near term, copper prices are likely to continue to be dictated by the pace of China’s economic recovery as well as the Fed’s interest rate hiking path. However, we believe low levels of global visible stocks are likely to prevent prices from significant decreases until copper consumption improves again.   Aluminium supply side woes ease as Yunnan restarts July was the first month this year that saw LME aluminium prices closing the month higher than where they started. Prices closed at a similar level to their peak within the month. However, the fundamental picture for aluminium has not changed. Instead, the July price increase came amid a softer US dollar and hopes of more stimulus from China. The start of August saw LME prices moving lower again. On the supply side, we expect output to grow fast in China. The power supply in Yunnan improved significantly from May with the arrival of the rainy season. By late July, around 1.1Mt of capacity restarted in Yunnan, and we believe the resumption of Yunnan capacity remains the key headwind for aluminium in the near term. However, if the upcoming dry season has insufficient rain, output could be cut again with a lack of hydropower leading to rising Chinese imports.   China's primary aluminium production (1000 metric tonnes)   In Europe, however, we don’t expect major restarts before 2025, while demand for aluminium remains weak. Europe suspended around 2% of the global total capacity by the end of 2022 as power prices surged. And although power costs have now eased, only one smelter has restarted so far this year. Meanwhile, Norsk Hydro recently said it does not plan to restart the aluminium output it curtailed during the European energy crisis while market conditions remain weak.   Chinese aluminium exports drop on weak global demand   On the demand side, Chinese exports of aluminium products did not improve in July, signalling weak demand for aluminium products globally. China exported 489,700 tonnes of unwrought aluminium and aluminium products, a drop of 24.9% year-on-year and down 0.6% month-on-month. The cumulative export from January to July 2023 is now at 3.29 Mt, which represents a decrease of 20.7% from the same period last year. In the near term, we believe aluminium prices will remain volatile as the market’s focus will stay on the bigger macro-economic picture with flagging global growth weighing on aluminium demand. We expect prices to start recovering in the fourth quarter on the improving global economy, which will lead to stronger aluminium demand growth. However, the recovery will be slow as demand will only start improving substantially before next year.   ING Forecasts

FX Daily: Quiet G10 markets despite Chinese turmoil Beijing continues to fight the recent turmoil on multiple fronts: real estate, financial, and the FX market. Overnight, the PBoC set the CNY fixing with the largest gap to estimates in order to curb bearish speculation. Despite all the turmoil in China, G10 volatility has remained capped, and this is probably why Japanese authorities are not intervening.   USD: Chinese authorities go all in to defend the yuan Developments in the distressed Chinese financial and property sector are emerging as the most prominent driver for market sentiment, especially after the Fed minutes proved to have limited implications for central bank expectations and developed market calendars are quite light. Overnight, Chinese authorities turned their focus on the FX market, deploying what is now regarded as the biggest defence of the yuan via fixing guidance on record. The People's Bank of China (PBoC) fixed USD/CNY at 7.2006, significantly below the average estimate of 7.305, which marks the largest gap compared to the estimate since the poll started in 2018. Today’s PBoC move follows yesterday’s reports that state-owned banks were asked by Chinese authorities to step up yuan interventions to reduce FX volatility. We could also see a cut in FX reserve requirements, often considered as a tool to avert sharp CNY depreciation. So far, the spillover into G10 currencies has been limited. The highly exposed AUD is down 1.4% this week, a relatively contained slump considering the amount of bad news that has piled up in the past few days. This is probably a signal of how AUD was already embedding a good deal of negatives related to China and how markets are expecting government intervention to avert black swan scenarios. This morning, the emergency yuan fixing has left FX markets quite untouched, with the exception of USD/JPY trading on the soft side, likely due to Japan’s service inflation hitting 2% for the first time in 30 years overnight. Incidentally, the pair is well into FX intervention territory but is probably missing enough volatility to worry Japanese officials. Still, the oversold conditions of JPY and the threat of interventions are likely going to exacerbate any USD/JPY downside corrections. The US calendar is empty today and the focus will likely be on bond market dynamics after back-end yields touched fresh multi-year highs yesterday. The combined effect of high yields and growing risks in China suggests the balance of risks is moderately tilted to the upside for the dollar. A return to 104.00 in DXY remains a tangible possibility in the coming days.

China concerns weigh on industrial metals It has been a summer of downward pressure for most metals. Renewed strength in the US dollar and a growing view that maybe the Fed has more work to do when it comes to monetary tightening has provided some strong headwinds to the metals complex. However, it is weakness in China which has been the key catalyst for the sell-off seen in most metals. The property sector remains weak, with housing starts and residential floor space sold still in deep contraction, whilst new home prices have started falling once again month-on-month. In addition, China’s manufacturing PMI remains in contraction territory. These are two important sectors for metals demand which are clearly struggling. Meanwhile, retail sales in China, which helped to support growth earlier in the year, are also weakening. Metal markets are likely to continue to be largely dictated by developments in China. However, it is difficult to see a swift recovery in China’s property sector. A number of base metal markets also appear to be more comfortable in terms of supply, at least in the prompt market. This is evident with the cash/3M spreads for aluminium, copper and zinc having all weakened recently and trading in contango. In addition, these three metals have seen inventory levels in LME warehouses growing over at least the last month.  

Metals – Fresh stimulus from China for the property sector Base metals prices extended this week’s gains this morning as healthy economic data and fresh stimulus measures in China buoyed sentiment. Caixin manufacturing PMI in China increased to 51 in August compared to 49.2 in July; the market was expecting the PMI to remain around 49. This is the strongest manufacturing PMI number since February. Meanwhile, Beijing has announced fresh stimulus measures aimed at supporting the property sector. The People’s Bank of China has lowered the minimum downpayment for mortgages for both first-time buyers (from 30% to 20%) and second-time buyers (from 40% to 30%) while the minimum interest premium charged over the Loan Prime Rate has also been reduced. China is also allowing customers and banks to renegotiate interest rates on existing housing loans which could reduce interest expenses for borrowers. LME continues to witness an inflow of copper into exchange warehouses. LME copper stocks increased by another 3,675 tonnes yesterday, taking the total inventory to a year-to-date high of 102.9kt. Meanwhile, cancelled warrants for copper remain near zero levels, hinting that there may not be any inventory withdrawals from LME in the short term and total stocks could continue to climb over the coming weeks. Europe witnessed an inflow of 2,700 tonnes yesterday whilst 950 tonnes were added in the Americas and 25 tonnes in Asia. Gold prices have held steady at around US$1,940/oz as the latest economic data from the US eased some pressure on the Federal Reserve to continue with rate hikes. The core PCE (Personal Consumption Expenditure) deflator in the US increased at a flat 0.2% month-on-month in July, the second consecutive month at 0.2% which should help the Fed in getting inflation back on track to around 2%. On the other hand, data from Europe was not that supportive with core CPI falling gradually from 5.5% to 5.3% and CPI estimates remaining flat at 5.3%. The focus is now turning to today’s US non-farm jobs report which is expected to show a smaller rise in payrolls in August.

Metals – SHFE aluminium inventories fall SHFE data shows that aluminium inventories at exchange warehouses dropped by another 8.5kt to a 5-year low of 89.6kt last week. Among other metals, copper stocks increased by 6,006 tonnes to 46.6kt, and nickel stocks increased by 449 tonnes to 3.8kt. Operating rates at steel blast furnaces in Tangshan China increased to 74.43% last week, the highest level in nearly six months as steel mills ramp up operations on optimism about stronger domestic demand on the back of stimulus measures by China. Beijing has been taking supportive measures to try to support the economy, including several measures to help the property sector. Meanwhile, global demand for Chinese steel also remains strong, which has supported operating rates. The latest positioning data from the CFTC shows that managed money net longs in COMEX gold increased by 32,439 lots over the last week to 58,134 lots as of 29 August. Expectations of a rate pause by the Fed at its September meeting appear to have helped bullish sentiment for gold. The softer US jobs report on Friday will likely reinforce this view. The move higher was driven by both long additions (+22,279 lots) and short covering (10,162 lots).

  Industrial Metals Monthly: China's stimulus in focus Our monthly report looks at the performance of iron ore, copper, aluminium and other industrial metals, as well as their outlook for the rest of the year. In this month's edition, we take a closer look at the recent impact of new stimulus measures introduced in China.   Metals markets assess China policy   China ramping up economic support A mixed picture of China's economy has been painted by the latest releases of official PMI data. While the manufacturing index increased slightly to 49.7 – its third consecutive rise since the lows of 48.8 seen in May – it's still falling short of the 50-level mark associated with expansion.  The non-manufacturing series, which had reflected the bulk of the post-reopening recovery, fell further in August. At 51.0, the index was a little lower than the forecast figures of 51.2 but at least remains slightly above contraction territory.   Meanwhile, the Chinese government has moved forward with a series of stimulus measures designed to turn around the flagging economy and its ailing property sector, which accounts for more than a quarter of China’s economic activity. Included in these measures was the decision to cut down payments and lower rates on existing mortgages. The nationwide minimum down payment will be set at 20% for first-time buyers and 30% for second home buyers. Mortgage rate cuts will be negotiated between banks and customers, and both policies will go into effect on 25 September. The introduction of these measures came after China’s home sales slumped in August. Sales by the country’s largest developers fell 34% from the previous year, according to China Real Estate Information Corp. It was the deepest drop seen in over a year. Further stimulus packages could also be introduced, which could boost the need for industrial metals. So far, Beijing has remained reluctant to back major stimulus that might be necessary to put a floor under falling home sales. News of a surge in home sales in two of China’s biggest cities has offered an early sign that government efforts to cushion a record housing slowdown are helping. Existing home sales for Beijing and Shanghai doubled over the last weekend (2-4 September) from the previous one. Reports of property developer Country Garden avoiding default with last-minute interest payments also restored some additional confidence in China’s property sector.   The metals markets will now be watching how sustainable this pickup in interest is and how long it will last. China’s recovery is still uncertain, and metals are likely to see some continued volatility for a while – at least in the near term. For the remainder of this year, the key factor for the direction of metals prices will be whether China will be able to stabilise its property market. Until the market sees signs of a sustainable recovery and economic growth in China, we will struggle to see a long-term move higher for industrial metals.   Fed pause bets bolster sentiment Sentiment in metals markets also received a boost after last week’s US jobs report that showed a steadily cooling labour market, offering the Federal Reserve room to pause rate hikes this month. Nonfarm payrolls increased 187,000 in August, while hourly earnings rose slightly less than the median economist forecast. The central bank hiked rates by 25 basis points at its July meeting following the recent strength seen in economic data. At the Jackson Hole conference last month, Fed Chair Jerome Powell announced plans to keep policy restrictive until confidence that inflation is steadily moving down toward its target has been fully restored. Over the next few weeks, we'll be keeping a close eye on US data releases which could shed more light on what the Fed may do next.   Higher-for-longer interest rates will ultimately lead to a drop in metals prices September appears set for a pause given recent encouraging signals on inflation and labour costs, but robust activity data means the door remains open for a further potential increase. Markets see a 50% chance of a final hike, while our US economist believes that rates have most likely peaked. US interest rates remaining higher for longer would lead to a stronger US dollar and weakening investor confidence, which in turn would translate to lower metals prices.     US rate cuts to start by the spring   Iron ore rises on China property aid Iron ore prices held above the $100/t mark in August despite China’s worsening property crisis, which in typical years makes up about 40% of demand.   Iron ore has managed to stay above $100/t for most of 2023    

Iron ore prices surged more than 15% over the past three weeks as China has continued its efforts to boost the steel-intensive property sector. Steel mills are also expected to ramp up as the building season begins again this month. However, the uncertainty around mandatory curbs will weigh on the outlook. After China’s steel output climbed to a record of more than one billion tonnes in 2020, the government responded by ordering production cuts in each of the next two years to cut back on emissions and match supply with demand. The intensity and the timeline of production cuts this year are still unknown, but any steel output cut would add to bearish risks for the iron ore market.   CISA daily average crude steel output at member companies   Meanwhile, China’s iron ore stockpiles are hovering around the lowest level since August 2020 as mills have been cautious about restocking amid property woes. From July to August, total iron ore inventories in China across major ports fell 16% to less than 120 million metric tonnes. However, the arrival of the construction season might encourage domestic mills to start restocking. China's iron ore imports in August were at their strongest in almost three years at 106.415 metric tonnes. Low inventories should also support iron ore’s price at elevated levels.   China iron ore total ports inventory   The supply side has been largely stable, with total iron ore production from the top four miners (Vale, Rio Tinto, BHP and Fortescue) ticking up to 539 million metric tonnes in the first half of the year – 4% higher than a year earlier. We believe that with the supply side largely stable, it will be demand in China that will continue to be the main driver for iron prices moving forward. We believe prices will remain volatile as the market continues to respond to any policy change from Beijing. We expect prices to average $105/t in the third quarter, with seasonal demand supporting. We're expecting $100/t in the fourth quarter and we see the 2023 average at $108/t. Risks will remain to the downside heading into year-end amid China steel output cuts, an uncertain outlook for the property sector and healthy supply.   Copper struggles for direction Against the backdrop of an uncertain path of US rate hikes and China’s lacklustre economic recovery, copper has been struggling for direction lately. Beijing’s latest measures to support the housing market helped copper make a recovery from a low in mid-August, but it has failed to hold above the $8,500/t mark.   After two weeks of rising prices, copper is falling again as the market assesses the effects of China’s measures to support its property market and how they might translate into demand for industrial metals.   LME copper warehouse stocks have been rising   Copper’s inventory levels in LME warehouses have been growing, up more than 40% in August after doubling in July. This shows clear signals of weakening demand. They do, however, remain at historical lows. We believe low inventories fuel the possibility for spot prices to rise rapidly if consumption picks up sooner than expected.   China's imported copper demand is showing signs of improvement   The Chinese market has just entered a peak demand season, which should be supportive for copper prices in the near term. China copper ore and concentrate imports are up 9% year-to-date to 18.104m tonnes, while imports in August climbed to all-time highs at 2.697m tonnes ahead of a seasonal pick-up in demand.  Signs of improvement are also emerging for China’s imported copper demand. The Yangshan copper cathode premium – which usually serves as an indicator of China’s import needs – has steadily been moving up over August to stand at $58/mt compared to a year-to-date low of $19.50/mt in March. Still, it remains even below the post-pandemic average of around $65/mt. A boost for China's property sector will be crucial in supporting demand going forward. We remain wary about the short-term outlook for copper, and China remains a key source of caution. We believe commodity-intensive stimulus is needed to support short to medium-term demand growth. In the longer term, we believe copper’s supportive decarbonisation trend should support prices. We maintain our price forecast at $8,400/t in the third quarter and $8,500/t in the fourth quarter, taking the 2023 average to $8,582/t.   Nickel underperforms Nickel has been the worst-performing metal on the LME so far this year, with year-to-date prices down more than 30%. One of the key drivers of the price decline has been the disappointing recovery in Chinese demand, with nickel prices dropping to a one-year low in August. We believe this underperformance is likely to continue amid a weak macro picture and sustained market surplus, with supply from Indonesia continuing to surge to meet the growing demand from the battery sector. In the past, market surpluses have been due to Class 1 nickel – but in 2023, the surplus will be on account of Class 2 nickel.   LME nickel stocks are critically low The LME’s Class 1 nickel stocks are critically low. However, we believe that LME’s new initiative – which has reduced waiting times for approving new brands that can be delivered against its contract – could potentially increase inventories.   China's refined Class 1 nickel output has been increasing in 2023       China’s refined Class 1 output has seen a solid increase in 2023 in response to historically elevated LME prices, and we believe Chinese producers will continue to submit fast-track LME nickel brand applications. This will allow them to deliver their Class 1 material to LME warehouses. The LME has already approved nickel produced by Quzhou Huayou Cobalt New Material Co, a subsidiary of China's Zhejiang Huayou Cobalt Co, as a listed brand in July. GEM Co. Ltd., a subsidiary of Jingmen Gem Co. Ltd. also applied last month to become an LME-deliverable brand. China’s refined Class 1 nickel output jumped 34.5% year-on-year to 129,400 metric tonnes in the first seven months of the year. This was faster than the 33.9% year-on-year increase in the country’s total output of battery-grade nickel sulphate over the same period, according to data from Shanghai Metals Market. Shanghai Metals Market estimates that 145,300 t/y of new refined class 1 nickel production capacity will be added in China this year. We forecast nickel prices to remain under pressure in the short term as a surplus in the global market builds and a slowing global economy mutes stainless steel demand. We see prices averaging $21,000/t in the third quarter and $20,000/t in the fourth quarter. However, the downside will be limited due to tightness in the LME deliverable market. Prices should, however, remain at elevated levels compared to average prices seen before the historic LME nickel short squeeze in March last year due to nickel’s role in the global energy transition. The metal’s appeal to investors as a key green metal will support higher prices in the longer term. We believe that demand for use in electric vehicle batteries remains a key factor for the longer-term narrative for nickel.    ING forecasts      

05:40BST Tuesday 26th September 2023 Asia weakness set to see lower European open By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a poor start to the week yesterday as concerns around sticky inflation, and low growth (stagflation), or recession served to push yields higher, pushing the DAX to its lowest levels since late March, pushing both it and the CAC 40 below the important technical level of the 200-day SMA. Recent economic data is already flashing warning signs over possible stagnation, especially in Europe while US data is proving to be more resilient.   Worries over the property sector in China didn't help sentiment yesterday after it emerged Chinese property group Evergrande said it was struggling to organise a process to restructure its debt, prompting weakness in basic resources. The increase in yields manifested itself in German and French 10-year yields, both of which rose to their highest levels in 12 years, with the DAX feeling the pressure along with the CAC 40, while the FTSE100 slipped to a one week low.   US markets initially opened lower in the face of a similar rise in yields with the S&P500 opening at a 3-month low, as US 10-year yields continued to push to fresh 16-year highs above 4.5%. These initial losses didn't last as US stocks closed higher for the first time in 5 days. The US dollar also made new highs for the year, rising to its best level since 30th November last year as traders bet that the Federal Reserve will keep rates higher for much longer than its counterparts due to the greater resilience of the US economy. The focus this week is on the latest inflation figures from Australia, as well as the core PCE Deflator from the US, as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday. This could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further to a record high.   On the data front today the focus will be on US consumer confidence for September, after the sharp fall from July's 117.00 to August's 106.10. Expectations are for a more modest slowdown to 105.50 on the back of the continued rise in gasoline prices which has taken place since the June lows. The late rebound in US markets doesn't look set to translate into today's European open with Asia markets also sliding back on the same combination of stagflation concerns and reports that Chinese property company Evergrande missed a debt payment.   Another warning from ratings agency Moody's about the impact of another government shutdown on the US economy, and its credit rating, didn't help the overall mood, while Minneapolis Fed President Neel Kashkari said he expects another Fed rate rise before the end of the year helping to further boost the US dollar as well as yields.     EUR/USD – slid below the 1.0600 level yesterday potentially opening the prospect of further losses towards the March lows at 1.0515. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.      GBP/USD – slipped to the 1.2190 area, and has since rebounded, however the bias remains for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently have resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.     USD/JPY – has continued to climb higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.     FTSE100 is expected to open at 7,624     DAX is expected to open at 15,405     CAC40 is expected to open at 7,124  

Looking ahead, investors are closely watching the upcoming PMI data releases. The National Bureau of Statistics (NBS) is set to release Manufacturing and Non-manufacturing PMI data on September 30. The Emerging Industries PMI's rise to 54.0 in September, up from 48.1 in August, has boosted expectations for a Manufacturing PMI above 50 for the first time since March. Non-manufacturing PMI is also anticipated to show growth, driven by infrastructure construction and local government bond issuance. The Caixin Manufacturing PMI and Services PMI are scheduled to release on Sunday, October 1. Bloomberg's survey is projecting the Caixin Manufacturing PMI to increase to 51.2, up from 51.0 in August. Having a higher weight in exporters in the eastern coastal regions of China, the Caixin survey tends to be influenced by the export trend in China. The first 20-day trade data in Korea showed a rebound in trading activities with China and pointed to the potential of a positive surprise in this data. But the fact that the Korean data this September had 2.5 more working days might caution such a conjecture. The Caixin Services PMI is expected to tick up to 52 from 51.8. These PMI indicators serve as timely barometers of economic activity and provide insights into the pace of recovery of the Chinese economy. If they come in higher, it will tend to confirm our base case for a gradual recovery in progress and a tactical rally in the making for Chinese equities. Nonetheless, if the majority of them come in lower than expected or even fall, the equity market will be at risk of making new lows. The upcoming PMI data will be pivotal for the near-term direction of the Hong Kong and mainland Chinese markets. It's worth noting that during this period, the Stock Exchange of Hong Kong will be closed for the National Day holiday on Monday, October 2, while mainland bourses will be closed for six sessions to observe the Mid-autumn festival and the National Day holidays from Friday, September 29 to Friday, October 6, 2023.   Crucial Meetings on the Horizon Looking beyond the immediate economic data, several crucial meetings are on the horizon that will significantly impact China's economic and financial policies. The Third Plenary Session of the 20th Central Committee of the Communist Party of China is expected to convene in late October. This session will address critical economic policies and set the strategic framework for economic development over the next 5 to 10 years. Another important meeting is the 6th National Financial Work Conference, which guides major financial system reforms and addresses critical issues in the financial system. It is held every five years, and the last one was held in 2017. While it was initially slated for 2022, it was postponed and is widely expected to be held in Q4 this year. This conference is likely to cover topics such as deleveraging in the property sector, shadow banking, and local government debts. Additionally, it will likely shape the financial system in ways that focus on serving the real economy, the government’s industrial policies, and comprehensive national security. Additionally, the Central Economic Work Conference in December will review the economic performance of 2023 and begin formulating policies for 2024. These meetings come at a crucial juncture for China's economic trajectory and provide an opportunity for policymakers to address pressing issues and shape the country's economic future.   Closing Thoughts In conclusion, the situation surrounding China Evergrande and the broader property developer debt overhang remains a significant concern. There is no expectation of a policy bailout for property developers, and the focus is on clearing housing inventory and completing pre-sold units. Deleveraging efforts will continue in the property sector, shadow banking, and local government financing vehicles. Recent economic data show tentative signs of a recovery in the Chinese economy. The upcoming PMI data releases will provide further insights into the sustainability of this recovery. Beyond that, the forthcoming critical meetings, such as the Third Plenary Session and the 6th National Financial Work Conference, will play a vital role in shaping China's economic and financial policies. In light of these developments, the base case remains a gradual economic recovery. However, it's important to monitor the evolving situation and be prepared for potential market volatility based on the outcomes of these meetings and economic data. For now, a tactical trade to go long on China and Hong Kong equities for Q4 is intact, but investors should remain vigilant and adaptable in the face of uncertainty.

China: People’s Bank of China (PBoC) injects more cash to support the weak economy Despite leaving the one-year medium-term lending facility (1Y MLF) at 2.5%, the PBoC injected a net CNY600bn (over and above amounts falling due) to help support stimulus spending, raising thoughts that perhaps they may also tap other policy tools such as required reserves in due course.   More funding will help activity to recover Ahead of the monthly deluge of activity data, the PBOC already provided markets with a positive surprise. Despite leaving the 1-year medium-term lending facility (1Y MLF) rate at 2.5%, the PBoC provided CNY1.45tr in funding, a net CNY600bn more than that which was falling due for rollover. The MLF is the conduit through which the PBoC lends funds to big commercial banks, who in turn, finance the rest of the economy. Short-term market interest rates have risen since September, as the CNY has weakened in the face of a stronger USD, and the PBOC has kept short-term funding costs high to deter CNY selling. However, this has also resulted in a bit of a liquidity squeeze, and it now looks as if the PBoC is looking to sidestep the unhelpful rate environment and alleviate liquidity issues by turning to volume lending instead.  In so doing, it raises thoughts that similar liquidity-enhancing policies, such as the rate of required reserves (RRR), might also be tapped in the coming weeks and months, as the government looks to support economic activity, without resorting to large direct fiscal stimulus measures, or to rate cuts, which could send the CNY weaker. The last cut in the RRR was back in September when the rate for banks was cut by 0.25%.    Activity data - mostly stronger except for anything property related The run of activity data again suggested further modest progress in China's recovery, though once again, there was a divergence between general activity, which moved forward, and anything property-related, which continued to flounder.  The year-on-year growth rate for retail sales moved from 5.5% to 7.6% YoY, and well above the 7.0% rate expected. But year-to-date year-on-year measures, which may be less whipped around by last-year's pandemic-related distortions, showed a smaller improvement from 6.8% to 6.9%.  Industrial production also showed gains, rising to 4.6%YoY (from 4.5%) and 4.1% YoY ytd (from 4.0%).  There was less good news for fixed asset investments, which slowed to 2.9% YoY ytd, from 3.1%. And property investment declined at a faster pace of 9.3% (from -9.1%) while residential property sales also fell slightly faster (-3.7% down from -3.2%).  The surveyed unemployment rate remained 5.0%, though we don't know what is happening to youth unemployment since the figures stopped being published. It most likely remains extremely high.    The economy is still struggling Taking all of the data together, the general sense is that things are moving slowly in a more positive direction, but that the economy still needs the liquidity support that the PBoC seems to be starting to provide, and the slightly more helpful fiscal stance that the central government is taking. We don't expect the external environment to improve meaningfully.  The US may be weathering high interest rates for now, but we suspect that won't last. And Europe is skirting recession, with little prospect of an upturn.  Moreover, while the property sector continues to struggle, which we expect will be the case for some considerable time, the spillover effects to the rest of the economy are likely to keep overall growth rates tepid. The government's 5.0% GDP growth target is not under threat any more. But it was always a very unambitious target.