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Developed Economies

  • Saudi Arabia has frozen all new trade with and investment into with Canada after a political spat between the two countries. Canada has recently urged Saudi Arabia to release political activists. Trade between the two countries works out to roughly £3bn per year.
  • Consultancy BDO’s latest UK service sector index read a surprising negative. The index read 94.73 for July vs 96.85 for June. Anything below 95 for this index is contractionary and this is the first contractionary reading since 2010. Commentators are putting the contraction down to uncertainty over Brexit. The July UK service’s PMI read 53.5, however, which is expansionary, albeit down form the 55.1 reading for June.
  • Across the channel Germany’s economy is sitting an astounding 3.4% unemployment rate, the lowest rate since July 1980. Meanwhile, Germany’s composite PMI figure hit a five-month high in July driven by stronger manufacturing activity. The German economy is clearly pumping along, though some commentators are warning that a future trade war with the US may take the steam out.

Emerging Markets

  • India is, according the latest readings, the fastest growing major developing economy. Annualized Q1 GDP growth came it at a blistering 7.7%. Compare this to China’s Q2 GDP growth rate of 6.7%. Indian inflation is rising – growing from 4.28% in March to 5% June – with the central bank targeting 5% inflation. It’s likely we’ll see an Indian rate hike in the next few months from today’s 6.5% as inflation is expected to continue upwards.
  • As mentioned Chinese annualized GDP growth was 6.7% in Q2, down from 6.8% in Q1. This is mainly down to a reduction in industrial activity counteracting an increase in retail activity. It’s not clear if tariffs put on Chinese goods by the U.S. is behind this drop-in activity, as some commentators claim. Other commentators are suggesting the country’s attempts to crack down on its risky shadow banking system is behind the drop.
  • Speaking of the U.S.-China trade war: China has filed a challenge to the U.S. 25% tariffs on $200bn of Chinese goods with the World Trade Organization. On Friday the country also announced retaliatory tariffs on $60bn of U.S. goods. These Chinese tariffs will include 25% tariffs on copper ores, minor metal ores, U.S. LNG and U.S. manufactured solar cells. U.S. agricultural commodities were spared new tariffs as they had already been targeted by previous Chinese tariffs.

Agricultural

  • Australia’s wheat crop this year is being devasted by severe drought. The crop is expected to come up below 20m tonnes this year. This is in-line with last year’s harvest which was the lowest in a decade. Sydney wheat futures are up 20% since early July and are trading at A$350/Tonne.
  • Much needed rains have fallen across the major sugar cane and coffee growing regions of Brazil in the last few days, and are expected to continue this week. This will temporarily halt sugar cane harvesting, but the added moisture should boost harvest output. Sugar #11 bounced off lows just above 10c/lb last week to trade above 11c/lb today. New York coffee is trading around 109c/lb after a multi-month bear market halted in July.
  • US lumber futures have seen a significant correction since the strong Sep-17 to May-18 bull market. Due to tensions between the US and Canada over Canadian lumber exports the market rallied to above $650/bft – a record high price. With building inventories through the summer producers are being forced to offer substantial discounts to buyers on the spot market undermining the fundamental support for the futures market. Current front month lumber futures are trading at $422/bft and its likely we’ll see the market below $400/bft this month.

Energy 

  • Saudi Arabian crude production was lower in July vs. June. The country produced some 10.29m bpd vs. 10.49m bpd in June. This is despite a pledge from Saudi Arabia to boost production. Elsewhere U.S. oil production is growing slower than analysts’ expectations. May output was 10.442m bpd vs 10.472m bpd in April and vs May expectations of 10.749m bpd. The U.S. EIA estimates June production will be 10.9m bpd.
  • U.S. natural gas storage is running low for this time of year. Currently there is an estimated 2.3 tcf in storage vs an average of 2.8 tcf for this time of year. Forecast models suggest that injection season will end with some 3.2 tcf in storage which is 500 bcf below normal levels. Commentators are suggesting we’ll see a price spike in U.S. gas futures on the back of this. This may also reduce U.S. LNG exports over the winter contracting global gas supply. 
  • The European gas market is in a similar situation with the sum of gas in storage in Northwest Europe sitting at 294.51 TWh at present vs 332.93 TWh in storage this time last year. This is primarily down to the sharp cold snap Europe saw at the end of winter delaying the start of injection season. The risk of price spikes in Europe from colder than normal weather over this winter is increased because of this.

Metals

  • Copper futures have been stuck in a rut over the last few months. SHFE, LME and CME copper futures are trading around ¥49,000/tonne, $6,100/tonne and $2.7/lb for July running into August after coming down sharply from early June levels. The drop came on the back of Chinese economic fears related the U.S.-China trade war. It appears as if the market has priced in all that fear and is essentially waiting for some clear indications that the trade war has had an impact on the Chinese economy. As mentioned earlier there was a small slowdown in Chinese GDP growth (Q1 6.8% to Q2 6.7%). The relative stability of the metal is a good indicator that the outcome of the trade war or the crackdown on China’s excess credit problem remains unknown.
  • Several Chinese cities in China’s coastal northeast Liaoning province are scrapping plans to build alumina refineries. The plans are being scrapped primarily due to environmental concerns. China is dependent on imported alumina from places such as Australia and Indonesia and existing Chinese alumina refineries are being hit by 30% output curbs to reduce pollution. The net result of this crackdown on industrial pollution will mean expanded alumina refinery growth in bauxite mining regions.
  • Global miner BHP Billiton is boosting investment into nickel mining and exploration activities as the global battery demand increases demand for the metal. The company is building the world’s largest battery grade nickel-sulphate plant in Western Australia and is looking to secure feedstock. The growth in battery demand for nickel is pushing other miners – which often provide nickel concentrate to BHP Billiton – to invest in their own nickel sulphate facilities which may leave the company struggling to find supply.