Gold flies high as Helicopter Ben is ready for take-off

The Fed was the major factor for the development in metals markets last week. Not only gold and other precious metals rose, but also the base metals advanced. A market report from Reuters stated that the comment about inflation would have triggered demand for inflation sensitive assets. In another report, an analyst is quoted saying that “the association with deflation is panic, then that flight to quality and liquidity is worth something”. Thus, what is the real reason for the firm metals markets after the FOMC meeting and what will be the future perspectives?

Two paragraphs of the FOMC statement are important to assess the monetary policy of the Fed:

1)       Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

2)       The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

(For the complete FOMC statement see Federal Reserve).

Unlike other central banks, the Fed is not looking at a broad measure of consumer prices. The FOMC members are smarter than the members of the ECB council and know that they can not fight the impact of weather conditions on consumer prices. Thus, the Fed is focusing on core inflation excluding the rather volatile segments of food and energy. The favorite index is not the urban CPI, which gets more attention in financial markets and in public, but the core personal consumption expenditure deflator. The core PCE has risen in the second quarter by 1.5% yoy after 1.8% yoy in the first quarter of 2010 (for the core PCE). The recent CPI data, the still rather low capacity utilization as well as the moderation of GDP growth indicate that the core PCE is at risk of declining further. All price indices have some measurement weaknesses. Thus, price stability is usually associated with a rise by close to 2% yoy and not just remaining unchanged. In this respect, there is no difference between the Fed and the ECB, the target for the Bank of England had been set by the Chancellor of the Exchequer (finance minister) at 2.5%. Thus, the first paragraph quoted clearly expresses the concerns of the Fed that aggregate demand might be too weak to prevent a dip into deflation.

The second quote underlines that the Fed would be ready to act to prevent deflation. It does not provide the slightest hint that the Fed would embark on an inflationary policy. In the likely case that the Fed would implement a new round of quantitative easing, there would be no rational reason to buy metals as a hedge against inflation. The Bank of Japan is applying quantitative easing since almost one decade and is still in an uphill fight with deflation. Thus, quantitative easing is by no mean a guarantee for an accelerated rise of inflation indicators.

 In the case of outright deflation, which Japan is currently experiencing, there is no reason to buy gold or other metals as a store of value. In addition, contrary to the above quoted comment from an analyst, gold does not provide any additional liquidity advantage. Physical possession of gold is associated with storage costs. Even at the very low interest rates offered on short-term Japanese Government paper, holding government paper provides superior real return perspectives. Even paper currency beats gold and other metals as a store of value in a deflation.

However, there is one major difference between Japan and the US, which plays a crucial role for the demand for metals. The Japanese yen is an important currency, but the status of the US dollar as global reserve currency is unrivaled. As the most important metals are priced in US dollars, the external value of the US currency plays a crucial role for the price trends in metals markets. A new round of quantitative easing by the Fed will have an impact on short-term interest rates and government bonds along the whole yield curve. Falling interest rates increase the incentive to use the US dollar as funding currency in carry trades and to invest in higher yielding assets in other currencies. The US dollar is likely to depreciate with quantitative easing, except a new financial crisis would trigger again a flight into the safe haven and to unwinding of carry trades. For the Fed, a weaker US dollar would have the positive impact that it would help to achieve the target to prevent deflation by higher import prices. For commodity investors, it would be supportive as commodity prices often rise stronger and more than compensate the impact of a weaker US dollar. And it is exactly this perspective, which was the main driver for precious and base metals following the release of the FOMC statement.

We are skeptical that the Fed would be successful with implementing further quantitative easing. Increasing the Fed balance sheet could be even counter-productive for three reasons.

First, as several academic studies demonstrated, the yield curve is one of the best indicators for future economic activity. A steepening of the yield curve signals that the outlook gets brighter and economic activity usually picks up with a time lag of around 6 – 12 month. Two measures of yield curve steepness are often watched to assess the outlook for GDP growth, the spread between the yield on 10yr US T-Notes and the 3m T-Bill rate or the difference to the 2yr US Treasury yield. In any case, the scope for quantitative easing to lead to a steeper yield curve is rather limited. The 3m T-Bill rate is at 0.19% and the yield on 2yr US Treasury paper is at 0.44% currently. Thus, quantitative easing might probably lead a flattening of the US yield curve, which would send the wrong signal to businessmen that GDP growth would moderate even further.

The second reason is related to the first one; however, it does not refer to spreads along the US Treasury curve but to spreads compared to other segments of the US bond market. Buying treasury paper by the Fed is likely to lead to wider spreads of other instruments over the government paper. A widening of spreads of mortgage bonds could send the wrong signal to financial markets as they might regard the spread widening as another sign of renewed pressure on the housing market. This could also lead to a deterioration of consumer confidence and lower consumption spending. For business fixed investment, the level of capital costs should be the more important factor. However, increasing spreads of corporate bonds over treasury notes could signal to corporate treasurers that the market would view investment plans as more risky. The board might decide to postpone investments, which would then be another dampener for aggregate demand.

The third argument refers to the relationship between yields and savings. Contrary to conventional textbook theory, lower yields would not necessarily lower savings, but could lead to a higher savings ratio. It affects the corporate as well as private household sector. Many companies sponsor pension schemes. As yields decline, those pension schemes get underfunded. While the value of current bond holdings rises as yields drop, the capital gains are not always sufficient to compensate for the lower income earned from new investments. If the duration of the portfolio is lower than that of the pension obligation, underfunding emerges. Quantitative easing is expected to drive yields lower and thus, to increase the underfunding of pension schemes. Companies would have to invest more funds in their pension schemes to meet future obligations. In Japan, the low interest rate level had severe implications for private consumption and the US might face the same problem. People already in retirement rely to some extend on their savings for their consumption. If the yield on these savings declines, they have to reduce consumption. Similar to the problem of companies, the active work force might have to increase the saving ratio in order to reach a certain level of wealth for future spending once they retire. Thus, the falling bond yields, which are probably pushed further down by quantitative easing could have the adverse and undesired effect that companies and private households increase their saving and spend less.

All in all, quantitative easing bears some considerable risk of even depressing aggregate demand and thus, increase the deflationary pressure. And it is doubtful whether a depreciation of the US dollar as a result of quantitative easing would be sufficient to compensate the negative factors mentioned above. The Fed might then increase the balance sheet expansion to fight deflation. The demand for the industrial use of metals might decline, but a weaker US dollar could still be enough to push metal prices up.    

Nothing’s going to stop gold, but for how long?

Last week, we wrote that the stronger than expected growth of Chinese industrial production would be positive for industrial metals, but probably negative for US Treasury yields and thus, also for gold. While industrial metals gained indeed, gold did not correct. Quite the opposite, it reached a new historical high.

At the beginning of the week, US Treasury paper climbed higher and yields declined as there were talks the Fed would buy more Treasury notes and bonds than holdings were maturing. Thus, the market priced in more quantitative easing by the Fed. The rise of the 10yr US T-Note future explains well the increasing price of gold at the beginning of the week.

However, as also US economic data came in better than expected during the week and US Treasuries pared their gains made earlier, gold did decouple and reached new record highs on Thursday and Friday. One explanation given by market commentators in the media was a weaker US dollar. However, this argument is not very convincing. Japan intervened in the foreign exchange market to weaken the yen against the US dollar. Thus US dollar index also moved sideways during the week, thus, it also does not explain the further rise of gold after US Treasury paper declined again.

The holdings of the biggest gold ETF, the SPDR Gold Trust, do not provide a clear picture. On balance, the holdings rose by 8 tones to 1,300 tones. However, after a rise on Tuesday, holdings declined again significantly on Wednesday. Only on Friday, the holdings at SPDR Gold Trust rose again. While gold closed higher on four days, the stocks at the biggest ETF increased only on two days and declined also on two days. This is not a strong indication.

Large speculators increased again their net long position in COMEX gold futures in the week ending September 14. According to the latest CFTC “commitment of traders” report, they have added on balance 4,564 contracts. Thus, their net long position at 244,261 contracts is again close to the high recorded at the end of June. As gold continued its advance, hedge funds and CFTs have probably added to their net long positions during the remainder of last week. Also the small speculators have increased their net long position slightly.

After reaching a new record high, analysts have revised their forecasts for gold higher. Many market pundits are now expecting a rise to 1,300 or even 1,400$/oz by the end of this year. These bullish forecasts might have triggered further gold buying. However, the market reaction was not very strong. If a market is really in a bullish mode, breaking out above a previous high should lead to a significant push higher. But gold made a strong daily advance to reach a new record high on Tuesday. In this case, it is not uncommon that a market digests the rise first before continuing the rally. And gold made new daily highs, which is also a positive sign. The technical indicators are also bullish. Thus, the chances are still good for a continuation of the rally and more days with new record highs.

Nevertheless, there is still one warning signal. Spot gold closed above the upper Bollinger band line, which is bullish as long as the closing price remains above this line. However, a close again inside the band is a negative signal, pointing at least to a consolidation or even the start of a correction. On Friday, spot gold closed inside the Bollinger band again. In addition, gold had formed a reversal chart pattern.

All in all, we are still convinced that the economic fundamentals do not argue for being long in gold. We fully agree with George Soros that gold is the next big bubble. However, the market is in a bullish trend since the end of July. This trend could continue. The technical warning signals are just a warning but not a sell signal yet. Thus, as long as no sell signal is triggered, going short gold is probably a dangerous game.

Believe in the Chinese Boom and not in Dr. Doom

In the 1960ties, the British mass tabloids reported in the summer months about the emergence of the monster of Loch Ness. This year, the monster had been replaced by the talk of a double dip recession in the US and in China. Even expert economists like “Dr. Doom” Nouriel Roubini explain that the double dip monster is looming around the corner. But like in the case of the monster of Loch Ness, lot has been written about the douple dip recession, about it has never been seen when monetary policy was expansionary. All those experts predicting a double dip recession in China had been proved wrong over this weekend.

Chinese statistics for industrial production and consumer price inflation were initially scheduled for release later this week, however, last Friday, the statistics office announced that the data would already been published on Saturday local time. Many experts and market participants expected that the re-scheduling was due to disappointing figures. But it turned out that all those experts were completely wrong. While the consensus of economists had been looking for a rise of industrial production in August by 13.0% yoy – not a weak number by any standards – the actual rise was almost a full percentage point higher at 13.9% yoy.

Chinese consumer price inflation came in as expected at 3.5% yoy, however, the rise of the inflation rate was driven by food prices, which is not a surprise given the rally of agricultural commodities in August due to the drought and harvest short-falls of wheat in the Black Sea region. A sound monetary policy would look through food price inflation as fighting higher agricultural prices after a poor harvest season would cause more harm then benefits. And the lower than expected rise of producer prices by 4.3% after 4.8% yoy in the preceding month would also argue for keeping monetary policy unchanged. However, Chinese monetary aggregates expanded too strongly. New loans rose to 545bn yuan from 533bn in the previous month while the consensus was looking for a drop to 500bn yuan. Also the growth rate of money stock M2 jumped from 17.6% yoy to 19.2%. Thus, a further tightening of Chinese monetary and credit policy has to be expected.

Economists have the reputation of not coming to a clear conclusion and arguing by on the one hand and on the other hand. However, the mixed economic data out of China on Saturday makes it difficult to draw a conclusion how base metal markets will react at the start of the new trading week. The rise of industrial production and the slower increase of the PPI would clearly argue for a rally, in particular in the copper market. However, the thread remains that the Peoples Bank of China will tighten monetary policy further given the surge of monetary aggregates. Thus, we would put a slightly higher probability on the scenario that base metals recover from the fall at the end of last week and continue to climb higher. However, the risk scenario that the market prices in a tighter monetary policy and sells base metals has also a high likelihood. Thus, we would remain long but would also buy some downside protection.

The Chinese economic data is probably negative for gold. The stronger rise of industrial production should reduce the fear of a double dip recession. Investors’ risk appetite is likely to increase, which implies that funds will flow out of the safe havens into the stock markets. The US Treasury market saw a slight rebound at the beginning of last week, but ended the week lower. The upward trend, which had been in place since April, has ended by various indications like trend line violation or MACD falling below its signal line. Gold come close to the record high last week, but did not reach it. It also closed lower on the week. Thus, we expect that the close correlation between gold and the US T-Note future will hold. Both markets are likely to trade lower on the outlook that the global economy will not dip into a renewed recession. 

   

Improved Outlook for industrial metals

September has the reputation of being the worst month for stock markets. As equity markets are a leading indicator for economic activity, there was fear that only gold would shine and other metals would be falling. Already during the preceding month, the major burden for industrial metals was the fear that global economic growth would slow down and that the US economy would drift into a double dip recession. Even Fed chairman Bernanke admitted that the outlook for US GDP growth would be unusually uncertain. The Fed decided not to embark on its exit strategy but to keep a floor on its balance sheet, which increased the concern in the markets. The yield on the 10yr US Treasury T-Note plunged, which had been interpreted as another indication for the emergence of a double dip recession. However, September did not live up to its reputation so far. Quite the opposite, the first three trading days are promising for industrial metals.

The trigger for an improvement of sentiment had been the release of the manufacturing PMI indices. The official Chinese PMI remained above the 50 threshold in the previous month. However, the markets focus more on the Markit/HSBC PMI, which dipped below this level. This month, both indicators increased and the HSBC PMI rose from 49.4 to 51.9, which gave industrial metals a first push to the upside. In the eurozone, the PMI was revised up from its initial estimate to 55.1. In the US, the ISM manufacturing index was expected to decline by more than 2 points to 53.2 but it rose surprisingly to 56.3. We were never convinced by the arguments for a double dip recession. We argued that a reading of 60 or even above has not been sustainable in the past. The PMI indices then declined, but remained at levels, which point to further growth in the manufacturing sector.

Also the US non-farm payroll figures were a positive surprise. While I was working for Dresdner Kleinwort investment bank, one of my colleagues was the best US economist, Kevin Logan. One valuable lesson I learnt while working with him was that economists get more cautious if their forecasts were too optimistic for two consecutive times. Then their forecasts get a too pessimistic bias. This was also the case with the current US labor market report. The reports for June and July disappointed due to the lay-offs of temporary workers hired for the US census and by States due to budget constraints. However, as the Obama administration pushed through that the federal government provides funds to the states, it was likely that the forecasts for the non-farm payrolls got to pessimistic. Instead of the expected loss of 101,000 jobs, only 54,000 jobs were lost. In addition, the two preceding months had been revised up significantly.

The economic data released during the first 3 days of September demonstrate that the fears of a double dip US recession as well as a sharp slow down of Chinese GDP growth were overdone. Dr Doom got it wrong this time. We expect that figures will show that GDP growth in the US will moderate from the fast pace of the recovery, but will remain positive. In China, the authorities prevented an overheating of the economy, which might be now on a non-inflationary expansion path. Thus, the fears that demand for industrial metals would collapse are also not justified. Therefore, we expect that industrial metals are likely to rise on balance during the final four months of 2010.

The improved economic data had a negative impact on the yield of 10yr US Treasury Notes, which rose again. The recently close correlation between gold and the 10yr US T-Note future would argue that investors also take profits in gold as the risk of a new round of quantitative easing is getting less likely. However, some gold bugs might play now the inflation card despite an acceleration of inflation is far away given the low levels of capacity utilization rates. Nevertheless, we would not rule out, that gold decouples from the US T-Note futures and might advance further. But one should keep in mind, that gold is already overbought. The net long position of large speculators rose further in the week ending August 31 and is close to the peak in June. Therefore, we regard a correction still as the more likely scenario for gold.  

High uncertainty among hedge funds supports gold

The uncertainty about the further development of global financial and commodity markets appears to be extremely high at present. However, they don’t follow the old market adage of “if in doubt, stay out”. Instead they invest in gold as a store of value. The risk is that once these investors decide to invest again in other higher yielding assets that the price of gold might collapse like in 1980. Currently, gold appears a suitable instrument for short-term trading, but not for long-term investing.

Stan Druckenmiller, a famous hedge fund manager, announced recently that he will close his fund and will retire. It was not only the tight time budget available for pursuing other interests like playing golf with friends, which led to this decision. Also the meager performance this year played a role as Mr. Druckenmiller got the development of the US Treasury market completely wrong. By the way, he is not the only one who got surprised by the more than 1.5 percentage point drop of yields on 10yr US T-Notes.

According to reports, other famous hedge fund managers like John Paulson and George Soros have invested heavily either directly or indirectly via ETFs in gold this year, while inflation is not on the horizon. As gold does not yield any return, one has to speculate on capital gains to make a profit. The major drivers of gold are also not providing a clear picture. The US dollar strengthened during the first half of 2010 against the euro due to the crisis of government debt in the southern eurozone countries. But the euro could pare a part of the loss at the beginning of the current quarter before giving back some of the gains. Crude oil is hovering sideways and was lately under pressure as the market fears the US economy might slip into a double dip recession. Only the falling bond yields are supporting gold as the opportunity costs of holding gold declined.

If hedge funds managers and CTAs were really convinced that the fundamental outlook for gold were positive, the other precious metals should also be bought by large speculators. However, the latest commitment of traders report compiled by the CFTC shows a completely different picture. In the week ending August 24, large speculators increased their long positions in Comex gold futures by 15,290 contracts or 6.3% to 256,244 contracts. Their net long position rose even stronger by 16,963 contracts or 8.3% to 221,191 contracts. Normally, silver posts stronger percentage gains when the price of gold advances. However, large speculators reduced their long positions in Comex silver futures by almost 1,000 contracts to 42,255 contracts, a decline of 2.3%. The net long position of the non-commercials declined less as the large speculators also closed some shorts. It decreased by 765 contracts or 2.2% to 34,807 contracts. Also the net long position in platinum and palladium declined.

This divergence between the development of net long positions in gold futures on the one hand and the futures on other precious metals does not support the argument that hedge funds were buying gold as a protection against medium- to long-term inflation risks. In this case, it would make more sense to diversify holdings and to buy also the other precious metals. From our point of view, it is an increased uncertainty (the unknown unknowns as former US defense secretary Ramsfeld described it) and the relatively low opportunity costs which induce hedge funds to buy gold.    

Correction at the gold market appears to be looming

Gold might be heading towards a correction after rising for more than four weeks. The fundamental arguments for buying gold have not been convincing lately. With a slow-down of the US economic growth, there is no risk the economy would overheat and lead to inflation. As many economists even predict or fear a double-dip recession, the risk seems to be biased more towards deflation than inflation. However, gold is not a perfect hedge against deflation, contrary to the pretentions of many gold bugs. Hedge Funds and other asset managers were heavily invested in gold and are now looking for the bigger fool to sell their gold. One should always be very careful when fund managers appear on tv stations and praise an investment vehicle. This is often the best selling opportunity, not only in gold but also in US Treasuries.

Last Friday, gold started to react on the stronger US dollar, while the firmer US dollar against the euro had been ignored for about one week. The trigger was an interview of Bundesbank chief Weber with Bloomberg TV. He indicated that an exit from quantitative easing should not take place before the end of this year and might start as soon as Q1 2011, depending on the financial stability. This should not come as a surprise, even as Mr. Weber is considered to be a hawk within the ECB council. As long as the money market of the eurozone is not functioning and banks of some regions have no access to the interbank market, the ECB is unlikely to embark on exit strategies. In addition, the Euribor futures have not priced in that the 3mth Euribor would be above the ECB refinancing rate by December 2010. Thus, the renewed pressure on the euro versus the US dollar appears to be overdone; nevertheless, the impact on gold was negative.

Unlike gold, the other precious metals traded sideways in July and August. Recently, silver and the PGMs even declined while gold moved temporarily above 1230$/oz. Within the precious metals complex, gold got overvalued. If valuations get overstretched, traders will sooner or later start to sell gold and buy the other precious metals.

We have pointed out the unusual positive correlation between gold and the 10yr US T-Note future. Last Friday, this correlation was another negative factor for gold. Since the beginning of April, the price of the T-Note future gained more than 10 full percentage points. The yield on 10yr T-Notes has fallen by 1.5 percentage points to 2.5% and traded even below the level recorded after the collapse of Lehman Brothers in September 2008. Even with a CPI inflation rate of 1.2%, the real yield is unusually low and not in line with the US economic situation. The past week, the 10yr US T-Note future showed first signs that the rally is coming to an end. The market traded sideways after reaching a new high at the start of the week. In a week over week comparison, the market even closed slightly lower. A new high but lower close is regarded as a key reversal pattern by chart technicians. Also other technical indicators point to a potential reversal. The ADX in the daily chart reached the 60 mark and has declined already slightly. Readings above 50 are a harbinger that the trend is going to exhaust and to reverse soon. Also the MACD and the stochastics are close to trigger sell signals. A correction in the US Treasury market would then have probably also a negative impact on gold.

But not only the intermarket relationships of gold turn negative, also the gold chart sends warning signals that the rally might come to an end. The candlestick pattern of a hanging man has emerged last Friday. This pattern has a high probability to indicate a trend reversal. The ADX is declining, which points to a weakening of the trend strength. In this environment, more emphasis should be put on oscillators like the stochastics instead of trend following indicators. The two lines of the stochastic have already crossed in the overbought zone. However, to trigger a sell signal, a return back into the neutral zone is required.

All in all, the odds are increasing that the rally in the gold market is coming to an end and that a reversal might be around the corner. However, before selling gold short, the technical indicators should provide more confirmation for a reversal.  

Irrationality in metals markets

John Maynard Keynes once stated that markets could stay longer irrational than one could remain liquid. Currently, it seems we are in such a situation. Gold continued its rise after founding support at around 1,160$/oz three weeks ago. Silver traded further sideways, but ended the week lower, while the PGMs suffered again stronger losses. Base metals also had a negative week on balance with the exception of tin, but trading was rather volatile with larger swings up and down. The driving forces behind these moves in the metals markets were the Fed policy and fears that not only the US might head towards a double dip recession but also a stronger slow-down in China would lead to global economic weakness.

 The correlation between gold and the US T-Note future became positive recently. And again last week, one could observe that gold rallied in line with the US Treasury market after the announcement of the Fed following the FOMC meeting. Furthermore, the behavior of the markets demonstrated that they are not information efficient, contrary to academic theories. After the semi-annual testimony of Fed chairman Bernanke and the Beige Book, it should have been already priced in that the Fed is unlikely to embark on tightening monetary policy. Some bond investors even betted the Fed would start another round of quantitative easing at the FOMC meeting last week. However, all the Fed is doing is just not to drain liquidity from maturing bond holdings. All proceeds will be reinvested, thus, the balance sheet will not be expanded but the Fed is just putting a floor on its balance sheet. Furthermore, the Fed clearly stated that “inflation is likely to be subdued for some time” (see FOMC statement). With no inflation on the horizon as far as the eye could see; there is also no reason to buy gold as a hedge against inflation. Some gold bugs argue that the metal would also be a perfect hedge against deflation. During periods of deflation, fixed income bearing assets perform better than real tangible assets like gold. Thus, this statement of the gold bugs makes as much sense as pretending that gasoline would be perfect for lightning and extinguishing fire.

In the case that the positive correlation between the gold price and the 10yr US T-Note future should prevail, the question arises, how far could both rise further. Usually, there is a close correlation between the 10yr T-Note future and the 3mth Eurodollar future, which matures one year later. This implies that the bond market rallies if also falling short-term interest rates are expected. The Fed is likely to keep the Fed Funds target rate at the current level for an extended period. With the Dec 2011 3mth Eurodollar future already trading above 99.0, the potential for further rise appears to be rather limited. Therefore, also the upside potential for the 10yr US T-Note future seems to be capped, but this does not exclude new all-time highs could be reached. In the current environment, this might also be supportive for gold.

The US economy is loosing steam compared to Q1 this year, there is no doubt. However, will this lead also to a double dip recession as more and more economists predict and markets fear? We remain skeptical or more positive formulated; we stay more optimistic for the US economy than the market consensus. The US consumer is not the driving force of the economic recovery. Given the balance sheet repair work of the private consumers, i.e. reducing indebtedness and increasing savings, the high unemployment rate and slow creation of new jobs, the private consumption will grew, but not at the rates seen in the past. However, inventories are still low relative to sales, thus, building up stockpiles is probably remaining a supportive factor and business investments are also likely to contribute to GDP growth in coming quarters. This also argues against strong gains of US Treasury futures and gold. And a continued growing US economy, even at a slower pace, should remain a positive factor for the PGMs and the base metals.

Asian investors already reacted disappointed on the FOMC statement, but their reaction in the markets for base metals and the PGMs was even more severe after the release of the Chinese trade data. While the trade surplus increased from $20.0bn to $28.7bn and the consensus expected a slight decline, the markets reacted negative on imports, which were only up 19% in July, far below economists’ predictions. This has been regarded as another signal for a sharp slow-down of the Chinese economy and weighed on metals markets. However, the rising trade surplus still indicates that the Chinese as well as the global economy is growing. Markets also reacted negatively on the German GDP, which grew by 2.2% qoq in Q2, the strongest growth rate after the unification in 1990. The pundits fear that this would not be sustainable. As construction spending made a bigger contribution to the German GDP growth, this expectation is probably right. Nevertheless, the ifo business climate and the PMI indices all indicate that the biggest economy of the eurozone will expand further at an elevated level. Thus, the negative reaction on surprisingly strong growth is not justified. It underlines the bearish sentiment in global equity and metals markets. This sentiment is currently the major thread for further market trends and could have a self-fulfilling impact on the global economy.