1、Global Commodities Research07 June 2019 Metals QuarterlyDespite the rally,gold still offers a cheap late-cycle hedge.We target$1,460/oz.Global Commodities ResearchNatasha Kaneva(1-212)834-JPMorgan Chase Bank NAGregory C.Shearer(44-20)7134-J.P.Morgan Securities plcThomas Anthonj AC(44-20)7742-J.P.Mor
2、gan Securities plcLadislav Jankovic AC(1-212)834-J.P.Morgan Securities LLCSee page 47 for analyst certification and important Data tracking suggests the slowdown in the global economy extended into 2Q19.The May global manufacturing PMI released this week showed the index falling 0.6-points to 49.8,m
3、arking the 16thconsecutive month of an uninterrupted slide in global manufacturing and dipping into contractionary territory.Base metals entered 2Q trading at an 18%premium vs underlying PMI and were pricing in a rebound rather than slump in global manufacturing.Even after losing 9%over the past two
4、 months,the complex is still pricing a slightly more than one point rise in JPMs global manufacturing PMI to 51.2.In other words,it is trading at about a 13%premium.Base metals valuations are no longer as stretched as they were in February and March,when we first turned neutral and then bearish on t
5、he space.The priced growth hurdle also does not appear as high relative to what could be delivered in the near-term given the likely policy responses from China and the US,leaving us with an overall constructive short-term bias in 3Q relative to spot levels.We opt to maintain our negative 4Q19 outlo
6、ok for base metals though,given the age of the cycle.We keep a sharp end-2019 selloff in our base case across industrial metals,although we have to admit that our forecasted price levels dont look particularly bearish vs current spot levels.With the unfavorable 2Q gold catalysts largely behind us,we
7、 maintain our bullish outlook on gold over 2H19 and into 2020 given the metals unique late-cycle characteristics.Our reasoning hasnt changed.We certainly see scope for gold to outperform in a business cycle that has become the longest on record.In terms of valuations,the extreme slide in yields has
8、left gold spot valuations fairly attractive for investors looking for a recession hedge:our fair value model shows that current spot gold prices are about$25/oz too cheap vs.real 10-year Treasury yields.Our bearish bias for 2Q19 worked well,and with the exception of zinc,all other base and precious
9、metals performed in line with our expectations,resulting in only slight mark-to-market adjustments.Aluminum aside,we make only cosmetic changes to our 3Q price forecasts,which leaves us quite constructive the base metals sector for the quarter relative to spot prices.We also opt to keep our 4Q19 pri
10、ce forecasts largely unchanged.Technicals:The broader down-consolidation in the metals sector(both precious and base)has reached countertrend decline targets,which means the start window for a broader countertrend rally is currently open.This view is also supported by the fact that the USD up-trend
11、shows signs of trend exhaustion,so that a deeper setback could be looming.Derivatives:The risks are tilting toward a shallow consolidation in gold vols.We think its opportune to position for capturing vol carry RV-ing ATM vols vs tactically overextended skew vols via long ATM vs.short 25D delta-hedg
12、ed XAU/USD calls,in vega notionals.2Global Commodities ResearchMetals Quarterly07 June 2019Natasha Kaneva(1-212)834-Gregory C.Shearer(44-20)7134- Thomas Anthonj(44-20)7742-Ladislav Jankovic(1-212)834-Slowdown in the global economy has extended into 2Q19After closing 4Q18 deep in the red at-7.0%,indu
13、strial metals reversed all of this selloff and more,returning 10.5%in the first quarter of the year.That payback rally occurred despite global economic growth falling to the slowest pace since mid-2016 and global manufacturing PMIs plunging to new lows.However,industrial metals have suffered a rever
14、sal of fortunes in the first two months of 2Q19,shedding 9.1%QTD and nearly fully erasing the sectors returns for the year(0.4%).On the other hand,precious metals have enjoyed a steady but unspectacular appreciation YTD mostly driven by palladium but to a lesser extent gold(Exhibit 1).Exhibit 1:Quar
15、terly performance of the JPMCCI TR metals sub-indices and sub-componentsSource:J.P.Morgan,BloombergThis uneven quarter-over-quarter performance for base metals masks the fact that while not much has changed fundamentally,macroeconomic expectations have diminished considerably.On the demand side,data
16、 tracking suggests the slowdown in the global economy extended into 2Q19.The May global manufacturing PMI released this week showed the index falling 0.6-points to 49.8,marking the 16thconsecutive month of an uninterrupted slide in global manufacturing and dipping into contractionary territory.The d
17、isturbingly weak trend in global business spending remains the main factor affecting manufacturing output.Our real-time tracker of global capex points to business spending contracting 2.4%in April and is tracing a 1.3%annualized contraction this quarter.Even more worrisome is the fact that while our
18、 projections are predicated on early-quarter data,the trajectory was weak even prior to the recent escalation of trade tensions(The time is now:Introducing the J.P.Morgan Capex Nowcaster,Lupton et al.,30 May 2019).Further weighing on manufacturing are deteriorating business expectations as a lack of
19、 progress on the US-China trade deal has been hitting business confidence.This is reflected in our 12-month-ahead US recession risks model,which has risen by roughly 25%-pts since last September to 42%at the moment,driven primarily by weakening in business sentiment.Consequently,we have marked to ma
20、rket the risks and made sizable cuts to our growth forecasts in every region.We now see global GDP growing at below-trend 2.5%pace in 2Q and at potential 2.7%for the reminder of the year.Even after the large downward revisions,the risks to our 2H19 outlook are still to the downside,given that revisi
21、ons to growth forecasts tend to be serially correlated(Exhibit 2).Exhibit 2:J.P.Morgan Real GDP Forecast Revision IndexIndexSource:J.P.MorganHowever,the signals from the real economy are still positive.Labor markets are healthy,corporate profitability remains resilient and credit availability is ade
22、quate.Policy also remains accommodative.In the US,an aggressive response from the Fed to a further deterioration in growth appears to be the modal outcome implied by the OIS curve,which is now pricing two full cuts by December 2019.Furthermore,we believe China is committed to maintaining 6%growth an
23、d will respond to any signs of slowing with further counter-cyclical policy measures.Supportive policies together with easing financial conditions and healthy private sector fundamentals are behind our view that the expansion will likely hold for now.Base metals valuations not as stretchedanymoreBas
24、e metals entered 2Q trading at an 18%premium vs underlying PMI and were pricing in a rebound rather than slump in global manufacturing.Even after losing 9%over the past two months,the complex is still 20184Q20181Q20192Q19 QTD2019 YTDIndustrial Metals-18.0%-7.0%10.5%-9.1%0.4%Copper-17.0%-4.0%9.3%-9.7
25、%-1.3%Aluminum-17.6%-10.2%3.2%-6.6%-3.6%Zinc-22.2%-4.0%20.2%-12.0%5.8%Nickel-16.3%-15.1%21.4%-7.4%12.4%Precious Metals-3.9%6.8%1.0%-0.2%0.7%Gold-2.7%7.2%0.9%0.9%1.8%Silver-10.2%5.4%-2.8%-3.8%-6.5%Platinum-14.8%-2.7%6.6%-6.6%-0.4%Palladium16.9%12.8%13.5%-0.1%13.3%BCOMIN TR-19.5%-8.7%12.8%-7.6%4.3%BCO
26、MPR TR-4.6%6.8%0.0%-1.5%-1.5%JPMCCI TR Sub-components92.092.292.492.692.893.093.293.493.689.590.090.591.0Jan-17Mar-17May-17Jul-17Sep-17Nov-17Jan-18Mar-18May-18Jul-18Sep-18Nov-18Jan-19Mar-19May-19DMGlobalEM3Global Commodities ResearchMetals Quarterly07 June 2019Natasha Kaneva(1-212)834-Gregory C.Shea
27、rer(44-20)7134- Thomas Anthonj(44-20)7742-Ladislav Jankovic(1-212)834-pricing a slightly more than one point rise in JPMs global manufacturing PMI to 51.2.In other words,itis trading at about 13%premium,on an aggregate basis(Exhibit 3).Base metals valuations are no longer as stretched as they were i
28、n February and March,when we first turned neutral and then bearish on the space(With price target reached,the tension between weak macro data and constructive monetary policy keeps us neutral,22 February 2019,Stretched valuations warrant caution on metals into 2Q but firmer growth should reopen upsi
29、de in 3Q,11 March 2019).The priced growth hurdle also does not appear as high relative to what could be delivered in the near-term given the likely policy responses from China and the US,leaving us with an overall constructive short-term bias in 3Q relative to spot levels.As valuations converge with
30、 reality,and assuming some level of stabilization in global growth,the sector could become tactically interesting again,particularly if Chinese policymakers announce some more immediate fiscal and monetary support in response to tariffs or the whole recent trade war escalation itself is unwound with
31、 the stroke of a pen.For now,we opt to maintain our negative 4Q19 outlook for base metals though,given the age of the cycle and the significant likelihood of a macro rollover in 2020.We keep a sharp end-2019 selloff in our base case across industrial metals,although we have to admit that our forecas
32、ted price levels dont look particularly bearish vs current spot levels.Exhibit 3:Global PMI and Bloomberg Industrial Metals SubindexLHS:PMI Index;RHS:BCOMIN IndexSource:Bloomberg,J.P.Morgan Commodities ResearchUnique late-cycle characteristics of precious metals keep us bullish in 2H19With the unfav
33、orable 2Q gold catalysts largely behind us,we maintain our bullish outlook on gold over 2H19 and into 2020 given the metals unique late-cycle characteristics.Our reasoning hasnt changed.We certainly see scope for gold to outperform in a business cycle that in March became the longest on record.In th
34、e most optimistic scenario,global central banks succeed in lifting growth,extending the cycle and bumping inflation higher.Gold tends to perform exceptionally well during such late-cycle periods,as long as the US dollar trades at least neutral to lower.In a negative scenario,as growth slips lower an
35、d the Fed pause turns into Fed cuts,gold also tends to outperform.In other words,we think being long gold over 2H19 and into 2020 offers unique hedges to both a bullish and bearish macro narrative.Moreover,the metal is uniquely positioned to hedge a plethora of other risks,be it an explicit collapse
36、 in US-China trade talks,a hard Brexit or political impasse on Capitol Hill.In terms of valuations,signs of economic distress have delivered extreme bond market pricing.An aggressive response from the Fed to a further deterioration in growth appears to be the modal outcome implied by the OIS curve,w
37、hich is now pricing two full cuts by December 2019,followed by another cut and a half by the end of 2020.At 2.12%,the benchmark 10-year notes yield has dropped to its lowest level since September 2017down more than a full percentage point since its recent high in Octoberand is trading below that of
38、the three-month bill(2.31%),further stoking fears of recession.The extreme slide in yields has left gold spot valuationsfairly attractive for investors looking for a recession hedge:our fair value model shows that current spot gold prices are about$25/oz too cheap vs.real 10-year Treasury yields(Exh
39、ibit 4).Exhibit 4:Golds premium/discount to 10-year real yieldsUS$/ozSource:Bloomberg,J.P.Morgan Commodities Research809010011012013014049505152535455Jan-15Apr-15Jul-15Oct-15Jan-16Apr-16Jul-16Oct-16Jan-17Apr-17Jul-17Oct-17Jan-18Apr-18Jul-18Oct-18Jan-19Apr-19PMIBCOM(55)(5)45 95 145Dec-17Jan-18Feb-18M
40、ar-18Apr-18May-18Jun-18Jul-18Aug-18Sep-18Oct-18Nov-18Dec-18Jan-19Feb-19Mar-19Apr-19May-194Global Commodities ResearchMetals Quarterly07 June 2019Natasha Kaneva(1-212)834-Gregory C.Shearer(44-20)7134- Thomas Anthonj(44-20)7742-Ladislav Jankovic(1-212)834-Price forecasts largely unchangedOur bearish b
41、ias for 2Q19 worked well,and with the exception of zinc and its protracted backwardation,all other base and precious metals performed in line with our expectations,resulting in only slight mark-to-marketadjustments.Aluminum aside,we make only cosmetic changes to our 3Q price forecasts,which leaves u
42、s quite constructive the base metals sector for the quarter relative to spot prices given the more tactical reasons we laid out above.At this juncture we also opt to keep our 4Q19 price forecasts largely unchanged.In aluminum,we trim our price expectations for each quarter in 2019,bringing our overa
43、ll 2019 price 4%lower.We have also downgraded our 2020 aluminum price forecast by 6%(Table 1).Table 1:JPM base and precious metals price forecastsIndustrial metals are LME cash in US$per metric tonne.Precious metals are spot prices in US$per troy ouncePrice and forecasts are quarterly and annual ave
44、ragesSource:J.P.Morgan Commodities Research1Q20192Q20193Q20194Q201920191Q20202Q20203Q20204Q20202020202120222023New1,8621,8101,8601,7801,8281,6801,7301,7201,7901,7301,8131,9212,306Old(Mar 2019)1,8901,8502,0021,8801,9061,8331,8131,9212,306Change-1%-2%-7%-5%-4%-6%0%0%0%New6,2216,1006,2005,6006,0305,200
45、5,4005,5655,5005,4165,3626,1667,584Old(Mar 2019)6,2356,2006,4005,6006,1095,4165,3626,1667,584Change0%-2%-3%0%-1%0%0%0%0%New12,39312,26512,80011,20012,1659,80010,00010,30010,50010,15011,00013,75016,500Old(Mar 2019)12,40012,69013,00011,20012,32310,00011,00013,75016,500Change0%-3%-2%0%-1%1%0%0%0%New2,7
46、072,7002,5002,3002,5522,0002,1002,1002,2002,1001,9802,2202,550Old(Mar 2019)2,6702,5002,4502,3002,4802,1001,9802,2202,550Change1%8%2%0%3%0%0%0%0%New1,3031,2901,3461,4051,3361,4351,4571,4671,4801,4601,3721,3041,369Old(Mar 2019)1,2901,2601,3461,4051,3251,4601,3721,3041,369Change1%2%0%0%1%0%0%0%0%New15.
47、5514.8015.8416.7315.7316.8817.7717.6718.0617.6016.1015.8016.90Old(Mar 2019)15.4515.0016.6217.3516.1017.6016.1015.8016.90Change1%-1%-5%-4%-2%0%0%0%0%New824840900950878970980980990980900870920Old(Mar 2019)816820900950872980900870920Change1%2%0%0%1%0%0%0%0%New1,4021,3441,4001,2501,3491,1001,0501,000990
48、1,0359201,0001,100Old(Mar 2019)1,3951,3301,4001,1501,3191,0359201,0001,100Change0%1%0%9%2%0%0%0%0%PalladiumAluminumCopperNickelZincGoldSilverPlatinum5Global Commodities ResearchMetals Quarterly07 June 2019Natasha Kaneva(1-212)834-Gregory C.Shearer(44-20)7134- Thomas Anthonj(44-20)7742-Ladislav Janko
49、vic(1-212)834-CopperAdjusting both supply and demand lower Copper mine production continues to underperform and we have removed almost 400 kmt from our 2019 supply profile.We have also downgraded our global copper demand forecasts.We still view current spot prices as overpriced compared to global gr
50、owth.Yet,if copper prices were to sell off by a couple more percentage points,lowering the entry level,and global growth stabilizes,upside for prices could reopen in 3Q19.Yet,as the global economy dips below potential by year-end,we expect prices to sell back below current spot levels and average$5,