Non-commercial investors add to short USD positions

- "The latest IMM data cover the week from 27 July to 3 August."
- "Non-commercial investors added further to short USD positions, which have now reached USD17bn. The dollar has lost close to 10% since its early July peak and with Friday’s disappointing US labour market report (released after the collection of IMM data) positioning is likely to have turned even more against the dollar. As short USD positioning becomes more stretched so does the upside risk to USD from a potential position squeeze."
- "Coinciding with the strong rebound in EUR/USD over the past month speculative investors have unwound their short EUR positions. EUR positions are now back at neutral levels (net shorts at 3% of open interest) for the first time since December last year."
- "Net long positions in the commodity currencies (AUD, CAD and NZD) have become even more stretched with NZD looking most vulnerable with net longs at 62% of open interest. A position squeeze, potentially driven by oil prices correcting fast back below USD80 per barrel (watch Wednesday’s IEA oil market report), could see AUD, CAD and NZD correct lower."
- "Net long JPY positions have now reached 36% of open interest despite the current strong JPY level fuelling speculation in the market about the potential for interventions by the Bank of Japan."

DenDanske IMM Positioning 20100809

‘Risk-On’ Returns To Commodity Markets

- DBLCI Commodity Returns: "Commodity index returns continue to be strongly positively correlated with the S&P500. This has led some investors to questions the diversification benefits of commodities. We find this is encouraging a new generation of commodity indices to emerge, namely the Risk Parity Commodity Index."
- Crude Oil: "Oil prices in 2007-08 seemed linked to shifts in the value of the dollar. Since 2009, the S&P500 appears to be the main driver. We are not convinced that recent dollar weakness and S&P strength can be relied upon to consistently drive oil prices upward over the next six months particularly in an environment where crude oil and product inventories have been slow to fall."
- Refined Products: "From a demand perspective, the US summer driving season has been stronger than expected. June-July gasoline demand is up 1.9% yoy. However, demand continues to be insufficient to eat through the high level of inventories."
- Natural Gas: "The continuing surge in shale gas production in the US raises the possibility that the US might export LNG rather than import it. A minimum spread of USD3.62/mmBtu on top of HH prices would likely be required to generate a positive netback on a sustained basis.
- Precious Metals: The positive correlation of gold prices to EUIRUSD is reestablishing
itself. Given our bearish outlook for the US dollar we believe this will trigger further gains in the gold price. We expect the liberalisation in China’s gold market will sustain the country’s rising market share of gold consumption relative to the rest of the world."
- Industrial Metals: "The industrial metals sector has dismissed fears of a slowdown in China and instead focused on the possibility that monetary authorities will do all that is needed to underpin economic recoveries. Copper rose to a three month high supported by China’s rural electrification program and production challenges in Chile."
- Agriculture: "Russia’s decision to ban wheat exports threatens hoarding and further price advances. However, we believe the relatively high level of US and global inventories in wheat and possibly upgrades to the Australian wheat harvest during the fourth quarter will limit price advances beyond October."

DeutscheBank Commodities Weekly 20100806

LatAm: Inflation below expectations

- "Inflation data took center stage this week. It was low in Peru and in line with expectations. Although high in Chile, it was still below expectations, as it was in Brazil, Colombia and Venezuela. In Brazil and Colombia the trend was also down."
- "The indicators of economic activity have maintained their trend of pervious weeks: very strong in nearly all the region, but with clear indicators of a slowdown in Brazil and Mexico. The decision by the Central Bank of Peru to raise its policy rate by 50 bps in response to the persistent increase in domestic demand surprised markets and makes clear the complex risk balance faced by the monetary authorities in the region."
- "Global markets show divergent movements, with LatAm assets demonstrating a positive trend in general."
- "After the easing of financial tension and the region's favorable economic performance, financial assets in Latin America have maintained their positive trend in the medium term, but adjustments in the next few days cannot be ruled out, with investors taking up technical positions."

BBVA Latin Weekly Observatory 20100806

Emotional stress test for underweighted investors?u

- No new world: "Peak in ifo growth optimism urges caution. In past cycles over the last 20 years, the reward/risk ratio for equities has deteriorated at an upper turning point in the growth expectations. Overall, the leading indicators point to a slowdown in the growth dynamic looking to 2011."
- Reporting season: "Positive interim track record for Germany. In July, the German equity index reported positive earnings revisions for the index earnings estimates for 2010 and 2011. In the other large EMU countries, the negative revisions predominate."
- Outlook: "Bet on the expected direction of the leading indicators. Falling leading indicators mean a headwind for the equity market and argue for a sideways move in 2H10. The equity market is currently trading near the upper edge of the sideways movement."
- STOXX sectors: "Predominantly negative earnings revisions. Since the beginning of the 2Q10 earnings reporting, the earnings expectations were raised in only two sectors but reduced in 17 sectors."
- Hedge within the defensives: "Firmer EUR supports Telecom versus Food & Beverage. The relative performance of Telecom/Food & Beverage is closely correlated at the moment with the EUR development."

Unicredit Market Outlook 20100805

Not time to fade the wheat rally yet

- Weather-related supply shocks have compounded to send wheat prices soaring higher "Wheat prices have rallied dramatically over the past month, with the Sep-10 CBOT contract up more than 76% and trading near $7.80/bu from a $4.40/bu level at the end of June. The main driver behind this rally has been growing concerns for the Russian 2010/11 crop as hot and dry weather is significantly damaging grain production. This supply shock,
combined with a low planted acreage in Canada due to excessive rain, has led the market to swiftly reprice its expectation for an inventory build into a deficit for the 2010/11 crop year."
- Prices have likely overshot as high beginning stocks and feed substitution should absorb some of this supply shock… "The velocity and magnitude of this price rally have been exacerbated by a near-record net short positioning coming into this weather shock and we expect ongoing production uncertainty to continue to lend support to prices in the near term. However, the current situation is very different from the 2006-08 wheat bull market as we are coming into this production disruption with elevated wheat inventories, especially in the US. Accordingly, barring further major deterioration in crop production, we
would expect lower wheat prices once the market gains a better grasp on this year’s wheat production and deficit. Acknowledging the current production issues we are revising our forecasts higher to 650 cents/bu from 550 cents/bu previously."
- … but still too early to fade this wheat rally "We would look to implement our bearish wheat view with low-cost option strategies such as put spreads, but expect near-term price action to offer better entry levels. These developments in the wheat market comfort us in our long-held constructive corn view as wheat-to-corn feed substitution will likely further support already strong expected corn demand."

GoldmanSachs Agriculture Update 20100806

Japan: Cautious FY guidance despite strong 1Q

- Strong 1Q earnings "TSE1 1Q recurring profits had increased more than 3.0-fold yoy as of
August 5, when about 70% of companies had reported (including financials and February and March year-ends). The results peak was July 30 and some 90% of TSE1 companies had reported by market cap. Sales were up 12% yoy and recurring profits up 214%. The progress
toward 1H guidance was ahead of the historical average, at 58.5%."
- But poor visibility for 2H "Upward revisions far exceed downward revisions. However,
companies seem cautious on 2H. Only 12% have raised full-year recurring profit guidance vs. 21% that have raised 1H guidance. (Downward revisions are 2.2% for 1H and 2.6% for the full year.) This could be explained by the yen’s appreciation since June and concerns of a global economic slowdown led by the US."

GoldmanSachs Japan Portfolio Strategy 20100806

A Stronger Commitment to Low Rates

- "Recovery’s loss of momentum coupled with less secure financial supports to growth has set the stage for Fed officials to signal a stronger commitment to accommodation efforts next week. Policymakers are expected to reinforce language that encourages lower forward rates in an attempt to seal off tail risks of renewed recession and deflation."
- "We do not expect a new wave of asset purchases but reinvesting the proceeds of MBS redemptions would reinforce the policy duration commitment. The earlier focus on exit strategies probably dulled the credibility of the Fed’s low rate commitment but highlights the difficulties of achieving policy success with unconventional strategies."
- "Financial conditions improved slightly in July, and there are encouraging signs that consumer credit is loosening. A slow rebound in car sales continues and a gradual lift in sales of pickup trucks hints that small businesses are spending more. Nonetheless, overall financial conditions remain too weak to support a solid recovery."
- "Many industries continue to add to headcount and working hours consistent with modest economic growth around 2% near term. But overall employment gains are being held back in part by downsizing in construction, finance and state and local government. The latter group lost 66,000 jobs in July. Factory employment gains likely are nearing an end."

Citigroup Comments on Credit 20100806

Higher wages have not led to higher inflation and, so far, have not impaired China’s international competitiveness

- "We have found no clear evidence that nominal wage increases have caused higher inflation in China in the past decade, or even in the past few months. Wage growth has largely been offset by labor productivity gains. Furthermore, China’s labor costs in the manufacturing sector were actually lower in 2009 than in 2001 on a per real unit output basis."
- "We expect CPI inflation to trend lower as the policy-induced slowdown in domestic
demand growth weakens further in the near term. We believe the inflation trend beyond the short term will be determined by monetary policy management."
- "Our analysis also suggests that the relative competitiveness of China’s manufacturing sector vs. the US is at approximately the same level now as in 2002, lowering the need for further significant currency appreciation (as indicated by our GSDEER model)."
- "China’s looming demographic constraints are likely to increase the upward pressure on
money wages, but we think this will at least partly be offset by the improvement in labor
quality and the release of surplus labor from the agricultural sector."
- "In our view, an increase in labor compensation as a share of total output would support domestic demand, and this is likely to be achieved through a reduction (rather than an increase) in government restrictions on the labor market."
GoldmanSachs Asia Economics Analyst 20100805

China: Trip Notes-After the Slowdown

- We visited Beijing, Chongqing, Changsha and Shanghai during July 27-30 – "We
discussed the slowdown, the 12th Five-Year Plan, property, energy efficiency and local government financing from the perspective of regulators, experts, banks and local authorities. Here is a summary of key takeaways."
- Officials are certain of a 2H slowdown, but also confident in meeting targets –
"Policymakers target 9% growth for the whole year and above 8% for 4Q, in line with our forecasts. Investment in economic housing is expected to make up for some of the shortfalls elsewhere."
- Policy to curb speculative property demand would likely remain in place – "Many are waiting to buy after prices correct deeper. Thus, policy would avoid a major
correction but would keep the pressure on demand, while increasing supply."
- Principal near-term risks are energy efficiency and external weakness – "To
reduce carbon intensity, authorities are clamping down on heavy industry, reducing export VAT rebates and curbing housing investment, adding some risk of over-tightening. External demand is still the greatest near-term risk."
- Monetary policy and banking policy on hold in 2H – "There would unlikely be any rate hikes this year. The Rmb7.5 trillion loan target leaves sufficient credit supply in 2H, though effective credit demand may be questionable. Low NPL ratio and high coverage should prevent further tightening from the CBRC."
- The 12th Five-Year Plan still focuses on investment – "Local development plans
remain aggressive, with cities like Chongqing planning railways to Europe and the Indian Ocean and the 10 million urbanization plan in 10 years. Though the growth target may be set lower at 7%, most ministries believe that at least 9% growth can be achieved."
- UDIV debt: It’s much more about the land than the project – "We provide some
detail on the creation and operation of a UDIV. The key is that the capital gains from developing a UDIV’s land pays the loans much more than any income stream of a project. This obviously is predicated on a robust property market, which our hosts expect can still last a while due to urbanization. But with the aggressive investment plan, fast urbanization would be a necessity."
- Standardizing UDIV finance – "The banking regulator has required all banks to
standardize their UDIV loan portfolios by Sep 30, so that every loan is backed either by a specific asset or by project revenue. No government guarantees are allowed. So banks are seeking additional collateral or guarantors. Some local governments are finding innovative ways to attract private capital."

Citigroup China Macro View 20100803

Market rewards “revenue beaters” more than “cost cutters” during strong earnings season

- "The results are in: with 443 stocks and 89% of market cap reporting, the S&P 500 closed out a strong first half as 52% of companies beat estimates by at least 1 standard deviation, in-line with 1Q 2010, but above the historical average of 41%. The market rewarded those firms positively surprising on both top and bottom line (“revenue beaters”) more than just bottom-line surprises (“cost cutters”)."

GoldmanSachs US Weekly Kickstart 20100806

Introducing the EMEA Inflationary Pressure Index

- Market movers ahead: GDP and inflation numbers "Next week will be busy in terms of economic releases. On Monday we will get industrial production in Turkey, which should show that industrial production growth has dropped to 9.6% y/y in June from 15.6% y/y in May. This will be yet another sign that Turkish economic growth is decelerating. On Friday we will get a bunch of GDP numbers for Q2. In general we expect the Q2 GDP numbers in EMEA to show gradual improvement. In Czech Republic we expect Q2 GDP growth of 1.4% y/y compared to 1.2% y/y in Q1. We are, however, more concerned about a possible setback in growth in Q3. There is also a lot of inflation numbers due next week in EMEA. Overall, we expect the numbers to show that inflationary pressure remains limited. Our new EMEA Inflationary Pressure Index (see more on page 3 and 4) shows that EMEA inflation is decelerating. Finally, Hungarian Minutes on Wednesday could prove interesting."
- FX Outlook: Stronger EUR/USD supports CEE currencies "The recent move up in EUR/USD is especially supportive for the euro-sensitive EMEA currencies CZK, PLN and HUF, while it is negative for the dollar-sensitive currencies TRY and ZAR. As the euro might continue to outperform the dollar we are looking for CZK, PLN and HUF to outperform TRY and ZAR in the short term. We are therefore quite comfortable with the Scorecard continuing to recommend to be long in CZK/ZAR."
- Fixed Income Outlook: Decelerating inflation "The calendar is fully booked with inflation numbers next week. It will be especially interesting to watch the outcome of Polish inflation on Friday. Although we expect Polish inflation to ease slightly to 2.1% y/y in July from 2.3% y/y in June, our new EMEA Inflationary Pressure Index (see more on page 3 and 4) shows that Polish inflation is still accelerating."
- Scorecard-based trade of the week Buy CZK/ZAR "For a fourth week in a row the Scorecard-based trade of the week is CZK/ZAR with the Czech koruna still the highest scoring currency on our EMEA FX Scorecard and the South African rand the lowest. A further move up in EUR/USD will support this trade which has performed rather well for most of this week."

DenDanske EMEA Weekly 20100806

Rally has more legs; Greater China led the run again among major markets

- MXAPJ +2.4%, Hong Kong (+4%), Phils (+3%) and Taiwan (+2%) led the rally; Indonesia (-2%) was in red
- MXAPJ 12M forward P/E at 12.4X, 12M trailing P/B at 2X
- Asian earnings tracking 54% of full year estimates
GoldmanSachs Asia Pacific Weekly Kickstart 20100806

Saving private payrolls

- Macro viewpoint: Saving private payrolls "Upward revisions to the saving rate suggest a faster pace of household rebalancing."
- Fed watch: Slippery slope
"Expectations for the Federal Reserve to step in with additional easing are growing, but we think it is a little too soon for the Fed to embark on a significant shift in its policy stance."
- The week ahead: All eyes on the FOMC
"All eyes will be on the Fed. The FOMC delivers its policy decision on Tuesday and even though the payroll report was a disappointment, we believe it was not such a disappointment that the Fed is about to reboot quantitative easing. In addition, we’ll be watching for consumer price inflation (CPI) and retail sales. On CPI, we expect a donut on core, which would take the YoY rate to 0.9% in July from 1.0% in June - well below the Fed's implicit target. On retail sales, we are expecting an auto-driven 0.4% increase on the headline. The core retail control measure, which strips out autos, gas, and building materials is also expected to rise 0.4%, which is consistent with a modest recovery in consumer spending from
the current pace."
Merrill Lynch US Economic Weekly 20100806

S&P 500 up in July on great earnings and fading global risks; US macro headwinds remain

- "In July, the S&P 500 rebounded +7% off its 2010 low as global risks receded and 2Q
earnings surprised strongly to the upside. Stocks that generated positive earnings
surprises through better-than-expected sales outperformed firms posting positive
EPS surprises achieved through better margins. Macro headwinds remain in the
form of decelerating US economic growth and persistently high unemployment rate."

GoldmanSachs US Monthly Chartbook 20100804

China: “The Leading Indicator of the Leading Indicators?”

- Leading Indicator? — "The Chinese equity market has shown signs of ‘leading’ global equity markets at turning points over the past three years (the late-2007 peak, the late-2008 trough and the recent peak in markets at end-2009/start-2010); as a result, the 13% rally in the Shanghai Composite since early-July has been a major support for improved overall global sentiment over the past month."
- Biggest GEM — "Not surprisingly, China is now the biggest emerging market in the world, accounting for 18.6% of MSCI GEMs currently, up from 6.5% in mid-2000."
- Structural Change — "The big rise in China’s weight in global markets over the past decade is unrelated to market performance and is explained mainly by definitional changes to the shares included in the major indices (the Red Chips entered MSCI GEMs in June 2000) and to a huge rise in new listings over recent years."
- Why? — "China’ s leading indicator role may be explained by: i) the sheer size of its economy; ii) China’s role as, by far, the biggest consumer of commodities in the world (around 40% for some and close to 70% for iron ore); and iii) the recent tendency of the large Chinese equity market to move to extremes."
- Normalization — "The slowdown in the Chinese economy should continue, cutting year-on-year GDP growth to a trough of around 8% in 2011 Q1 – still, not a ‘hard landing’. Given that and inflation at around 3%, our China macro team expects policy to move to Neutral in the second half of 2010 with no rate hikes at all."
- China Strategy — "Our Chinese strategist, Minggao Shen, has turned more positive and expects the Shanghai Composite to rally by a further 5-15% to 2,800-3,100 by end-2010, based on: i) the economic slowdown being largely priced in; ii) policy headwinds are easing; iii) the massive liquidity drain in H1 2010 from the flood of IPOs etc. has likely ended; and iv) margin squeeze may have peaked."
- Asia Strategy — "Our Asian strategist, Markus Rosgen, has cut the size of his Underweight in China, on more attractive valuations and a slightly more bullish view on regional real estate; he looks to add to the market over the summer."
- GEMs Strategy — "We are currently Neutral in China in our GEMs portfolio. Given the analysis in this report, the recent strong rally in Chinese equities is important for global equities as a whole. However, with emerging markets looking somewhat overbought short-term, we also look to add to China mainly on weakness."
- Bullish — "Based on ‘no double-dip’ scenario, solid growth in emerging markets, low interest rates ‘for longer’ and attractive valuations, we remain bullish on emerging markets for the long-term (including on Chinese equities)."

Citigroup Global Emerging Markets Strategy 20100803

Japan: August 2010-Major rebound for equities globally, particularly in southern Europe

- S&P Global Equity Index up 5.8% in July — "Global equities rebounded sharply in July after the release of EU bank stress test results. As we had expected, the BCBS eased its draft regulations, which resulted in significant growth for bank stocks globally."
- Greek crisis calming — "Equities grew sharply in southern Europe and developing markets. Growth in southern Europe was led by Greece (+21.4% in July), Spain (+14.0%), Portugal (+4.1%), and Italy (+8.3%)."
- Japanese equities up just 1.0% in July — "However, on a dollar basis Japanese equities were relatively strong. The dollar-based S&P Japan Equity Index is up 1.6% YTD (but down 5.5% in yen terms). By comparison, the US Equity Index is up 0.8% and the Europe Equity Index is down 5.7% (dollar base for both)."
- Long-term yen appreciation risk — "The yen-dollar rate is firmly in the ¥80$-¥90/$ range. The yen has strengthened over the long term, from a July 1998 low of ¥147/$ to ¥85/$ in November 2009. Even if the yen falls into the ¥70/$-¥80/$ range, the government and/or BoJ may not intervene in the forex market."
- Asia-related stocks, domestic demand stocks likely to benefit from deregulation
— "China and other Asian economies are doing relatively well, so we recommend making China-related stocks (machinery, autos, trading firms, marine transport) the core of one's investment portfolio. We also expect to see deregulation in the tourism, real estate, and communications sectors, so domestic-demand stocks could be attractive as well."
- Beneficiaries — "We think beneficiaries of current trends include 1) Komatsu (machinery), a global infrastructure-related stock; 2) Unicharm (personal care), a core Asia-related stock; 3) Nidec (electronic machinery); Rakuten (consumer cyclical), a domestic demand-related stock with high growth potential; and ANA (transportation), which should benefit from moves to nurture the tourism industry."

Citigroup Japan Portfolio Strategist 20100802

Europe strikes back

- "In the US the FOMC meeting is the main event next week. We believe that the
speculations about further monetary easing are premature, but that the assessment of the current economic situation will be downgraded. We expect US July retail sales to increase 0.5% m/m after a weak H1 2010."
- "For the euro area, the key event next week is expected to be the release of Q2 GDP data. We expect to see robust growth, but at a rather uneven pace. Germany is expected to stand out as the top-performer."
- "UK inflation report on Wednesday is expected to weigh on GBP and support Gilts."
- "In Scandinavia focus turns to inflation numbers out of Denmark, Sweden and Norway. The monetary policy meeting in Norges Bank will not attract much attention. Unchanged rates are widely expected."
- "Over the past month the euro area has been the main provider of good news while US data have disappointed. The German Ifo index, German factory orders and Euro PMI all surprised to the upside, while US data covering housing, business and consumption have all been weak."
- "The relative stronger numbers out of the euro area relative to the US and less PIIGS
concern have pushed EUR/USD above 1.32."
- "Wheat prices rise strongly on Russian drought and subsequent export ban. A new food
crisis cannot be ruled out if the export ban spreads to other countries like we saw in 2008. However, global wheat stocks are in fact plenty and other grains prices are not rising to the same degree."

DenDanske Weekly Focus 20100806

Weaker leading indicators will successively dominate in the course of 3Q

- Stress test: "The impact of the stress test on the ability of the interbank money market to function is a key indicator with respect to the mediumterm impact on the parameters for the equity market. The more strongly the stress in the banking system is ultimately linked with the problems of individual countries (government deficit, competitiveness), the less probable rapid relief is."
- EMU: "The causes of the tensions in EMU can only be eliminated via a protracted reform process. The possible renewed escalation of the tensions remains a material risk factor."
- Economy: "The recent rise in the Ifo expectations does not mark the beginning of a new positive trend. The positive share price effects from the reporting season will successively wane, and the strains from weaker leading indicators will increase."
- Financials: "Rally yes – sustained no. We think three risk groups will cut short the rally by the banks: credit risk, sovereign risk and regulatory risk."
- Defensives: "Growing appeal in 2H10. Leading indicators such as the money supply M1 are signaling the turning point in the relative earnings dynamic of cyclicals versus defensives."
- STOXX 600 allocation: "Chemicals, Oil & Gas, Telecom and Utilities remain overweighted. Alongside Construction & Materials, we are underweighting Basic Resources and Retail."

Unicredit Market Outlook 20100730

China: July 2010 - Play the rebound, but watch out for the potential risks

- Key market drivers: "MSCI China rose 4.1% over the past month, underperforming MSCI EM by 1.8%. All sectors recorded positive returns. IT sector was the best performer (+12.2% m/m), followed by Materials (+11.6% m/m) and Industrials (+11.2% m/m). Telecom turned to be the worst performer, up only 1.3% m/m."
- Key economic events: "China’s 2Q10 and June macro indicators, as well as July’s manufacturing PMIs, have continued to show a moderation in the country’s growth momentum. Real GDP rose 7.2%q/q saar in 2Q, following an increase of 10.8% q/q saar in 1Q. IP rose slower than expected, up 13.7%Y/Y in June compared with 16.5%Y/Y in May. Moreover, the NBS manufacturing PMI fell from 52.1 in June to 51.2 in July, registering the lowest reading in 17 months. Inflation-wise, June headline CPI rose at a slower-than-expected 2.9%Y/Y. On the policy front, we expect the PBoC to raise the benchmark policy rate once, by
27bp in 4Q10. Our year-end Rmb/US$ target stands at 6.6."
- Key company news: "We now believe that the current rebound in China equities may prove to be longer and more powerful than we originally thought back in earlier July. This is because: (1) China authorities recently voiced dual emphasis on maintaining a relatively fast growth rate and adjusting economic growth mix towards consumption, which marks a slight change from its previous focus on managing inflationary expectations and adjusting economic mix; and (2) China’s macroeconomic data for July may point to sharp sequential slowdown,
thus increasing investors’ expectations that the authorities may loosen their monetary tightening and refrain from harsher measures. That said, we refrain from calling a major turnaround in China equities, as: 1) We see continued downward earnings revision risk, as China’s economic slowdown ripples through macro-sensitive sectors; and 2) A number of
sector-specific policy risks could hurt earnings and de-rate multiples of related companies."

JPMorgan China Monthly Wrap 20100802

Base metals prices recovering on China, diminishing financial stress

- Sentiment recovering, reinforced by supportive fundamentals "Improved sentiment on Chinese policy direction and reduced fears that a European financial dislocation would derail the growth economies have led to sharply higher metals prices. Zinc and copper – the metals with the strongest medium-term outlook – have led the gains, reinforcing our view that longer-term growth expectations will remain the key driver of relative price levels. Adding to the improving sentiment have been mildly tighter physical markets, as global inventories continue to draw and delivery premiums across products remain firm despite some seasonal weakness and softening economic indicators since late May."
- Risk/reward for long positions less compelling, but we expect further upside for copper and zinc "We continue to believe that fluctuations in trend growth expectations will
drive price volatility during 2H2010. Further, the strength of the recent rally reduces the risk/reward for long positions. However, we believe that the fundamental drivers for metal demand remain strong and we continue to expect further upside for copper and zinc, the more supply-constrained metals over the medium term. The systematic rolling forward of our 3-, 6-
and 12-mo forecasts suggests a 6-mo copper price forecast of $7,925/mt. Accordingly, we maintain our recommendation for a long position in Dec- 10 copper. However, given the near-term uncertainty, recent price strength and relatively low volatility, we believe that the current environment is providing a compelling opportunity for second half producer hedging."
- Near-term nickel price risk skewed to the upside, but remain neutral medium term "Although we remain neutral-to-bearish on nickel and aluminum over the medium term, we believe that nickel may have near-term upside before year-end given the risk of another temporary imbalance. We believe that aluminum price risk is skewed to the downside from current levels."

GoldmanSachs Metals 20100803

US inventories build as crude oil imports surge

- A shift from storing crude oil at sea to on land… "Last Thursday’s weekly petroleum status report from the US Department of Energy (DOE) reported a 7.3 million barrel build in US crude oil inventories. The driver of this build was a surge in US crude oil imports, which reached 11.15 million b/d. However, we do not expect this level of imports to be sustained as we believe it was driven by both a push to unload tankers ahead of the arrival of Tropical Storm Bonnie and the release of crude oil from floating storage following the decline in the carry in the forward curve. We would suspect that while there likely has been significant
unloading of floating storage in the US Gulf Coast recently, the reported decline of 13.9 million barrels likely captures some changes in oil in transit. Nevertheless, the rapid unloading of floating storage is consistent with the significant weakening of the contango in WTI prices."
- … And bringing oil ashore ahead of Tropical Storm Bonnie… "The high import number also likely reflects some oil shipments ahead of schedule before the arrival of Topical Storm Bonnie, which threatened to disrupt oil shipments in the gulf region from Friday July 23 onwards. Bonnie also subsequently led to a cumulative oil production loss of 2.7 million barrels, which we expect to be felt in the coming week’s DOE reports."
- …But underlying US demand remains firm "The underlying US demand for oil remains quite strong, and has climbed to 19.8 million b/d. We estimate this is the highest post recession demand number so far, as the strong demand data in May has been revised down by the US department of Energy."

GoldmanSachs Energy Weekly 20100802

China – Our big real-estate survey, Phase 1

- "The Tier 2 and Tier 3 cities have not seen much of a correction in land or apartment prices. Moreover, developers’ sentiment about sales volumes seems pretty good, and they do not appear to be postponing construction. A wave of new supply is planned for September. Developers on the whole seem to think sales volumes will be down 20-30% y/y this year, which is eminently survivable."
- "This is important, since if sales and construction activity holds up in most Tier 2 and Tier 3 cities, then the economy will not tank, and the State Council will not be forced to loosen real-estate or monetary policy."
- "Developers expect apartment prices to fall more in the Tier 2 and Tier 3 cities, but this is acceptable, and developers are taking advantage of lower land prices to build up their land banks. Credit conditions have tightened, but not to the extent seen in 2008. Moreover, many developers still appear to be pretty cash-rich."
- "Problems such as land hoarding and accessing bank lending to fund land purchases still appear common, however. We are also seeing significant forinvestment buying in Tier 2 and Tier 3 cities."

Stand Chart Special Report 20100803

GS Sustain Monthly Focus

- GS SUSTAIN identifies long-term leaders "The GS SUSTAIN framework identifies long-term investment opportunities across global industries. The GS SUSTAIN Focus List brings together the leaders we identify in each of the sectors examined to date. We make no changes to the GS SUSTAIN Focus List in this update. Since the launch of the GS SUSTAIN Focus List on June 22, 2007, mature industry leaders have outperformed the MSCI World All Country Index by 38.7% and emerging industry leaders have outperformed this benchmark by 2.5%."
- Further evidence of economic realignment "Second quarter earnings reported by companies in each region have so far exceeded consensus expectations by more than the long-run average but uncertainty over the economic outlook is growing, particularly in the US where economic data has begun to point to slowing growth. In our view GS SUSTAIN’s long-term perspective, and the economic realignment central to the analysis of many industries, provides a valuable roadmap."
- We highlight GS SUSTAIN mature industry leaders with attractive valuation entry points "The mature industry stocks on the GS SUSTAIN Focus List are identified without reference to earnings or asset multiples. We screen these companies to highlight those for which (1) our analysts have strong positive views, (2) valuations are attractive versus peers and (3) valuations are attractive versus history. Among the mature industry leaders, we highlight Vallourec, Monsanto, 3M, Qualcomm, ABB, Vestas and Lenovo."
- Our recent research highlights opportunities in emerging industries "On July 27, we published Emerging Industries: Identifying pure-play growth opportunities in a changing world. Our top-down analysis of global economic trends, consumption patterns and resource constraints highlights 15 growth themes, and 464 companies exposed to those themes from
Goldman Sachs global coverage. We highlight 56 leaders offering rapid forecast growth, reasonable valuations and attractive positions in their industries."

GoldmanSachs GS Sustain Monthly Focus 20100802