Analysis
- Palladium remains under pressure, although the long lower shadow on Thursday implies decent buying below the market.
- Support from the 20 and 40 DMAs at $692 and $685 respectively has been broken and will act as immediate resistance.
- Palladium has found temporary support at $663 – the 61.8% Fibo of the June-August rally. But the stochastics remain bearish.
- Further support is seen at $637, the 50% Fibo, while the 100 DMA stands at $619.
- We maintain our view that medium-term price sentiment has strengthened after the break of the DTL from September 2014 at $615, which should serve as an underlying price base.
Macro factors
US data will be the major focus today – non-farm payrolls for August will be a key metric for gauging the path of US interest rates and the dollar. But other data yesterday proved somewhat lacklustre. The ISM PMI reading showed manufacturing activity contracted in August, slowing to 49.4 from 52.6 in July. PGM-related data also proved disappointing: US light vehicle sales fell 4.2 percent year-on-year in August, which manufacturers attributed to weaker consumer sentiment. Sales totalled 16.98 million vehicles on a seasonally adjusted annualised rate, down from a strong 17.88 million vehicles in July.
Palladium ETF holdings remain stable for now although there is the risk of further stale disinvestment in the short term given that the previous bouts of strength in rand-denominated palladium have triggered long liquidation. The rand has stabilised after rallying sharply following reports that finance minister Pravin Gordhan been issued with a request to appear before police. Emerging market currencies are set to remain volatile ahead of Federal Reserve chair Janet Yellen’s speech on Friday due to the implications for US monetary policy. South Africa’s economy faces increasing headwinds after the contraction in first-quarter GDP and having narrowly avoided a downgrade to junk status by the leading ratings agencies. The latest developments, alongside accusations of corruption against President Jacob Zuma, point to greater currency (and, in turn, economic) volatility in the country ahead of the next general election in 2019.
Net length among Nymex speculators fell 333 contacts last week to 14,890 contracts; still, the net length remains two percent higher so far this year.
NUM members at Eskom agreed a wage deal on August 12, ending week-long industrial action. The correction lower implies expectations of a similarly quick resolution to wage negotiations in the platinum sector. But we are somewhat sceptical given the dominance of the more militant Amcu.
Downstream palladium demand indicators remain strong. Chinese passenger-vehicle sales rose 26.3 percent year-on-year to 1.6 million units in July, according to CAAM (China Association of Automobile Manufacturers). Sales of 12.646 million vehicles in the first seven months were up 11.1 percent on January-July 2015. The upbeat sales in China are particularly bullish for palladium, given the dominance of gasoline-powered vehicles there. Passenger vehicle sales in Europe were up 9.4 percent in the first half of 2016. But the latest US figures show signs of fatigue – light vehicle sales were up just 0.6 percent year-on-year in the first eight months. Still, palladium will also benefit because figures indicate there has been further slippage in diesel vehicle sales following various emissions scandals.
The global palladium market will record a deeper 843,000-ounce deficit in 2016 compared with the 447,000-ounce deficit in 2015, according to the latest forecast by Johnson Matthey. It forecasts total supply to rise 1.5 percent to 9.01 million ounces – a near-10-percent rise in recycling volumes will offset static mine production. Global palladium demand is set to increase 5.7 percent to 9.8 million ounces, fuelled by growth in sales of gasoline-powered cars, tighter emission regulations and record demand from the chemicals industry.
Conclusion
With price sentiment still largely dollar-led, palladium will be looking to payrolls data later to gauge direction.
But despite the slowing momentum in the US vehicle market, strong growth in emerging markets along and deficit forecasts continue to create a favourable price environment.
