Commodities Advantage：Glass Half Full

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access Commodities Advantage: Glass Half Full Commodities Research Macro view: Sparks fail to fire Friday's non-farm payrolls added another strong link to the chain of positive data surprises that have emerged from the US since March. Although data are now clearly confirming the Q1 US slowdown as an anomaly, market pricing has displayed a frustrating disconnect to the gathering momentum. The US rates and FX markets offer explanations why. In China, two of our analysts are currently travelling through key infrastructure corridors. So far, first hand discussions have tended to confirm prior expectations: industrial commodity demand is benefiting from seasonal improvements but little else besides. That on-the-ground impression ties in with the final PMI numbers and trade data for April, both of which suggest stabilization but don't hint that a strong rebound is imminent. On the plus side, however, we note little concern within China's industrial heartland that systemic risks to the economy are rising. Focus: Gasoline, a summer buy? “Yes” would be our short answer. Although there may still be some further downside risk in the short term, we don't subscribe to the idea that the opportunity to buy summer gasoline has come and gone already. In this week’s focus we detail why we like the fundamental story of gasoline from three angles: demand is growing across the western hemisphere; supply is unlikely to overwhelm; and inventories, at least those we can monitor, are low. Until recently, what was not to like was that everyone liked gasoline – it was a consensus long story. However, following the quite brutal sell-off over the past three weeks, we think the time is right to look for entry points, especially on September RBOB over Brent. Also in this issue US Natural Gas: Fundamentals are still tightening, with few signs yet that year-on-year power demand for natural gas will be significantly reduced by coal switching. Base Metals: Stability the watchword in China. We note some evidence on the ground of a modest seasonal uptick in demand but little excitement about forward order books. Fears of a systemic crisis appear exaggerated, for now. Precious metals: Palladium market singularly unprepared for a sell-off. Investors keep buying in to the bullish consensus. We look at the palladium options market ahead of the June expiry and find that although palladium-implied volatility still looks rich relative to historical vol, compared to silver vol it may be closer to 'fair value' than many think. Research Analysts Marcus Garvey +44 20 7883 4787 marcus.garvey@credit-suisse.com Tom Kendall +44 20 7883 2432 tom.kendall@credit-suisse.com Bhaveer Shah +44 20 7883 1449 bhaveer.shah@credit-suisse.com Andrew Shaw +65 6212 4244 andrew.shaw@credit-suisse.com Jan Stuart +1 212 325 1013 jan.stuart@credit-suisse.com Johannes Van Der Tuin +1 212 325 4556 johannes.vandertuin@credit-suisse.com 08 May 2014 Fixed Income Research http://www.credit-suisse.com/researchandanalytics 08 May 2014 Commodities Advantage: Glass Half Full 2 Table of Contents Macro: Sparks fail to fire 3 Mixed euro zone and China PMIs 4 Focus: Gasoline, time to drive 5 Why we look to buy September RBOB futures 5 Natural Gas 9 Tightening fundamentals 9 Base Metals 10 China: Systemic risks overstated, stability the watchword 10 Precious metals 12 Palladium market singularly unprepared for a sell off 12 Commodity Investment Flows 14 Trade Recommendations 17 08 May 2014 Commodities Advantage: Glass Half Full 3 Macro: Sparks fail to fire Friday's non-farm payrolls added another strong link to the chain of positive data surprises that have emerged from the US since March. The robust headline number, backed by strong private payrolls, was composed of broad industry-wide gains throughout both goods and service sectors – a story reminiscent of the industrial production print a few weeks ago. Although data are now clearly confirming the Q1 US slowdown as an anomaly, market pricing has displayed a frustrating disconnect to the gathering momentum. In line with FX, equity and rates markets, gold experienced a short-lived and trivial dip on the payroll print before actually closing higher on the day on Ukraine headlines. Gold's price action on Friday mirrored the moves of many risk-sensitive assets within recent weeks. This behavior has its roots in range-bound US 10-year yields, which see-sawed on the payrolls and have subsequently gravitated even lower this week to 2.57%. O