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Markets prepare for rate hike as US Fed meeting nears

Following a volatile ride in the wake of the U.S. presidential election, political turmoil in Europe last week added to nervousness in global markets.

A lost constitutional referendum vote led to the resignation of Italy's Prime Minister Matteo Renzi, meaning a crucial restructuring program for Italy's troubled banking system fell through. Renzi's defeat marked the end of Italy's 63rd government in 70 years and has prompted concerns that financial stability in Europe could once again be shaken.

Monte dei Paschi di Siena, the world's oldest bank and one of the largest in Italy, is one of several lenders under pressure to raise money as soon as possible to prevent a wind-down. Signs are that it will largely be down to Italy's government to bail out the bank, after the European Central Bank's supervisory board turned down a request to give Monte dei Paschi more time to come up with a rescue plan.

Meanwhile, the ECB is set to scale back on the amount of bonds it buys every month to €60 billion from €80 billion, starting in April. Nonetheless, it extended its quantitative easing program initiative by nine months to the end of next year.

With the next meeting of the U.S. Federal Reserve Open Market Committee due Dec. 14, markets are now preparing for an interest rate increase of 25 basis points, from 0.50% to 0.75%. Expectations are that two further increases will follow next year.

Price ring

Metals had a mixed performance last week, with iron ore jumping strongly to a level of US$81.70 per tonne, while most base metals saw marginal gains around the 1% mark.

Aluminum and copper both went up by a few notches, and lead was even up 2.5% at US$2,331 per tonne, but nickel slipped as much as 3% to close at US$11,058 per tonne.

It was a reverse picture for precious metals, which felt the impact of a stronger U.S. dollar and widely finished the week in the red. Silver was the only gainer among the precious metals, booking a 1.2% increase to US$16.90 per ounce, while gold and platinum both lost more than 1%.

Talking points

J.P. Morgan Cazenove upgraded its 2017 iron ore price forecast to US$60 per tonne, from US$54 per tonne, on expectations that improved markets dynamics and buoyant ore prices seen in the fourth quarter will continue to carry on into early 2017. The view was largely based on ongoing strength in met coal and steel prices, resilience in Chinese demand, and "risk-on" trader sentiment.

"As 2017 progresses, we expect prices to soften from current levels as the market digests the slight oversupply, and coal prices ease with marginal production responding," the team around Fraser Jamieson stated in a Dec. 2 note. "The key risks remain Chinese demand staying positive, and ongoing supply discipline from the majors."

2017 Chinese steel production is expected to grow 1.5% to 824 million tonnes, while global iron ore demand is set to accelerate by 2.1%, or 43 million tonnes. Mining majors are tipped to supply 77 million tonnes more into the market than this year.

The bank's medium-term estimates were upgraded by US$5 per tonne to US$7 per tonne amid revised forecasts of 58 million tonnes of oversupply in 2018, "before the market starts to look more balanced in 2019/20."

"2018 appears to have the weakest pricing fundamentals [...]. However, [the 58 million tonnes of oversupply] is relatively modest in our view, and only likely to trigger a correction back to US$55 per tonne.

"The market starts to look more balanced in 2019/20, helped by Vale SA's extended Northern System ramp-up, and no other major projects coming on."

J.P. Morgan Cazenove's long-term price forecast of US$50 per tonne remained unchanged.

Executive exchange

Afarak Group Oyj last week was among those companies announcing management changes. Afarak named Guy Konsbruck as new CEO and successor to Alistair Ruiters and appointed Predrag Kovacevic as CFO.

BC Iron Ltd. saw Brian O'Donnell taking on the role of chairman, stepping into the footsteps of Anthony Kiernan, who is stepping down from the company's board to focus on other substantial business interests.

Avenira Ltd. also filled the role of chairman following the death of Richard Block. Christopher Pointon will replace the late executive as independent nonexecutive chairman.

Meanwhile, Assore Ltd. appointed Charles Walters as CEO, replacing Chris Cory, who will retire in June 2017.

Eastern Iron Ltd. named Myles Fang as interim CEO, replacing retiring CEO Greg De Ross.

Financings

Major financing deals last week included a placement by Aureus Mining Inc., now named Avesoro Resources Inc., which raised about US$76 million. The group transitioned to an owner-operator mining model following the acquisition of mining equipment and inventory through its subsidiary, Bea Mountain Mining Corp.

Hummingbird Resources Plc agreed a total of US$55 million in new loans, ensuring full funding of its Yanfolila gold project in Mali. Total CapEx for Yanfolila is US$88 million.

Largo Resources Ltd. inked a term sheet for a debt facility of 140 million Brazilian reais with a consortium of Brazilian banks. The money will be used to repay principal and interest due 2017 on an existing loan from the Brazilian Development Bank.