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Weak metals run signals Trump policies could bring more volatile times

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Weak metals run signals Trump policies could bring more volatile times

Equity markets last week continued to move higher, with the Dow Jones Industrial index above 20,000 on Jan. 25. The broader S&P 500 benchmark also hit new highs, helped by rallies in sectors directly affected by U.S. President Donald Trump's first executive actions, including the building of a wall along the border with Mexico, and a requirement to use domestic steel in U.S. pipelines.

Nevertheless, there are indications that President Trump might have inherited an economy that is weaker than anticipated by markets. December quarter GDP in the U.S. grew only 1.9% on an annualized basis, against consensus expectations of 2.2%. This means the U.S. expanded by just 1.6% in 2016, which is its weakest performance in five years.

A sell-off in eurozone government bonds has left yields in Austria, France, Germany, Italy and Spain at their highest for a year. There has also been upward pressure in yields for U.S. government bonds as funds have moved from bonds to equities since U.S. voters put Trump into the White House.

"Markets are now looking for more concrete legislation from the new Trump Administration. In practical terms, expectations of U.S. fiscal policy, corporate tax reform, and trade policy are driving much of the global market action," strategists from Bank of America Merrill Lynch noted Jan. 30.

The bank kept its forecasts for commodities unchanged but highlighted that U.S. politics "opened up risks across the board."

Late Jan. 24, China's State Administration of Foreign Exchange announced measures to encourage companies to keep funds within China. The regulations include requirements for additional documentation when foreign companies in China remit profits above US$50,000 back to their home countries. The rules are designed to staunch capital outflows and strengthen Chinese renminbi.

Price ring

Metals prices saw a rather disappointing performance in the first week of Trump's presidency.

Among the major mined commodities, only copper and iron ore rose in the seven days since the inauguration on Friday, Jan. 20. Iron ore climbed 3.6% to US$83.3 per tonne, while copper jumped 3.2% to US$5,890 per tonne.

Aluminium, nickel and zinc all finished the week in the red, dropping 0.1%, 3.1% and 0.1%, respectively.

Precious metals had an equally bad performance throughout the week, with silver down 0.2% and gold losing 1.8%.

Talking points

Analysts and economists alike have pointed out a high level of uncertainty for the global economy as new trade and fiscal policies feed through.

Mining companies also are excepting more volatility as a result, as Evolution Mining Ltd.'s executive chairman Jake Klein flagged last week.

"If the first few days of the Trump presidency are anything to go by volatility and uncertainty is going to be something that comes part and parcel of 2017," Klein said. However, he also said that this was good news for gold.

"You also have the issues around Brexit and a whole lot of other trade uncertainties so I think gold as an asset class will certainly continue its recovery from 2016 and have a good 2017," Klein stated.

This view was very much in line with forecasts by RBC Capital Markets, which expects gold’s trading pattern year-to-date to continue through the end of the year with an upwards drift.

"The proliferation of unknowns, inherently difficult to hedge, remains a key reason why we recommend gold allocations and underpins our positive view through yearend despite a still strong dollar and a rising rate environment," the analysts elaborated in a Jan. 26 note.

They also stated that the on/off uncertainty pattern will result in on/off moves in gold and other assets, in particular equities "fluctuate with presidential tweets and changing market interpretations of both new and old U.S. policies."

Executive exchange

TNR Gold Corp. and its 15.9%-owned International Lithium Corp. last week announced a reshuffling of their management and board structures, which saw TNR Gold's nonexecutive chairman Kirill Klip taking on the positions of president and CEO. Gary Schellenberg stepped down as CEO and as a director.

Other notable management changes included the appointment of Wang Junqiang as CEO of Lingbao Gold Co. Ltd., replacing Qiang Shanfeng, while BCGold Corp. named its executive chairman Gary Anderson as interim CEO, effective immediately.

Meanwhile, Deep-South Resources Inc. has named Pierre Léveillé as CEO, following the resignation of Tim Fernback.

Financings

Major financing deals last week included Sandfire Resources NL's announcement to early repay A$50 million of a A$380 million facility, enabling the Australian copper producer to become debt free nearly one year ahead of schedule. A strong cash position and the improvement in the Australian dollar copper price over the past six months were the key drivers for the early repayment.

Fortuna Silver Mines Inc. is seeking to raise about US$65.0 million through a bought-deal offering of 10,325,000 common shares to a syndicate of underwriters. The offering will close Feb. 9.

Beijing Shougang Co. Ltd.'s parent company plans to raise up to 6 billion Chinese yuan by issuing bonds that can be converted into shares in the listed subsidiary.

Victoria Gold Corp. is looking to secure US$220 million in project debt funding for its Eagle gold mine, part of the Dublin Gulch property in Canada's Yukon Territory.

Vedanta Resources Plc priced its US$1.0 billion in bonds due 2022 at 6.375%. Funds are earmarked to buy back the company's outstanding US$750 million in 9.5% notes due 2018 and US$1.2 billion in 6% notes due 2019.

Meanwhile, Alamos Gold Inc. launched a US$250 million bought-deal financing, which will see a syndicate of underwriters purchase 31.45 million common Alamos Gold shares at US$7.95 apiece. The company will use the proceeds to repay its outstanding US$315 million senior secured 7.75% high-yield notes maturing 2020.

United Co. RUSAL Plc priced five-year eurobonds for US$600 million with an annual coupon of 5.125% per annum.