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The message from low bond yields and gold bugs

A faltering dollar has lifted gold some 17 per cent this year, the US 10-year Treasury note is plumbing 10-month lows and the renminbi is poised for a Monday morning 'fix'

Here are the leading questions for markets and investors as a new trading week beckons.

The rift between economic data and lower bond yields

Top tier government bond yields have steadily fallen from their recent peaks in July, and beyond the nuclear sabre-rattling between the US and North Korea, it appears fixed income investors are rather gloomy about things.

As the 10-year US Treasury note yield plumbs its lowest level since last November, near 2 per cent, so the relationship between short and long term maturities — a classic market barometer of recession risk — has flattened. It comes as soft data, such as the survey-based ISM manufacturing series, has been robust, while hard data, such as monthly jobs figures, suggest late-cycle hiring momentum and the notable absence of wage gains.

Luca Paolini, chief strategist at Pictet Asset Management, notes: “Either leading economic indicators are too optimistic or bond markets are too bearish. A divide has recently opened between the bullish future painted by current surveys and the economically bleaker one the fixed income market is discounting.”

He suggests: “Ultimately that gap will close, and bonds are going to take the hit.”

Others take the view that there is no disconnect between low yields and high-flying equities, given the supportive role played by central bank purchases of bonds, running at nearly $2tn so far this year alone.

But a closer look at the US equity market, loitering near record peaks, also shows a degree of angst. The strong outperformance of fast-growing companies, notably in the technology sector, says a lot about lacklustre expectations for the rest of the economy. Equity investors have also sought companies with strong balance sheets, another sign of a defensive mindset, and one that suggests the cheerleading of market bulls is misplaced. Absent fiscal stimulus, Wall Street looks vulnerable, particularly as the momentum of double-digit earnings growth is fading.

How far can you push the PBoC?

Watch carefully the Monday morning “fix” of the onshore renminbi market — where the People’s Bank of China sets the midpoint of the daily permitted trading range. The renminbi has jumped 4 per cent in six weeks to its highest in nearly two years. The pace of the rally is quickening too — which is making some uneasy given Beijing’s well-known dislike of market “volatility”. If the PBoC is unhappy, setting a weaker fix at 9.15am local time — 15 minutes before trading begins — is how it will send that message. If it doesn’t, then this rally could go far further, very quickly.

Gold’s glittering run set for a bump?

Gold bugs have a lot to like at the moment. The precious metal has appreciated some 17 per cent this year, with a gain of 7.5 per cent alone over the past month towards $1,360 an ounce.

A big driver remains the faltering dollar and moribund expectations of US inflation pressure picking up that should keep interest rates low. A temporary deal over the US debt ceiling, kicked down the road to December, also may encourage buyers of any dip in the gold price until political uncertainty fades.

Indeed, analysts at Goldman Sachs estimate that worries over North Korea have only been a modest factor in the yellow metal’s price rally. “We find that the events in Washington over the past two months play a far larger role in the recent gold rally followed by a weaker dollar.”

Ahead of US inflation data for September due out Thursday, some believe gold has room to continue rising.

Numis Securities says: “Gold has now broken out of the long-term down channel that it had traded in since 2012 and is now at the upper end of the short-term up channel that it has traded in since the beginning of the year. These are both good things.’’

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US waives Jones Act vessel law as Hurricane Irma approaches

The Trump administration has suspended a law requiring US vessels to be used for coastwise travel in order to ease distribution of fuel supplies amid an intensely active hurricane season.

Acting secretary Elaine Duke of the Department of Homeland Security on Friday approved a waiver of the federal Jones Act “in recognition of the severity of Hurricanes Harvey and Irma,” the department said.

“This waiver will ensure that over the next week, all options are available to distribute fuel to states and territories impacted by Hurricanes Harvey and Irma, both historic storms,” according to a statement from the department.

The Jones Act limits vessel movements between US ports to US-built, flagged and staffed ships. Waiving it would enable foreign-flagged vessels to move fuel from ports such as New York to Florida, adding to transport options.

The waiver will be in effect for a week and is tailored for the transport of refined fuels, such as petrol, in areas affected by the hurricane, the department said.

“This is a precautionary measure to ensure we have enough fuel to support lifesaving efforts, respond to the storm, and restore critical services and critical infrastructure operations in the wake of this potentially devastating storm,” Ms Duke said.

“Hurricane Harvey significantly disrupted the distribution of fuel across the Southeastern states, and those states will soon experience one of the largest mass evacuations in American history while at the same time we’ll see historic movements through those states of restoration and response crews, followed by goods and commodities back into the devastated areas.”

The last Jones Act waiver was issued in December 2012 after superstorm Sandy paralysed the US east coast.

After hammering Caribbean communities, Hurricane Irma is expected to hit Florida this weekend.

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Goldman Sachs commodities trading head to leave after second quarter slump

The head of Goldman Sachs’ commodities trading business — the largest of any Wall Street bank — is leaving.
Greg Agran “has decided to retire from the firm at the end of November,” the bank said in a memo on Friday. A partner, he has been with the bank for 26 years.

His departure comes after Goldman suffered a dismal first half of the year in commodities, including its worst quarter ever in the second quarter. Low volatility has dampened customer demand to enter into hedging deals and left hedge funds with few opportunities to trade with banks.

Goldman also lost more than $100m trading natural gas in the Marcellus shale market of Pennsylvania and Ohio, according to an earlier Wall Street Journal report.

It is not alone in enduring poor returns from commodities trading. The world’s top 12 investment banks recorded their lowest half-yearly revenues in the sector since at least 2006, according to Coalition, a research company.

But Goldman was singular in standing by its storied commodities franchise, known as J Aron, as other banks scaled down in recent years. It expanded aggressively as a natural gas trader in North America, a move in which Mr Agran played “a significant role,” the memo said.

The bank is scheduled to discuss the direction of the fixed income and commodities business at an investor conference on Tuesday.

After Mr Agran’s departure, Jeremy Taylor and Ed Emerson will serve as co-heads of global commodities trading. They will work closely with Isabelle Ealet, a global co-head of Goldman’s securities division who formerly oversaw the commodities division, a person familiar with the matter said.

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Dollar and Treasury yields lifted by US jobs data

Friday 21.00 BST

What you need to know

US non-farm payrolls rise 209,000 in July, more than expected
Dollar and Treasury yields jump as analysts point to December rate rise
Dow sets eighth successive record closing high
Oil prices end choppy week on firm note

Overview

The dollar finally enjoyed some respite and the benchmark 10-year US Treasury yield climbed off a one-month low as a solid jobs report supported the case for the Federal Reserve to press ahead with plans for policy normalisation.

US equity indices hovered near record highs — with the Dow Jones Industrial Average touching an all-time peak of 22,089.05 in early trade — with financials bolstered by the rise in yields.

European bourses ended the week on a strong note, helped by a sharp retreat for the euro against the dollar. Energy stocks underperformed on both sides of the Atlantic despite a rally for oil prices following a very choppy week.

Hot topic

The big focus was on the US economy. Non-farm payrolls rose by 209,000 last month — more than expected — following an upwardly revised 231,000 increase in June. The jobless rate eased to 4.3 per cent from 4.4 per cent.

Average hourly earnings rose 0.3 per cent in July, as expected, leaving the year-on-year rate of increase at 2.5 per cent, against expectations for a dip to 2.4 per cent.

“The combination of lower unemployment and better wage data . . . supports the Fed’s case for announcing ‘quantitative tightening’ — shrinking the balance sheet — in September and raising rates again in December,” said Mikael Olai Milhøj, senior analyst at Danske Bank.

“However, we still think the jobs report underpins the Fed’s dilemma; unemployment and wage inflation are low at the same time.

“The problem is that the tightness of the labour market is not the only factor determining wage growth. Second-round effects following many years with low inflation have hit wage growth.”

Futures markets continued to price in a less than 50 per cent probability of the Fed raising rates for the third time this year in December, according to CME Group’s FedWatch tool.

“The [NFP] data reinforce a view that the market is significantly under-pricing Fed risks, most obviously for 2018,” said Alan Ruskin, strategist at Deutsche Bank.

“However, this is too far off to do the dollar much good. The way the data should be thought of is that it should provide dollar ‘downside protection’ at key levels, rather than decisively turn the currency around.”

Forex and fixed income

Nevertheless, the jobs figures prompted a huge sigh of relief among dollar ‘longs’ as the US currency rallied 0.7 per cent against a weighted basket of peers, after hitting 15-month lows earlier in the week.

The euro sank 0.9 per cent to $1.1755 on Friday — after briefly climbing above the $1.19 level on Wednesday — leaving it barely changed over the week. The dollar was up 0.6 per cent against the yen at ¥110.66.

Sterling, meanwhile, was down a further 0.7 per cent versus the dollar at $1.3043. It closed at $1.3131 a week ago.

The Bank of England delivered a dovish hit to the UK currency on Thursday after its scheduled policy meeting.

“No rate rise, only two votes against this decision and the economic outlook was lowered slightly,” said Lutz Karpowitz, currency analyst at Commerzbank.

“Compared with market expectations that was disappointing. Comments from the central bank had caused rate hike speculation recently.”

The 10-year UK gilt yield tumbled to its lowest for more than a month, before partially recovering yesterday to 1.17 per cent, still down 5bp over the week.

In the US fixed income arena. the 10-year Treasury yield, which moves inversely to its price, was up 4 basis points at 2.26 per cent. It hit 2.218 per cent on Thursday, the lowest since June 27, as participants watched developments in the probe into Russian involvement in the US election.

The German 10-year Bund rose 2bp on Friday to 0.48 per cent, but was still 7bp lower for the week — the biggest weekly fall since April.

Equities

On Wall Street, the Dow secured an eighth successive record closing high of 22,090 as it gained another 0.3 per cent. The gauge rose 1.2 per cent over the course of the week,

The broader S&P 500 equity index added 0.2 per cent on Friday to 2,476 — just a point shy of its record close last week — and registered a weekly advance of 0.2 per cent. In Europe, the Stoxx 600 rose 1 per cent, for a weekly gain of 1.1 per cent.

Asia-Pacific equities were mixed on Friday following a downbeat Thursday session in the US, when the S&P 500 closed down 0.2 per cent. Tokyo’s Topix index slipped 0.2 per cent. The Shanghai Composite eased back by 0.4 per cent.

Commodities

Oil prices pushed higher after seesawing through the week amid a continued focus on the outlook for global supply. Brent settled at $52.42 a barrel on Friday, up 0.8 per cent on the day but still down 0.2 per cent over the week.

The rebounding dollar and higher bond yields on Friday helped push gold down $9 to $1,258 an ounce, for a five-day decline of $11.

Additional reporting by Michael Hunter in London and Hudson Lockett in Hong Kong

For market updates and comment follow us on Twitter @FTMarkets

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Five markets charts that matter for investors

Your “springboard” guide to current market concerns, presented in a logical and concise manner, with direct links to more details.

Share buybacks dropping
US corporate debt issuance
Buying US shares on margin
Further weakness for the US dollar?
Europe’s jobs market and ECB policy

If you are interested in . . .

Share buybacks and what less activity means for US equities

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A big and persistent buyer of US shares continues retreating. US company share buybacks have been falling for the past four quarters after peaking during the first three months of 2016, according to the Federal Reserve’s Flow of Funds data.

Recent research from Goldman Sachs notes how companies through share repurchases or M&A activity represent the biggest buyers of US equities since the start of this bull market in 2009.

The slowing pace of companies buying back their own shares has certainly not halted Wall Street’s stellar run so far this year. While there is a reduced tail wind of buybacks helping boost earnings per share via a lower share count, US companies have reported robust year-on-year sales and earnings growth for the recent quarter. That has helped offset the decline in buyback activity, but some warn that the clock is ticking for Wall Street bulls.

“As prior cycles/bear markets show, share repurchases tend to peak just ahead of, or coincident with, the start of bear markets. Companies are, of course, typically pro-cyclical — buying high and reducing share buybacks into the recession/bear market, in order to conserve cash,” says Longview Economics. Michael Mackenzie

If you are interested in . . .

The pace of US corporate debt issuance as borrowing costs drop

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Investors across the globe have been queueing for a piece of the US corporate debt market, helping to drive risk premiums or spreads down towards their lowest levels since the financial crisis. The search for income was evidenced by the latest jumbo bond sale from AT&T, when bankers counted orders of roughly $60bn for the $23bn transaction. More than a dozen smaller deals have followed in the days since, helping boost volumes back to a record pace for 2017.

Since the year’s start, foreign investors have purchased roughly $54bn of US corporate bonds, according to Treasury data. That, coupled with the more than $130bn that has flowed into US fixed income mutual funds and exchange traded funds this year, has helped suppress corporate borrowing costs. Moody’s data show yields on companies rated Baa, the lowest investment grade tier, have fallen to 4.36 per cent. That is down from 4.73 per cent at the end of 2016.

The question for investors is how long can this persist? Many point to the extraordinary stimulus programmes still under way by the European Central Bank and Bank of Japan as a reason yields will stay the course. But others point to rising leverage metrics, record-high equity valuations and deteriorating investor protections on riskier corporate bonds as reasons to be wary.

Regulators have also warned US banks over “aggressive” financial projections that are being used to justify loading companies up with more debt. Eric Platt

If you are interested in . . .

The US equity market’s bull run

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The use of borrowed money to pump up investment gains is a compelling feature of bull runs and margin debt has been rising over the past year. Taking New York Stock Exchange data, adjusted for the market capitalisation of the S&P 500, shows the use of margin is back at a record level from mid-2015.

That is hardly surprising given the broad market’s stellar run since the election of Donald Trump. The S&P 500 has gained nearly 16 per cent and set 37 closing highs, according to S&P Dow Jones Indices, since November.

A robust second-quarter earnings season has certainly helped to drive the market higher lately and helped investors ignore the political turmoil and lack of fiscal stimulus from Washington.

As Alastair George, chief strategist at Edison Investment Research, notes: “The bull case for equities seems to be increasingly based on a single ‘Goldilocks’ scenario.”

He adds: “If equity valuations remain as high as they are and the global economy continues to slowly expand, and profit margins remain at record levels, and monetary policy remains accommodative and volatility remains low, then investors will have no alternative but to drive equity prices higher.”

The hefty use of margin debt alongside slumbering implied equity volatility — the CBOE Vix recently set an all-time nadir — and stretched valuations, means Wall Street has priced in a lot of good news. But recent flows into exchange traded funds that benefit from a rise in volatility suggest some investors are preparing for a correction. Michael Mackenzie

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The value of the world reserve currency and implications for markets

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This year has not been kind to the US dollar. Measured against its main rivals, led by the euro, the dollar index has depreciated more than 9 per cent in 2017 and it is within sight of breaking down to a level last seen at the start of 2015. That represents quite a reversal given how the dollar began the year at a 14-year high and the Federal Reserve has tightened overnight borrowing costs twice in 2017.

The dollar index has declined for five consecutive months, the longest losing streak since April 2011.

So can the dollar bounce or at least steady from here?

Despite a substantial interest rate gap in favour of the US over Europe, UK and Japan, the dollar has fallen from favour. This suggests that other forces, namely the political turmoil surrounding the Trump administration and lack of fiscal stimulus being passed in Washington, are influencing sentiment.

Alan Ruskin at Deutsche Bank notes: “The market will probably continue to the view [of] the Trump administration as encouraging of US dollar weakness, at least while it is helpful for equities and growth.”

Strong investor flows into Europe — whose economy has outperformed the US this year — on top of a region that already has a solid current account surplus, has certainly bolstered the euro at the expense of the dollar. Euro strength has yet to prompt a strong response from the European Central Bank, but currency strength has begun weighing on European exporters. In contrast, US multinationals are enjoying an earnings bounce from a weaker dollar.

Beyond the main currencies, the dollar has also notably fallen versus an array of emerging market units since January. That has made EM a hot ticket among investors this year, highlighting the importance of a benign dollar for the sector’s fortunes.

Declining US core inflation also supports a view that the current Fed tightening cycle is near an end, while investors are fixated on when the ECB will signal that hefty monetary easing has a shelf life.

Barring a technical bounce for an oversold dollar, the currency requires a catalyst to jump-start its fortunes. This brings us back to data and whether the US economy can show signs of acceleration and core inflation rebounds in the coming months.

Lee Hardman at MUFG says: “While the US dollar is lacking fundamental support, we would add some caution that the risk of a reversal in the near term is also high against most other G10 currencies. The stage is being set for a corrective rebound, but there is no obvious fundamental trigger yet.”

Michael Mackenzie

If you are interested in . . .

The European Central Bank and its bond-buying programme

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The slack in Europe’s labour market. It is a factor curbing eurozone wage growth, which at 1.4 per cent is significantly shy of what economists believe policymakers would like before they scale back the ECB’s €60bn monthly bond-buying policy.

Mario Draghi, the ECB’s president, described wage growth as a “linchpin” for future policy calls. Investors and traders will next tune into Mr Draghi at the end of August when he will speak at an annual gathering of central bankers in Jackson Hole, Wyoming.

“If Draghi sticks to his word and wage growth remains the linchpin for the ECB, loose monetary policy is here to stay,” says Carsten Brzeski, ING chief economist. Michael Hunter

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Oil drops after US crude inventories fall less than expected

US crude oil inventories registered their fifth straight week of decline last week. However crude prices moved lower as the pace of the fall proved less than expected.

Inventories of crude oil in the US dropped by 1.5m barrels in the week to the July 28, the US Energy Information Administration said on Wednesday.

That is less than the 3.5m barrel draw the market was expecting and compares to the 7.2m barrel decline recorded in the previous week.

West Texas Intermediate, the US oil marker, gave up a small gain to trade 0.6 per cent lower at $48.88 a barrel on the news. Brent crude also dropped into negative territory to trade down 0.3 per cent at $51.60 a barrel.

The decline came even as stockpiles of gasoline, one of the main products refined from crude, fell by a larger-than-expected 2.5 barrels. Meanwhile, the refinery utilisation rate rose 1.1 per cent to 95.4 per cent.

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S&P 500 inches up to fresh record close

Friday 21:00 BST

What you need to know
● Oil prices rally after previous day’s slide
● S&P 500 ekes out tiny gain to close at record
● Sterling drops as poll shows tighter election race, FTSE 100 hits peak
● US GDP data add to case for Fed rate rise next month
● Gold jumps to four-week high
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Overview

Wall Street ended an impressive week on a steady note — eking out a tiny gain to a fresh record close — as oil prices recouped some of the previous day’s steep losses and the latest US GDP data reinforced expectations for a June rate rise.

Sterling’s drop to to a one-month low against the dollar was a key feature in the currency markets, after opinion polls suggested the forthcoming general election could be far closer than previously expected. The pound’s move helped the UK’s FTSE 100 share index reach a record high.

Hot topic

Oil markets remained at the centre of attention after disappointment at the outcome of the latest Opec meeting triggered the biggest one-day fall for prices since the start of 2016.

The sell-off came after Opec members agreed to extend crude output cuts until March 2018, with a number of non-Opec producers, including Russia, backing the decision.

“In hindsight, we can now clearly say that there must have been a substantial amount of anticipation in the market for not only an extension of cuts, but also for deeper cuts,” said Bjarne Schieldrop, chief commodities analyst at SEB.

But Harry Tchilinguirian, oil strategist at BNP Paribas, said it was hard to describe the meeting as disappointing when it swiftly agreed what had been flagged well in advance.

“The price action that day was more likely the result of the liquidation of positions taken earlier in the hopes of a positive twist to an otherwise forgone conclusion,” he said.

“The rebalancing narrative of the oil market is by no means derailed by this meeting. If anything, it is reinforced by producers’ resolve.

“Opec and non-Opec countries are singing from the same song sheet — all they need to do is maintain high compliance with pledged supply cuts.”

Oil price action was very choppy on Friday, but Brent finally settled at $52.15 a barrel, up 1.3 per cent — after swinging between $50.71 and $52.23 — following a 4.6 per cent slide on Thursday.

US West Texas Intermediate was 1.7 per cent higher in late trade at $49.73, after the previous day’s 4.8 per cent dip.

In focus

A fresh record high for the UK’s FTSE 100 share index came as sterling, took a hit from political uncertainty and some disappointing UK economic data.

A YouGov/Time opinion poll showed a dramatic narrowing of the Conservative party’s lead over Labour to just five points.

Furthermore, gross domestic product growth for the first three months of the year was revised down to 0.2 per cent quarter-on-quarter from 0.3 per cent.

“Our view that the pound’s recent rally can continue as the economy remains resilient and Brexit worries gradually ease has been dealt something of a double blow,” said Jonathan Loynes at Capital Economics.

“Both Theresa May, prime minister, and sterling bulls will be watching the remaining economic data to be released ahead of the election closely, not least the consumer confidence figures on May 31.”

Sterling was down 1 per cent against the dollar at $1.2808, the lowest since April 26, and 0.7 per cent softer versus the euro at €1.1467.

Equities

The choppy nature of trading in oil markets on Friday left energy stocks flat in the US — in turn helping to keep the S&P 500 index reined in following its rise to record closing and intraday highs on Thursday.

But the US equity benchmark still managed to edge up marginally to a record close of 2,415.8 as activity wound down ahead of the long weekend break. It was the seventh rise in a row for the index.

For the week, the S&P gained 1.4 per cent.

There was a similarly cautious tone across much of Europe on Friday, with the pan-regional Stoxx 600 index and the Xetra Dax in Frankfurt both slipping 0.2 per cent.

Weakness in energy stocks hobbled both the Japanese and Australian stock markets, with the Topix index off 0.6 per cent and the S&P/ASX 200 down 0.7 per cent — the latter also pressured by declines for miners as China’s iron ore prices hovered near seven-month lows.

Hong Kong’s Hang Seng was flat and remained near its highest level since July 2015, while the Shanghai Composite gained 0.1 per cent. China stocks have recovered their poise since Moody’s on Wednesday downgraded China’s sovereign ratings to A1.

Forex and fixed income

The euro was down 0.4 per cent against the dollar at $1.1168 as the US currency found some support from a larger than expected upward revision to US first-quarter GDP growth to an annualised pace of 1.2 per cent.

“Somewhat faster GDP growth in the first quarter, coupled with slightly higher core inflation, further strengthens the case for another rate hike in June,” said Harm Bandholz, chief US economist at UniCredit.

Nevertheless, the yield on the 10-year US Treasury slipped a further 1 basis point to 2.25 per cent, leaving it flat for the week.

The 10-year German Bund yield fell 3bp to 0.33 per cent yesterday, for a five-day decline of 4bp.

Elsewhere, the dollar was down 0.5 per cent against the yen at ¥111.24.

Gold rose to a four-week high of $1,267 an ounce, up $12 on both the day and the week.

Additional reporting by Peter Wells in Hong Kong

For market updates and comment follow us on Twitter @FTMarkets

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Week in Review, May 27

US drillers add oil rigs for 19th straight week, though pace slows

US drillers brought rigs online for the 19th consecutive week even though the pace at at which they were added slowed for the second week in a row.

Drillers added two oil rigs in the week ended May 26, bringing the total number of operational rigs to 722, oilfield services company Baker Hughes said on Friday. That is more than double the 316 rigs that were drilling for oil at this time a year ago.

Over the month, drillers added 35 rigs, the slowest pace of growth since November.

Analysts had warned that oil price recovery could be undercut by rising US production, in response to an output cut agreement by Opec and non-members like Russia in 2016 to bolster crude prices.

Saudi Arabia-led Opec and Russia this week extended their agreement to cut output to the first quarter of 2018 in an attempt to curb a three-year oil supply glut.

Oil prices were little changed, with West Texas Intermediate up 1.2 per cent to $49.50 a barrel, while Brent crude, the global oil marker, rose 0.9 per cent to $51.90 a barrel.

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Call to tackle China’s soaring aluminium output

An international coalition of aluminium trade associations has called for a global forum to be created ahead of the G20 meeting in Hamburg this summer to tackle China’s soaring output.

Russian companies, hit particularly hard by Chinese production, are also backing the initiative by trade groups from the US, Europe and Canada, which represent companies including Rio Tinto and Alcoa.

“This situation not only significantly distorts international trade flows affecting all of our countries but also undermines global stability,” the three trade associations said in a letter to G20 leaders.

China is the world’s largest producer of aluminium but, for the first time, has committed this year to cut capacity in its northern areas to reduce air pollution. The pledge has offered hope that the government might enact measures similar to those that have helped to reduce steel and coal capacity.

Despite a tentative recovery in prices following a five-year slump, experts warn that China’s pledge has not yet reduced net capacity.

“While the central government has acknowledged that overcapacity is a problem and they have announced plans to address it, to date we have not seen any movement,” Charles Johnson, vice-president of policy at the US Aluminum Association, said. “Overcapacity continues to increase and any announced planned closures have been surpassed by new openings.”

At last year’s G20 summit in Hangzhou, President Xi Jinping promised to cut China’s steel output over the next five years.

A document released by China’s Mininstry of Environment Protection and other local governments called last month for 28 northern cities to reduce aluminium capacity by 30 per cent in the winter months. The regions account for around 20 per cent of global aluminium capacity, according to analysts at Goldman Sachs.

Aluminium prices have risen 11 per cent this year to $1,916.5 a tonne, after touching their lowest levels since 2009 in late 2015.

Mr Johnson said he expected President Trump’s administration to take the issue as seriously as Barack Obama. Before he left office Mr Obama’s administration filed a case at the World Trade Organisation that challenged how Beijing’s financial sector subsidises its aluminium industry.

Russia’s desperation to find a solution was underlined last month when the country’s minister for industry and trade told reporters that Moscow was planning to propose a cartel of aluminium producers similar to oil’s Opec. Industry and government officials later said the minister was speaking on his own behalf.

“We have big concerns over the mounting overcapacity problem. There is support for this move and hope a global forum will find ways address the overcapacity issue,” a person with knowledge of the Russian Aluminium Association’s stance said.

In 2001, Russia accounted for around 10 per cent of global aluminium production, slightly less than China. Last year, it produced just 6 per cent of the global total, as China’s share soared to more than 50 per cent.

Rusal, the country’s largest producer, was overtaken as the world’s number one by China’s Hongqiao, after being forced to close down smelters because of the fall in the global aluminium price, blamed on Chinese overproduction.

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Digging into Agarwal’s £2bn Anglo American bet

Macquarie buys Cargill’s petroleum business

Cargill, one of the world’s largest commodity traders, has agreed to sell its petroleum business to Australia’s Macquarie, the infrastructure and natural resources focused investment bank.

The sale of the Geneva-based petroleum business comes as Cargill, which is primarily focused on agricultural commodities, looks to streamline its business during a tough period for the sector.

For Macquarie, the deal will give its commodity business its first office in the trading hub of Geneva, where the majority of the 140-strong Cargill Petroleum team is based.

The transaction is expected to close later this year, Cargill said in a statement. Terms of the deal were not disclosed.

The move marks a partial reversal for Cargill from four years ago when David MacLennan, who is now chief executive and chairman of the privately held US company, said he was looking to move deeper into energy trading as increased regulatory pressure pushed some banks out of the sector.

While some banks such as Morgan Stanley, Deutsche Bank and JPMorgan have scaled back their commodity divisions, others — particularly Macquarie — have continued to expand.

The Australian bank is not registered as a deposit-taking bank in the United States, meaning it has faced less onerous restrictions than some of its rivals, especially in trading physical commodities. It has become one of the biggest banks in the sector over the past five years.

“With Macquarie’s strategic focus and commitment to energy and commodities, we are certain this talented team will excel in its organisation,” said David Dines, president, Cargill Energy, Transportation and Metals.

By getting a foothold in Geneva, — one of the world’s main commodity trading hubs alongside London, Houston and Singapore — the bank will have a platform to expand its trading operations in Europe.

Nick O’Kane, global head of energy markets at Macquarie Group, said the acquisition would bring “greater reach to the Macquarie platform . . . positioning us for continued growth”.

Reflecting the importance of natural resource trading to Macquarie the banks equivalent of a fixed income division is called the Commodities and Financial Markets group. Most other banks group commodities under FICC, or Fixed Income, Currencies and Commodities.

In Macquarie’s 2016 financial year, which closes at the end of March, the division made A$576m (US$441m) in net profit.

Cargill said it will continue to trade in other energy markets including North American gas and power, as well as continuing to offer financial hedging and risk management, including in oil and refined products.

JPMorgan acted as exclusive financial adviser to the Minneapolis-based company.

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Morgan Stanley in talks to sell oil tanker stake

Morgan Stanley is lopping off more pieces of its once-sprawling commodities empire, as Wall Street faces scrutiny over dealings in oil, gas and electricity.

The investment bank is in advanced negotiations to sell its stake in Heidmar, an oil tanker operator. A deal could be announced within weeks, industry executives said.

Subsidiaries of Morgan Stanley have also sold two US power stations that were part of its lucrative energy trading business, leaving just one mothballed Nevada plant in its portfolio.

The disposals are the latest move by Wall Street banks to shed holdings that store, transport or process cargoes of commodities. Goldman Sachs and JPMorgan Chase have cut loose metals warehouses and power plants, while Morgan Stanley in 2015 sold its 2m-barrel-a-day global oil merchant business to Castleton Commodities International, a private trading house.

Bank regulators have grown concerned about the risks of handling hazardous commodities, historically the domain of commercial companies. The Federal Reserve has proposed steep capital charges on banks in the sector, citing dangers of “environmental catastrophe” from spills and explosions.

Morgan Stanley once had the biggest physical footprint among the banks, but is shifting towards dealing commodity derivatives to clients. The value of its commodities inventories has declined from $10.3bn in 2011 to less than $200m, filings at the Fed show.

The shipowner George Economou and the bank are negotiating to sell their respective 49 per cent stakes in Connecticut-based Heidmar to investor FDX Capital, two people briefed on the talks said. Morgan Stanley acquired Heidmar in 2006 and two years later sold just over half the company to Mr Economou and company executives.

Morgan Stanley and Heidmar declined to comment, FDX could not be reached and Mr Economou said the process “still has some way to go”. TradeWinds, a shipping publication, first reported FDX’s involvement.

Last year, Morgan Stanley sold a 100mW gas-fired power plant in Lee County, Alabama and an 80-mW oil-fired plant in Bainbridge, Georgia to Walton Electric Membership Corp, a rural co-operative in Monroe, Georgia. The bank still has long-term power supply obligations in the region and has contracted to purchase power from the plants until the 2030s, records show.

“They call us when they want the energy and we dispatch it for them,” said Robert Rentfrow, a Walton senior vice-president.

Morgan Stanley’s remaining physical commodities holdings include a 30 per cent stake in Global Energy International of Singapore, which supplies marine fuel and operates tankers, and Pioneer Energy Holdings, which owns a diesel terminal in Queensland, Australia, according to securities filings and executives.

Under a provision of US law, Morgan Stanley and Goldman are the only Fed-regulated banks allowed to own commodity infrastructure such as tankers and power plants, in addition to the materials that flow through them.

In its rule proposal, the Fed said “both environmental risks and reputational risks are higher” from such assets and suggested burdensome capital requirements for banks that continue to own them.

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Cofco’s head of international operations leaves

Plans by Chinese food group Cofco to build an international grain trading business to rival the biggest names in the industry have been thrown into doubt by the sudden departure of the unit’s chief executive.

Matt Jansen, who joined Cofco International 18 months ago, left the company this week for personal reasons, said the state-controlled group on Friday, as it announced the appointment of a long-serving executive as his replacement.

Mr Jansen joined Cofco under former chairman Frank Ning, who wanted to build an international grain trading business to compete with the four companies that dominate the market: Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus Company.

Since 2014 Cofco has embarked on an aggressive acquisition spree, spending more than $4bn on Nidera, a Dutch grains trader, and the agricultural trading arm of Noble Group, the Hong Kong-based commodity house.

But Cofco’s international expansion plans have suffered setbacks. The most recent was the disclosure last month of a $150m hole in the accounts of Nidera last month, which followed losses because of the actions of a rogue biofuels trader.

One person close to Cofco said Mr Jansen’s departure followed a clash over strategy. “The reasons Matt joined the business have changed,” added this person.

Sector watchers said the appointment of Jingtao ‘Johnny’ Chi as the new head of Cofco International signalled a focus on supplying food for China’s huge population rather than building a business to compete on the global stage.

“The Chinese are reining in Cofco International and taking back control,” said Jean-Francois Lambert, founding partner at Lambert Commodities, a consultancy, and former head of commodity trade finance at HSBC.

“The idea of building an international grains trading business is no longer on the agenda.”

Mr Jansen was poached by Cofco in 2015 from ADM, where he had risen through the ranks to head its oilseed trading unit.

He embarked on a full restructuring of Cofco International, replacing most of its senior managers and axing thousands of employees. One of his biggest achievements was improving the performance of its Brazilian sugar business.

Mr Jansen told the Financial Times in April that he was looking for Cofco International to take a stock market listing by 2020, and spoke of plans to make acquisitions in the US.

His departure could further delay plans to integrate Nidera with the assets acquired from Noble Group. This process was supposed to have started in December.

Mr Jansen, who will serve as a Cofco adviser on a temporary basis, could not be reached for comment.

Cofco highlighted Mr Chi’s record integrating businesses and his experience of international agriculture markets.

“Johnny successfully merged and consolidated three Cofco agriculture entities into a single platform that has produced a total turnround in performance,” said Patrick Yu, chairman of Cofco International. “He is well versed in the international agricultural business as he has led Cofco’s import and export business for the past seven years.”

Mr Ning left Cofco in December 2015 and is now the chairman of Sinochem, the state-owned chemicals and fertiliser company.

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Transmar woes add to cocoa market jitters

The UK’s Brexit vote shook the cocoa futures market in 2016, pushing the commodity that is priced in sterling to levels not seen in decades.

Six months on, traders are feeling a new aftershock from the UK referendum following a filing for bankruptcy protection at the end of December by the US subsidiary of a top 10 cocoa processor Transmar Group.

Transmar Commodity Group filed for Chapter 11 in the US bankruptcy courts in New York with debts of more than $400m, according to court filings. Its problems stem primarily from financial issues at its European affiliate Euromar, whose financial predicament worsened after the UK voted in June to leave the EU.

The latest saga has added to the jitters surrounding cocoa, which despite its surge after the UK referendum, was one of the worst commodities performers in 2016, losing almost a quarter of its value.

According to court filings, during 2013 and 2015, Euromar took on “various unfavourable forward purchase contracts, including certain unhedged forward contracts, which resulted in enormous losses”. The Brexit vote had “further significant negative impact on the liquidity of Euromar”.

The financial woes surrounding Euromar led to a severe shortage last year of cocoa butter, processed from cocoa and a key chocolate ingredient. This wreaked havoc in the physical cocoa markets, causing pain for chocolate manufacturers.

It also had a devastating impact on Transmar Commodity Group. As affiliates owned by the Transmar Group, the two companies traded with one another with intercompany claims settled at the end of each year. Financial support from Transmar Commodity Group and Japanese trading company Itochu, which bought 20 per cent of the parent group in early 2016, failed to resuscitate Euromar, which filed for insolvency in Germany at the start of December.

The European affiliate’s inability to pay Transmar Commodity Group for the products it bought, as well as the burden of financial support, ultimately led to the US division’s bankruptcy filing.

According to the court filings, Transmar Commodity Group has more than 350 commercial customers, including Hershey, Mars and Nestlé.

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