Fundamental Analysis - Basic Level RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

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Fundamental Analysis The study of the factors that affect physical supply and demand. General economic principle says demand and supply determine price. Demand and supply situation helps predicting the price of commodities. Generally, –Demand > Supply = Higher Prices –Supply >Demand = Lower Prices RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Factors affecting demand and supply Production and consumption Level Trade practices Government interference Taxes Political Events Weather Transportation cost Technological change, etc RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Factors affecting commodities price Every major economic indicator released from major economies impact their respective currencies. Positive economic data strengthens the currency and negative data weakens the currency. This impacts the price of commodities accordingly. US dollar is regarded as the strongest currency that impacts commodity prices. RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Relationship between indicators Inflation and interest rate, impact the Currency which ultimately impacts the price of commodities. For Example: –if the inflation is rising in US, then demand for US currency will decline as their export becomes expensive. –In this scenario, the currency of major trading partners of the US will strength. –The price of Crude oil declines with the prospect of weaker US economy. –A weaker US dollar generally strengthens gold prices. RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Major economies to follow USA Eurozone China Japan Middle East BRIC nation RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Major Fundamental Indicators Fundamental indicators released from –US –Euro zone –China –Japan –emerging economy impacts the commodities market. US Economy –being the world’s largest economy has the biggest influence in the world economy. –US economy plays a bigger role in guiding currencies and commodity market. However, –one cannot ignore the fact that due to integrated global business environment, Euro zone, China, Japan and other emerging country’s fundamental indicator also play a bigger role in commodity market. RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Major Fundamental Indicators Monetary Indicators Economic Indicators – – US –International RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Monetary Indicators Major Fundamental Indicators RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Market in Crisis One of the major news that can severely affect the market is monetary policy changes by major economies, we give three examples A) Quantitative Easing ( US federal reserve) B) Euro Zone stimulus C) Chinese stimulus Quantitative Easing 2, November 3 rd 2010 RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Euro Stimulus, June 24 th 2009 Chinese Stimulus, November 2008 (discharged over ) RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Adverse news affects the market for commodities The start of the financial crisis started with the realization that many big financial companies were in trouble. The main crisis was in the housing market and this became evident when series of news reports from mid-July to August confirmed the fear. Conversely, good news such as stimulus packages builds market confidence and rallies the prices of commodities that are demand driven. During start of the financial crisis, Oil hit a high of around $145 mark and tumbled all the way to around $35 in a matter of 6 months. In the next slide, we see a series of events that led to the financial crisis and its relation to the Crude Oil price decline. RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

July 11, 2007, Standard and Poor’s places 612 securities backed by subprime residential mortgages on a credit watch. July 24, 2007 | SEC FilingSEC Filing Countrywide Financial Corporation warns of “difficult conditions.” July 31, 2007 | U.S. Bankruptcy FilingU.S. Bankruptcy Filing hedge funds that invested in various types of mortgage- backed securities. August 17, 2007 | Federal Reserve Press ReleaseFederal Reserve Press Release Following an intermeeting conference call, the FOMC releases a statement about the current financial market turmoil, and notes that the “downside risks to growth have increased appreciably.”FOMC RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

February 13, 2008 | Public Law Public Law President Bush signs the Economic Stimulus Act of 2008 (Public Law ) into law. RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Major fundamental indicators … Economic Indicators - US –Employment situation –Weekly unemployment claims –Retail sales –GDP –Industrial Production/ capacity utilization –ISM report - Manufacturing –Chicago Purchasing Managers Index –Consumer price Index (CPI) –Producer Price Index (PPI) –Productivity and cost –Consumer confidence index –Durable goods orders RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Major fundamental indicators… Economic Indicators – International –German Industrial Production –German IFO Business Survey –German Consumer Price Index –Japan Tankan Survey –Japan Industrial Production –OECD composite leading indicator (CLI) –Industrial production of China –Industrial activity in other BRIC countries RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Market sentiment Commitment of Traders (COT) report Released by CFTC on weekly basis COT reports provides a breakdown of each Tuesday open interest for markets in US. The reports includes open interest separated by reportable and non reportable position. For reportable position additional data is provided for commercial and non commercial. The data includes: –Changes from previous report –Percents of open interest by category –Number of traders RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Useful resources RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

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