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Analysis
Equity markets have made a mixed start on Friday while absorbing the recent dovish shift in central bank rhetoric against a backdrop of rising trade tensions. Markets today await key employment data, which is forecast to show the United States added 180,000 non-farm payrolls last month. The latest Commitment of Traders' data showed net length among Nymex funds increased by 973 contracts in the week to May 28; the 493-contract reduction in fund shorts amplified the 480-contract build in gross longs. Exchange-traded fund (ETF) holdings in the funds we track total 683,736 oz, down from 776,627 oz at the end of December 2018 - long liquidation has continued to feature. Given the relatively low level of exposure, the risk of further significant disinvestment has been significantly reduced. But the scale of disinvestment last year indicates investors are not enamored by the long-term prospects for autocatalyst demand due to the electric vehicle (EV) revolution. Vehicle sales continue to slow - global light vehicle sales dropped by 6.6% year on year in January-April, according to LMC Automotive. China's National Development and Reform Commission (NDRC) has announced plans to counter slowing domestic sales; however, most of the measures focus on new-energy vehicles rather than fossil-fueled vehicles. Despite this, strong growth in petrol vehicle sales - because of motorists shunning diesel - is boosting autocatalyst palladium demand. Tighter emission standards are likely to increase autocatalyst palladium loadings. The China VI standard will take effect from mid-2020, while India is accelerating its emission control plans and will introduce Bharat Stage VI standards from April 2020. Meanwhile, consultancy Johnson Matthey (JM) forecasts secondary supplies to increase again to a fresh all-time high, reflecting high palladium loadings in the spent autocatalyst lifecycle. But the rate of growth should moderate following two years of very rapid gains. Still, the underlying fundamentals remain supportive. JM estimates the structural deficit could approach 1 million oz in 2019, adding to the 809,000-oz deficit in 2018. Palladium's price premium to platinum has narrowed to $549 per oz from more than $720 per oz in mid-March. Conclusion Range trade continues for now. Structural fundamental tightness is underpinning price sentiment, as is the threat of supply disruptions - wage negotiations in South Africa are shortly to start. But the current chart set-up suggests downside risks remain, as does the threat of slowing vehicle sales amid increasing trade tensions. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.
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