The general weakness comes amid disappointing Chinese trade data for October, renewed risk aversion, a pause in the oil rally, and tighter financial conditions in China. Aluminium (+0.3%) is the only metal in positive territory, while lead (-0.6%) leads the rest of the complex lower.
Volume has been average with 8,070 lots traded as of 06:24am London time.
This follows an overall weak session on Tuesday in which the London Metal Exchange Index returned a negative 1.8%, dragged lower by weaker zinc (-2.3%), nickel (-2.2%), and copper (-2.1%). This was driven by long liquidation, judging by the fall in open interest in most LME base metals, indicative of some profit-taking after a euphoric period during this year’s LME Week in London.
Precious metals are marginally bid this morning, with the complex posting an average gain of 0.1%. But given the fall in global risk appetite, we would have expected stronger buying pressure across the complex. All of the precious metals were down on Tuesday, posting an average loss of 0.5%, in spite of a 5% surge in the Volatility Index (VIX), which should have prompted investors to rebuild some risk-unfriendly positions.
On the Shanghai Futures Exchange this morning, the base metals complex is under marked selling pressure, down by an average of 1.4%. Aluminium (-2.9%) is the weakest, while zinc (-0.6%) and nickel (-0.7%) appear to be the most resilient. Spot copper prices in Changjiang are up by 1.6% at 53,640-53,790 yuan per tonne and the LME/Shanghai copper arb ratio stands at 7.84, compared with 7.82 on Tuesday.
Equities are broadly lower this morning: the Hong Kong Hang Seng Index (-0.19%), the CSI 300 index (-0.16%) and the Nikkei 225 (-0.10%) are down, while Kospi Index (+0.27%) is bucking the trend – this after a strong session on Tuesday. In the United States, the Dow Jones closed roughly flat (+0.04%) at 23,557. In Europe, the Euro Stoxx 50 closed down by 0.6% at 3,659. US and European equities were dragged lower by the financial sector due to falling bond yields.
The dollar index is little changed (-0.03%) at 94.889 this morning, having traded sideways since late October. As the volatility across risk assets seems to be rebounding, some carry trades could be unwound while US bond yields could uphold their downward trajectory, which could pressure the dollar lower.
The economic calendar is relatively quiet today. After the release of slightly disappointing Chinese trade data (see table below), investors will pay close attention to the publication of US crude oil inventories – which could have implications for the currently positive sentiment for oil, which has rallied strongly so far this week, driven by expectations of another extension of cuts in 2018 by the Organization of the Petroleum Exporting Countries.
Base metals should enjoy some upward pressure as we believe that the market remains in “buy-the-dip” mode. While the current bout of profit-taking makes sense after the strong gains made last week, the fact that there has been no fresh selling suggests that bearish sentiment has not picked up pace. As such, once conservative traders are done with their profit-taking, some buying on the dips should emerge. In spite of Tuesday’s weakness, our technical indicators continue to point to further strength in the very short term.
Precious metals may witness stronger upward pressure in the days ahead should risk aversion continue to rise. As we have said in our previous reports, a VIX below 10 is untenable and investors should expect a rise in volatility in the very short term. In such a scenario, we would expect the dollar and US real rates to move lower, which in turn would push the complex higher.
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