The weaker tone in the base metals comes in spite of a positive global risk appetite, evident in gains across Asian equities, and could be driven by tighter financial conditions in China - reflected in the rebound in the overnight Shanghai Interbank Offered Rate.

Lead (-0.8%) is the weakest performer, while tin (-0.1%) and copper (-0.1%) appear to be the most resilient. Volume has been average with 5,628 lots traded as of 06:41am London time. On Monday, the London Metal Exchange Index posted a gain of 0.6%, supported by fresh buying - judging by the rise in open interest in most LME base metals.

Precious metals are generally weaker this morning, with palladium (+0.1%) being the only metal in positive territory. The outperformance of palladium is underpinned by the current risk-on mood across the financial markets, in light of its positive correlation with risky assets like equities.

Base metals traded on the Shanghai Futures Exchange are down by an average of 0.1% this morning. Tin (-0.9%) is the weakest, while lead (+1.0%) is the strongest. Spot copper prices in Changjiang are up by 0.3% at 54,420-54,660 yuan ($8,204-8,241) per tonne and the LME/Shanghai copper arb ratio stands at 7.82 - compared with 7.86 on Monday.

Equities are broadly higher today - the Nikkei 225 (+1.7%), the Hang Seng (+1.4%) and the CSI 300 (+0.6%) are firmer, while the Kospi (-0.2%) is slightly weaker - after a solid start to the week on Monday. In the United States, the Dow Jones closed little changed at 23,548. In Europe, the Euro Stoxx 50 closed down by 0.2% at 3,682. Although a raft of positive purchasing managers’ index (PMI) data was released on Monday from both sides of the Atlantic and oil prices rallied strongly, investors were not inclined to further boost their exposure to equities.

The dollar index is little changed (+0.03%) at 94.84 this morning after picking up slightly on Monday. The strength in the dollar against most currencies seems to be driven by higher US yields and the rewinding of carry trades thanks a positive global risk sentiment.

Looking at the day ahead, investors will pay close attention to speeches from European Central Bank president Mario Draghi and US Federal Reserve chair Janet Yellen. On the macroeconomic data front, retail PMI from Europe and US IBD/TIPP economic optimism will capture investor attention. On the political front, US President Donald Trump arrived in South Korea on Tuesday, following a visit to Japan on Monday, the first stop of his five-nation Asia tour. This could ease geopolitical tensions, thereby boosting risk assets.

Base metals may continue to push still higher in the coming days as positive sentiment remains intact, inducing financial players to continue to extend their long positioning. The strong gains made last week may attract momentum-based traders, which could amplify the uptrend in prices this week. We expect LME copper to retest its key level of $7,000 per tonne by the end of the week and its 2017 high of $7,177 per tonne (intraday basis) by the end of the month.

Precious metals, with the exception of palladium, may continue to struggle in such a risk-on environment. As the geopolitical climate is likely to be artificially less tense due to Trump’s Asia tour, haven demand is likely to remain poor. That said, we remain of the view that a sudden rise in the CBOE Volatility Index cannot be ruled out in the immediate term, which could render the macro backdrop for the complex slightly friendlier. In this case, precious metals could enjoy a rebound and palladium could start underperforming its peers.

Metal Bulletin publishes live futures reports throughout the day, covering major metals exchanges news and prices.