Volume has been thin with just 4,879 lots traded as of 06:49am London time.

This comes amid a small rebound in global risk appetite, evident in renewed weakness in the yen (indicative of “risk-on” mood) and gains in US equity futures.

Precious metals are broadly weaker today, with the complex showing an average loss of 0.1%. Platinum (+0.1%) is the strongest, while palladium (-0.3%) is down the most. The weakness in precious metals is driven by the decline in risk aversion. Yet, it is worth noting that haven assets have performed poorly despite a weaker dollar, lower US real rates, and rising volatility.

On the Shanghai Futures Exchange today, the base metals complex is weaker, down by an average of 0.9%. Nickel (-2.5%) is the weakest, while tin (+0.2%) is the most resilient. Spot copper prices in Changjiang edged 0.2% higher to 57,880-53,020 yuan per tonne and the LME/Shanghai copper arb ratio stands at 7.84, down from 7.86 on Wednesday.

Equities attempted a rebound this morning, although in China, the Shanghai Composite Index is down 0.1% at 3,399 after falling 0.79% on Wednesday - its strongest sell-off since August 11, when it fell 1.63%. Equities in the rest of world are rebounding. In Japan, the Nikkei 225 is up by a healthy 1.5% at 22,351, likely supported by the weakness in the yen. Equity futures in the United States are also rising, with the S&P 500 futures up by 0.38% at 2.573. On Wednesday, the MSCI World Equity Index closed down by 0.26% at 5,704, as risk-off mood dominated the financial markets.

The dollar index is rebounding for a second straight day today, up by 0.07% at 93.96. But it remains down 0.47% on the week, on track to post its second weekly loss. In spite of the renewed weakness in the dollar since the start of the month, base metals have performed poorly, probably reflecting some profit-taking after substantial gains made in October, where the London Metal Exchange Index rose 4.4%. Precious metals have performed slightly better so far this month though we would have expected more meaningful upward pressure considering the friendly macro forces for the complex.

On the economic calendar, investors will pay attention to inflation data in Europe, unemployment claims, industrial production and the Philly Fed Manufacturing Index from the US. In addition, eyes will also be on speeches from US Federal Open Market Committee (FOMC) members Robert Kaplan and Lael Brainard. While Kaplan is in line with the FOMC consensus, Brainard is relatively more dovish. Any dovish rhetoric from the FOMC officials could reinvigorate the risk-on environment, prompting investors to buy the dips with a vengeance after the recent mini-sell-off in equities. This could be supportive of base metals but a headwind for precious metals.

Base metals may continue to experience some weakness until prices become sufficiently attractive to trigger some dip-buying. We are presently the less friendly toward lead, which is down roughly 4% in the week to date on the LME, principally because bearish sentiment is picking up, evident in a rebuilding of shorts, probably on concerns over stronger supply. Aluminium is the most resilient, which is not a surprise considering the winter cuts in China from November 15 to March 15, 2018.

Precious metals could weaken further in the coming days, holding the view that “what cannot go up must go down”. Although macro forces are positive for the the complex (weaker dollar, lower US real rates, rising volatility index), precious metals are capped, indicative of the presence of strong selling pressure. That said, given our view that the macro backdrop should remain friendlier for longer, we expect an eventual rally in the precious metals complex by year-end. But at present, the market forces us to temper our bullish view.

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