LEAD TODAY: Erasing May’s gains

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Short term: Flat
Medium term: Up
Long term: Up
Resistances:
R1 2,400 50 DMA
R2 2,555.5 recent high
R3 2,685 2018 high
R4 2,779 Jul 2011 high
Support:
S1 2,307 July 7 low
S2 2,300 Psychological support
S3 2,241 May 2 low
Stochastics:
Bearish
Legend:

BB – Bollinger band
Fibo – Fibonacci retracement level
HSL – horizontal support line
SL – support line
MACD – moving average convergence divergence
DTL – downtrend line
UTL – uptrend line
H&S – head-and-shoulder pattern
RSI – relative strength index


Analysis
  • The London Metal Exchange’s three-month lead price traded as low as $2,307 per tonne, falling as much as 2.9% in the week to Friday July 6.
  • Selling intensified last week after the metal triggered the bear flag and traded below all of the key daily moving averages we follow.
  • Both the daily RSI and stochastic lines remained under pressure and this suggests that the downside momentum is not over yet.
  • If our AB=CD bearish count is correct, a retest of May low at $2,241 per tonne is still on the cards.
Macro drivers
The broader risk-off sentiment which pushed most of the base metals prices lower, has spilled over to LME lead too. Escalating trade tensions between the United States and China hit new heights last Friday after US President Donald Trump’s administration imposed tariffs on $34 billion of China-origin goods. China has responded in kind, reiterating that it will not back down in a tit-for-tat trade war, sending fear and uncertainty into global market. But this morning, risk-on sentiment started to recover mildly, with the Shanghai Composite up by 1.9%, the Hang Seng Index firmer by 1.6% and the Nikkei up by 1.3% – all up into the close. If European trading can sustain the bullish sentiment, the base metals complex should see more short-covering.

That said, the pullback in LME lead prices remains in an orderly fashion – unlike its peers such as tin or copper. This is because lead’s fundamental backdrop remains quietly positive. Global inventory levels have tightened since the start of 2018, with more potential supply constraints on the way. Ever since the US backed out of the Iran nuclear deal, fresh sanctions and a downward spiral on its currency has capped supply of Iranian lead. Meanwhile, Chinese secondary lead smelters are being forced to shut operations in light of fresh environmental inspections.

Fresh environmental inspections are likely to keep China’s domestic refined lead market tight. Government officials have started to clamp down on heavily polluting secondary lead producers after updating its regulations based on its ‘Blue Sky Plan’ initiatives. As well, a crackdown on imports of lead waste products has shaken the smelting industry - it might force smelters to consider capacity cuts which may result in a rebound in spot lead concentrate treatment charges (TCs) for both high-silver and low-silver lead concentrate on a cif China basis to $20-30 per tonne. 

This comes at a time when underlying demand is modestly strong. The International Lead & Zinc Study Group (ILZSG) pegged lead usage in the first four months of 2018 at 3.86 million tonnes, an 0.8% increase from last April of 2017. The study group now estimates global usage to increase by 2.7% in 2018 to 11.90 million tonnes amid increased usage in China and the US.

Conclusion
Although we continue to favor LME lead, deteriorating risk-on sentiment as a result of the ongoing trade war between the US and China has forced global investors to stay cautious and reduce their exposure in riskier assets. Technically, there is more downside to be had and as such, we will let the selling run its course for now.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

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