China’s Association of Automobile Manufacturers (CAAM) estimated vehicle sales growth of 11.7% year on year in May, which follows a 4.4% rise in April. Given how metal intensive cars are and the fact that China’s vehicle market had been in decline for the best part of two years, this is good news.

  • Asian-Pacific equities indices were stronger, as were pre-market major western equity index futures.
  • Brent crude oil price rises above $40 per barrel while it starts to close the gap after dropping from $45.18 to $37.37 in March.
  • Sentiment gaining strength on back of a combination of re-openings, central bank/government support and bargain hunting.
  • China’s Caixin services purchasing managers index (PMI) data recovered to 55 in May from 44.4 in April.

Base metals
Three-month base metals prices on the London Metal Exchange were for the most part weaker this morning, the exception was tin that was up by 0.3% at $16,005 per tonne. The rest were down by an average of 0.5%, led by a 0.8% decline in nickel ($12,775 per tonne), while copper was off 0.3% at $5,550.50 per tonne. While prices were generally lower, the underlying trends are upward, which suggests prices are just pausing this morning.

The most-traded base metals contracts on the Shanghai Futures Exchange were mixed, with July lead and zinc off by 0.3% and 0.2% respectively, while the rest of the base metals were up by an average of 0.8%. August tin led the advance with a 1.5% gain, while July copper was up by 0.7% at 44,880 yuan ($6,310) per tonne.

Precious metals
Spot gold prices were weaker again this morning with prices down by 0.3% at $1,724.85 per oz, this compares with a price of $1,740 per oz at a similar time on Monday. The other precious metals were mixed with silver down by 0.9% ($17.90 per oz) and platinum down by 0.3% ($848.50 per oz), while palladium ($1,976.50 per oz) was up by 0.7%.

Wider markets

The yield on benchmark US 10-year treasuries has firmed and was recently quoted at 0.7%, this after being at 0.66% at a similar time on Tuesday, which suggests a more risk-on climate - the range in recent weeks has been 0.61-0.74%.

Asian-Pacific equities were stronger this morning: the Nikkei (+1.29%), the ASX 200 (+1.83%), the Hang Seng (+1.28%), China’s CSI 300 (+0.39%) and the Kospi (+2.76%).

Currencies

The US dollar index continues its downward trend and was recently quoted at 97.42, compared with 97.81 at a similar time on Tuesday morning. It started to break out of the bottom of its 98.54-100.87 range on May 28, a range it had held since early April. Sentiment is turning bearish for the dollar, which seems to be a delayed reaction to the US Federal Reserve’s extremely dovish developments in recent months that includes the central bank’s pumping of dollars into the international market via international swap lines.

Given the dollar weakness, it is not surprising that most of the other major currencies we follow are firmer: the euro (1.1207), the Australian dollar (0.6936) and sterling (1.2585), although the yen (108.65) is weakening while safe-haven trades are unwound.

The Chinese yuan (7.1080) has firmed, it was at 7.1177 at a similar time on Tuesday and has been strengthening since it hit a weak point of 7.1770 on May 27.

Key data

Wednesday’s economic data is focused on services PMI and employment data that is being released across Europe and the United States. In addition, there is data on the European Union’s producer price index and US data on factory orders and crude oil inventories - see table below for more details.

Today’s key themes and views

The base metals have either been extending their rebounds or moving back toward the upper levels of their recent ranges in recent days, all of which suggests there is optimism that the reopening of economies will bring with it improved demand.

For now traders seem to be putting aside fears that the rift between China and the US will lead to action that will threaten the fledging recovery. The focus going forward will now be on whether the re-opening of economies is sustainable in that it does not spark major second-wave spreads of Covid-19.

Because we think there is a big risk of this happening in some regions we expect the global recovery to face many challenges, including the potential for greater production disruptions.

This may be a medium-term problem that materializes in the weeks and months ahead, so may not get in the way of the rebounds continuing in the short term.

Gold prices have once again run into resistance ahead of $1,750 per oz, and given the increased risk-on in other asset classes this is not surprising. But despite the prospect of recovery, the legacy of the huge debt that has been created to fight the impact of Covid-19, which seems to be starting to undermine confidence in the US dollar, may mean investors want to continue to hold higher levels of gold in their portfolios.

In addition, there is increased risk of social unrest and political instability where massive unemployment has happened and where social welfare systems have been inadequate to support those people whose lives have been turned upside down by lockdowns - a slow fuse may be burning in regards to this.