- Markets might be buoyant and the global economy might be starting to recover, but it is still massively damaged.
- The World Bank expects global economic output to contract by 5.2% in 2020, and warns its forecast could be revised lower if uncertainty and shutdowns persist.
Three-month base metals prices on the London Metal Exchange were mixed this morning; nickel, lead, zinc and aluminium were little changed, while copper and tin were up by 0.5% and 0.8% respectively, with the former recently quoted at $5,743.50 per tonne.
The most-traded base metals contracts on the Shanghai Futures Exchange were up across the board this morning by an average of 0.9%, led by a 1.5% gain in July copper to 46,390 yuan ($6,555) per tonne. The July lead and zinc contracts were the laggards with gains of 0.3% and 0.4% respectively.
The precious metals were off by an average of 0.4% this morning, with gold down the least with a 0.1% decline - it was recently quoted at $1,696.11 per oz. The rest of the precious metals were down by an average of 0.6%. Generally, the more industrial precious metals have held up better than gold in recent weeks, as seen by the gold/silver ratio falling to 1:96, from highs in March of around 1:124.
The yield on benchmark US 10-year treasuries has eased and was recently quoted at 0.85%, this after 0.9% at a similar time on Monday morning.
Asian-Pacific equities were mixed this morning: the ASX 200 (+2.54%), the Hang Seng (+1.59%) and China’s CSI 300 (+0.66%), while the Kospi (-0.13%) and the Nikkei (-0.46%) were weaker.
The US dollar index is holding in low ground and was recently quoted at 96.65, this after a low of 96.44 on Friday.
While the dollar consolidates, most of the other major currencies we follow have also started to consolidate recent strength, although they are managing to hold up in high ground: the euro (1.1295), the Australian dollar (0.6998) and sterling (1.2714), although the yen (107.98) is also starting to strengthen again after last week’s show of weakness.
The Chinese yuan (7.0734) is strengthening, it was at 7.0773 at a similar time on Monday and is recovering from recent weakness - it set a low at 7.1770 in late-May. The stronger yuan suggests some easing in United States-China tension.
Tuesday’s economic agenda is quite busy - see table below. The key data is likely to be the European Union’s employment change and revised gross domestic product numbers, while US wholesale inventories and job openings are also likely to be closely watched.
In addition, UK Monetary Policy Committee member Sir Jon Cunliffe is speaking.
Today’s key themes and views
The rebounds in the base metals prices are for the most part looking strong and much of that is put down to high hopes for better demand from infrastructure projects, combined with light restocking while manufacturers reopen, but investors also seem to be soaking up asset classes that are still recovering.
Overall, we expect the promised spending on infrastructure to boost demand for the metals but it will take time to feed through to actual orders and will likely be somewhat countered by a global recession that means demand is likely to be down year on year. So the demand side of the equation may be slow to recover. But we fear there is increased risk that there will be more supply disruptions in the months ahead while economies ease Covid-19 restrictions before they have the virus under control.
Gold prices have rolled over to the downside for now because the run-up in equities and bond yields are increasing the opportunity cost of holding gold. But given that the rebound in equities may have run ahead of itself and there is still a lot of uncertainty as to how we recover from this pandemic, it seems likely that investors will want to continue to hold higher levels of gold in their portfolios. As such, we expect dips will be well supported.