This morning, Wednesday August 12, the bears have the upper hand, with base metals prices down on the London Metal Exchange and Shanghai Futures Exchange - both complexes were down by an average of 1.4% as at 6.20am London time

Wider markets were mixed while they were buffeted by crosswinds coming from a stalemate over US Congress’ pandemic relief fund, progress on a Russian vaccine and mixed economic data.

  • Chinese retail sales of light vehicles increased by 7.9% in July, compared with July 2019, ending a two-year contraction.
  • Gold prices slumped on profit-taking; hopes for a vaccine appear to have been a catalyst.
  • US ten-year treasury yields leap to 0.66% - a sure sign of a move away from safe-havens…
  • …the stronger yield has given the dollar some lift, which is another headwind for the metals.

Base metals

The base metals on the LME were down across the board, led by a 2.4% drop in zinc to $2,362 per tonne, followed by 2% declines in both copper ($6,278 per tonne) and nickel ($14,050 per tonne). The rest were off between 0.4% and 0.7%.

Concerted price weakness on higher than average volume bodes ill. Volume on the LME as of 6.20am London time was 10,669 lots, compared with 3,210 at a similar time on Tuesday.

The most-traded base metals contracts on the SHFE were also down across the board, with October nickel leading the decline with a 2.4% decline, followed by a 1.8% drop in September copper that was recently quoted at 49,860 yuan ($7,174) per tonne. The rest were down between 0.5% for September aluminium and 1.5% for September lead.

Precious metals
We had thought a short-sharp correction in gold was likely, and it has been sharp with spot gold prices down by 2.4% this morning at $1,881.56 per oz after a 5% fall on Tuesday - we now need to see if it is short-lived.

The other precious metals bar palladium were similarly weak this morning. Silver was down by 6.8% at $24 per oz, which follows an 11.4% drop on Tuesday, while platinum was down by 1.1% at $930 per oz, after a 4.7% decline yesterday.

Palladium bucked the trend, however, and was up by 1.3% at $2,132.50 per oz this morning, although it did fall by 6.3% on Tuesday. The recovery in Chinese auto sales may well be underpinning palladium prices this morning.

Wider markets

The run-up in US 10-year treasuries has taken the yield outside its recent 0.5% to 0.6% range - in recent weeks we had suggested the yield was forming a base.

Asian-Pacific equities were mixed this morning: the CSI 300 (-1.36%), the ASX 200 (-0.11%), the Hang Seng (+0.25%), the Nikkei (+0.41%) and the Kospi (+0.35%).

Currencies
The dollar index has found some support from the firmer US yields and it was recently quoted at 93.78, compared with 93.54 on Tuesday morning, it will need to rise above 94 to suggest it had put in a base.

With the dollar firmer, the other main currencies were drifting lower: the euro (1.1730), the Australian dollar (0.7123), the yen (106.71) and sterling (1.3045).

Key data
Key data already out this morning showed the United Kingdom’s gross domestic product (GDP) rose by 8.7% in June, compared with May, but it fell by 20.4% in the second quarter compared with the first. The month-on-month data beat expectations, while the quarterly data was roughly in line with expectations. UK industrial and manufacturing production came in strongly, but the trade balance was worse than expected - see table below for more details.

Key data out later includes the European Union’s industrial production, with US data on consumer prices, crude oil inventories and the Federal budget balance.

In addition, Federal Open Market Committee member Robert Kaplan is scheduled to speak.

Today’s key themes and views
Copper and tin prices seem to have been the two metals that had lost upward momentum the most in recent weeks and that seems to now be weighing on the complex. The base metals had looked overbought in our view for some time now so we are not surprised some profit-taking has emerged, and now the dollar’s decline has halted, at least for now, that may be another catalyst for some price weakness in the metals.

We do not think the pullbacks will last long, we remain bullish in the medium term given the amount of money that has been pumped into the financial system and into infrastructure projects.

We remain overall bullish on gold, but thought a short-lived, sharp dip could be constructive because the market had become overbought in our view. This sell-off will shake out weak longs and provide a buying opportunity for those who missed the boat when prices started to accelerate in mid-July.