Base metals well placed to react to better Chinese PMI data

FastMarkets

Base metals on the London Metal Exchange are on divergent paths this morning, Friday June 30, with three-month copper and nickel prices firmer by 0.4%, with copper at $5,947 per tonne, aluminium and zinc prices are little changed, while lead and tin are off either side of 0.4%.

Volume has been average at 5,827 lots as of 06:09 BST.

Today’s performance comes after a bullish day on Thursday that saw average gains of 0.8%, led by a 2.7% gain in tin prices, with aluminium and copper prices closing up 0.8%. Good Chinese manufacturing purchasing managers’ index (PMI) data is likely to give sentiment a boost in this already more bullish climate.

Precious metals are little changed to firmer with platinum prices up 0.2% at $921.20 per oz, gold prices are little changed at $1,246.12 per oz – this comes after a generally weaker day on Thursday when prices closed down an average of 0.4%, led by a 0.9% drop in silver prices.

The base metals on the Shanghai Futures Exchange (SHFE) are also split this morning, copper prices are up 0.3% at 47,380 yuan per tonne ($7,000 per tonne), nickel and tin prices are up slightly, while aluminium is off 0.7% and zinc and lead prices are off 0.4%. Spot copper prices in Changjiang are off 0.1% at 47,100-47,250 yuan per tonne and the LME/Shanghai copper arb ratio has eased to 7.97, suggesting LME copper prices are relatively stronger than SHFE copper prices.

September iron ore prices on the Dalian Commodity Exchange are consolidating recent gains; prices are off 0.4% at 469 yuan per tonne. On the SHFE, steel rebar prices are up 0.4%, while gold and silver prices are down 0.7%.

In international markets, spot Brent crude oil prices are up 0.8% at $47.86 per barrel and the yield on the US ten-year treasuries has climbed to 2.28%.

Equity markets were under pressure on Thursday as follow-through concerns about possible shifts in European Central Bank (ECB) and UK monetary policies spooked markets. The Euro Stoxx 50 closed down 1.8% and the Dow closed down 0.8%, although it had been down 1.2% at the low of the day. Asia has seen follow-through weakness this morning with the Nikkei off 1.5%, the ASX 200 is off 1.4%, the Hang Seng is off 0.8% and the CSI and Kospi are down 0.3%. Key now will be whether equities have another down day or they compose themselves ahead of the weekend.

The dollar index at 95.55 continues to plunge, while it does, the euro at 1.1437 is surging, sterling is strong at 1.3011, as is the Australian dollar at 0.7693 and the yen is fairly flat at 111.95.

The yuan continues to strengthen, it gapped higher again this morning and was recently quoted at 6.7669. This turn round in the yuan seems to be on the back of the weaker dollar as much as it is being boosted by the vote of confidence it received when the ECB reported it had started to hold yuan-denominated assets in its reserves. Other emerging market currencies we follow are if anything slightly weaker, but generally remain flat.

The economic agenda is very busy today – data out already shows a decline in UK GfK consumer confidence, Japan’s core CPI was mixed, its unemployment rate climbed to 3.1%, from 2.8%, industrial production fell 3.3% and housing starts declined 0.3%. On a brighter note, Chinese manufacturing PMI jumped to 51.7 from 51.2 and non-manufacturing PMI climbed to 54.9 from 54.5. Data out later includes German retail sales and unemployment change, French consumer spending and CPI, there is also CPI out of the EU, UK current account data, gross domestic product (GDP), index of services and revised business investment. US data includes personal income, spending and PCE prices, Chicago PMI and University of Michigan consumer sentiment and inflation expectations – see table below for more details.

We have been expecting base metals prices to work higher and that accelerated on Thursday. Better Chinese PMI data, if supported by better Caixin PMI data on Monday, would help justify the stronger tone. There is some feeling that this may just be end-of-quarter window dressing, but we think there is more to it than that. We have generally been quietly bullish for the metals for the medium and longer terms and in recent weeks may be we have moved into that medium term time frame. We remain mildly bullish, although initially short-covering may add some fuel to rallies. In the short term, if equities and bonds suffer more of a shake-out then that could lead to some risk-off, but it did not seem to get in the metals’ way on Thursday.

General risk-off in equities and bonds could weigh on precious metals prices if investors are looking at ways to raise margin, however, a secondary reaction could be more bullish as investors rotate out of equities and bonds and look for havens. The weaker dollar should also help gold prices. For now, prices are under pressure, we would expect gold prices to be well supported, but the likes of palladium may have further to correct.

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