METALS MORNING VIEW: Base metals pressured by China’s tighter financial conditions

Base metals traded on the London Metal Exchange are edging lower this morning, Tuesday November 21, posting a marginal decline of 0.2%. Aluminium is the weakest with a fall of 0.5%, while lead, flat at $2,457 per tonne, is the most resilient.

Trading volumes have been weak with just 4,568 lots traded as of 07:08am London time.

This comes amid a small rebound in global risk appetite, evident in gains across Asian equities (eg, the Shanghai composite index: +0.3%) and gains in European equity futures (eg, Eurostoxx 50: +0.4%). But tighter financial conditions in China (Shanghai interbank offered rate: +0.8%) are probably undermining speculative buying interest in the base metals complex this morning.

Platinum (+0.4%) and palladium (+0.3%) are the most reactive, while gold and silver, both flat, are being pressured lower in spite of a weaker dollar (US Dollar Index: -0.0%) and lower US real rates (10-year Treasury Inflation-Protection Securities yield: -1.8%). In spite of friendlier macro forces toward the precious metals complex, investors prefer to buy the dips in equities rather than building long exposure to haven assets.

On the Shanghai Futures Exchange today, the base metals complex is ticking lower, down by an average of 0.1%. Aluminium (-2.5%) is the weakest while copper (+0.8%) and nickel (+0.9%) are the strongest. Spot copper prices in Changjiang are up by 0.5% at 53,130-53,280 yuan per tonne and the LME/Shanghai copper arb ratio stands at 7.90, slightly up from last week.

Equities enjoyed robust gains this morning. In Asia, risk is “on”, with the CSI 300 (+1.8%), the Hang Seng (+1.2%), and the Nikkei 225 (+0.7%) all up after a strong session on Monday. While there is some profit-taking in US equity futures (eg, Dow Jones futures: -0.03%, S&P 500 futures: -00.3%), European equity futures are showing decent gains, with the Euro Stoxx 50 futures up by 0.4%.

The dollar index is stable today at 94.02, after appreciating 0.4% on Monday, the strongest daily performance since October 26 (+1.24%). In spite of a weak dollar last week (-0.8%), LME base metals remained under downward pressure, posting an average loss of 1.1%. But precious metals benefited from the dollar weakness, showing an average gain of 1.6%.

The economic calendar is fairly quiet today. After the release of slightly disappointing all industries activity in Japan, investors will pay attention to existing home sales in the United States as well as an interesting discussion between US Federal Reserve chair Janet Yellen and former governor of the Bank of England Mervyn King in New York.

Base metals are likely to come under further downward pressure in the coming days as momentum-based sellers are in charge of the trend in the immediate term. But when prices become attractive, we expect some speculative/physical buying on the dips. At this juncture, aluminium appears to be the weakest, as Monday’s rise in open interest alongside lower prices suggests that bears are back and intend to push prices lower. Copper should be in the best posture to take advantage of a continued rise in global risk appetite in so far as the red metal tends to attract the most of reflation-oriented trades.

Precious metals could weaken further in the coming days, because sentiment seems to be negatively skewed and financial players are not inclined to hold on their long positions in spite of friendly macro forces. But although the “safe-haven” trade looks dead at present, we think that the recent rebound in volatility could herald a more prolonged period of risk aversion in the coming weeks. In this case, precious metals could perform well, especially gold and silver.

Metal Bulletin publishes live futures reports throughout the day, covering major metals exchanges news and prices.