Base metals in “wait-and-see” mode ahead of China’s PMIs

  • The LME was closed yesterday due to bank holiday – base metals were generally under pressure last week.
  • Precious metals were stronger yesterday as market participants finally came to their senses following last week’s turbulence due to the resurgence of a hawkish tone from main Fed members.
  • Base metals are likely to trade in a sideways fashion until the release of China’s PMIs later this week.
  • Precious metals are vulnerable to renew selling pressure amid Fed hawkishness.

Base metals were under selling pressure last week with the exception of zinc and tin, which managed to set fresh year-to-date highs. Copper fell the most, down nearly four percent week-on-week, amid tangible signs of fundamental weakness combined with an unfriendly macro. Precious metals also were weaker last week, with gold dropping the most, down 1.5 percent week-on-week, largely attributable to hawkish statements from Fed members and encouraging US macro data releases, prompting the market to reprice upwardly the path of Fed funds rates.

This morning, base metals on the LME are mixed amid stronger volumes than last week, most notably in zinc. Interestingly, zinc, falling one percent, is performing the worst, while nickel, edging 0.6 percent higher, is the strongest base metal. Precious metals continue to strengthen following their yesterday’s gains, with the complex up 0.9 percent on average, especially thanks to palladium, already up 1.9 percent at the time of writing.

In Shanghai, the October base metals contracts are a little weaker, with the complex down 0.2 percent on average. Lead is the worst performer, dropping 0.6 percent, while copper, rising 0.2 percent, is the only metal to post a gain this morning.

Meanwhile, spot copper in Changjiang is up 0.2 percent at 36,430-36,550 yuan, while the contango with the futures is at $1.49 per tonne, and the LME/Shanghai copper arb ratio is slightly up from Friday at 1:7.85.

Bonds – The US government bond market rebounded noticeably on Monday after selling off last Friday. The recent volatility in the US government bond market has been driven by sharp changes in Fed tightening expectations due to mixed official messages. While the probability of a September rate increase rose from 21 percent to 33 percent last Friday largely due to hawkish remarks from Vice Chairman Fischer at the Jackson Hole conference, it dropped back to 20 percent yesterday due to more dovish speeches from Atlanta Fed President Lockhart and St. Louis Fed president Bullard over the weekend. Changes in Fed tightening expectations are likely to continue in the coming days, with macro data releases exacerbating the volatility across most risky asset classes, especially commodities.

Stocks – Broad equities were mixed on Monday. European equities were a touch weaker but continued to trade in a tight range.  US equities enjoyed upward pressure as market participants were reassured by the dovish tone from some Fed members and robust US macro data – the Dow Jones edged 0.58 percent higher while the S&P 500 closed up 0.58 percent. Looking at equities this morning, yesterday’s stronger tone in the US is positively affecting the Asian session, with most equity markets in positive territory. Apart from the Nikkei 225, which is broadly flat, the Hong Kong Sand Index is edging nearly one percent higher, the Kospi is strengthening 0.57 percent, while the CSI 300 is currently posting a smaller 0.13-percent gain.

FX – The dollar is appreciating slightly today, with the DXY currently trading at 95.712, after remaining unchanged on Monday and appreciating markedly on Friday. The dollar will continue to be driven by changes in the expected path of Fed funds rate – the release of the August jobs report this Friday is likely to be a source of volatility. Any sharp fluctuations in the dollar could affect precious and base metals and more broadly commodities.

The economic agenda will be slightly busy today. A raft of Japanese macro data has already been released earlier this morning. Household spending, unemployment rate, and retail sales were all stronger-than-expected in July, which has had only a slightly positive effect on Asian equities and metals.  

Later today, European data will include German import prices and prelim CPI, Spanish Flash CPI, and Italian retail sales. In the US, we will get the S&P/CS Composite-20 House Price Index (HPI) while the Conference Board will release its consumer confidence index for August. Any positive surprise in US macro data is likely to affect the dollar and the probability of a September rate increase, which in turn would weigh on base and precious metals.


Near-term outlook:

Base metals are likely to trade in sideways fashion because market participants are in “wait and see” mode ahead of the release of China’s manufacturing PMIs on September 1. Near-term risks to prices are however skewed to the downside as the dollar could continue to strengthen and global financial conditions to tighten amid robust US data and resulting higher Fed tightening expectations. Copper is likely to be the most affected – the latest CFTC statistics confirmed that speculators continued to rebuild short positioning. While zinc and tin avoided selling pressure last week thanks to idiosyncratic factors, a prolonged decline in base metals could eventually produce negative spillovers on these relatively stronger metals. Hence, we remain cautious.

Precious metals are likely to witness only temporary gains. Last week’s sell-off appeared exaggerated because market participants were confused about mixed Fed messages and a possible rate increase in September. But our view remains that a probability of September rate increase currently at 21 percent remains too low so the Fed is likely to continue to guide the market toward a steeper expected path of Fed funds rate. Under this scenario, gold and silver would be the most negatively affected.


Overnight Performance
BST 05:11 +/- +/- % Lots
Cu 4642 21 0.5% 1272
Al 1644.5 -3 -0.2% 480
Ni 9880 55 0.6% 465
Zn 2296 -24 -1.0% 3389
Pb 1872 -7 -0.4% 33
Sn 18885 0 0.0% 5
  Average   -0.1%      5,644
Gold 1323.51 6.56 0.5%  
Silver 18.745 0.11 0.6%  
Platinum 1076.9 7.9 0.7%  
Palladium 696.9 12.9 1.9%  
  Average PM   0.9%  


SHFE Prices 05:11 BST RMB Change % Change
Cu 36440 70 0.2%
AL  12335 -55 -0.4%
Zn 17890 -75 -0.4%
Pb 13840 -85 -0.6%
Ni 78770 170 0.2%
Sn 124660 -210 -0.2%
Average change (base metals)     -0.2%
Rebar 2451 -25 -1.0%
Au 285.3 -0.15 -0.1%
Ag 4181 12 0.3%


Economic Agenda
BST Country Data Actual Expected Previous
12:30am Japan
Household Spending y/y
-0.5% -1.3% -2.3%
12:30am Japan
Unemployment Rate
3.0% 3.1% 3.1%
12:50am Japan
Retail Sales y/y
-0.2% -0.9% -1.3%
 7:00am EU
German Import Prices m/m
  -0.1% 0.5%
All Day EU
German Prelim CPI m/m
  0.1% 0.3%
8:00am EU
Spanish Flash CPI y/y
  -0.5% -0.6%
9:00am EU
Italian Retail Sales m/m
  0.2% 0.3%
2:00pm US
S&P/CS Composite-20 HPI y/y
  5.1% 5.2%
3:00pm US
CB Consumer Confidence
  97.2 97.3