Metals set to remain “Fed-dependent” in near-term

  • Base metals posted  solid gains yesterday amid encouraging China’s PMIs.
  • Precious metals were mixed because weaker US data reduced somewhat investors’ fears over a Fed rate increase in September.
  • Looking ahead, base metals are likely to extend gains, principally because investors will continue to digest China’s data. Precious metals may surprise to the upside because of a possible bout of short-covering should the market realise that the Fed is unlikely to raise rates in September after the release of the US jobs report.

Base metals enjoyed solid upward pressure on Thursday, in part triggered by a stronger-than-expected China’s official manufacturing PMI for August, with zinc, tin, and lead hitting fresh 2016 highs. Precious metals were weaker in the first half of the trading session before strengthening in the second half, in response to a weaker dollar and a flatter expected path of Fed funds rate following disappointing US ISM manufacturing PMI.

This morning, base metals on the LME are showing small gains amid stronger volumes, with nickel, rising 0.8 percent, being the top performer. Precious metals are generally flat as investors remain in a “wait and see” mode ahead of the US jobs report due later today.

In Shanghai, the November base metals contracts are markedly stronger, with the complex up 1.8 percent on average. Lead performs the strongest, surging 3.6 percent, while copper, up just 0.3 percent, continues to struggle as investors prefer to remain on the sidelines.

Meanwhile, spot copper in Changjiang is up 0.5 percent at 36,550-36,670 yuan, while the contango with the futures is at $5.89 per tonne, and the LME/Shanghai copper arb ratio is slightly higher from the start of the week at 1:7.87.

Bonds – The US government bond market rallied on Thursday, sending yields lower, in part due to a weaker-than-expected August ISM manufacturing PMI below the 50 level for the first time since February and a noticeable drop in oil prices – WTI slumped another two percent – amid expectations of stronger production from Iran due to an unlikely agreement over production caps at the next OPEC meeting.

Stocks – Broad equities were slightly weaker yesterday. Most European equities posted losses, with the Euro Stoxx closing down 0.19 percent. US equities struggled to finish in positive territory.  The Dow Jones closed up 0.10 percent while the S&P 500 ended flat.

Looking at equities this morning, Asian equities are generally strengthening. Apart from the Nikkei 225, down 0.41 percent, the Hong Kong Sand Index (+0.35 percent), the CSI 300 (+0.30 percent) and the Kospi (+0.25 percent) are all trending higher. Stronger risk-appetite is boosting base metals pricing.

FX – The dollar is a touch weaker today, with the DXY currently trading at 95.60, after consolidating yesterday due to lower expectations of a Fed rate hike in September after negative US macro data. But the dollar is strengthening against the yen, with USDJPY up 0.11 percent, as Japanese monetary base and consumer confidence surprised to the upside. The pound strengthened noticeably yesterday after the August manufacturing PMI surged from last month, far above market consensus (53.3 vs. 49.0 expected and 48.3 in July).

Economic calendar – in terms of the day ahead, investors will focus their attention on the much-awaited US jobs report for August. Any deviation from the consensus (NFP expected at +186,000 and unemployment report at 4.8 percent) could result in sharp changes in the expected path of the federal funds rate, which in turn would generate volatility across metals prices. The estimated probability of Fed rate increase in September was yesterday at 27 percent, up from 20 percent at the start of the week.


Near-term outlook:

Base metals are likely to enjoy further gains in the near term because investors may continue to digest encouraging China’s data. While copper has underperformed the rest of the complex in recent days, indicative of a poor sentiment, we believe that near-term risks to prices are skewed to the upside because the market has not yet priced in the elevated risk of strikes at at Anglo American’s Los Bronces (437,800 tonnes per year) and Codelco’s Salvador (49,000 tonnes per year) in Chile following unfruitful wage negotiations. Lead, zinc, and tin may continue to outperform the rest of the complex due to more short-covering, as the tightening in LME nearby spreads suggests.

Precious metals could surprise to the upside today. It seems that investors have built some short positions across precious metals since the start of the week on expectations of a stronger US jobs report, reflected in the stronger estimated probability of a Fed move in September. But given our view that the Fed is unlikely to raise rates in September even if US jobs numbers are robust because of rising downward risks to the inflation outlook, we think that a short-covering rally may develop once the market starts to revise lower the probability of a Fed rate hike in September.


Overnight Performance
BST 05:34 +/- +/- % Lots
Cu 4645 19.5 0.4% 1648
Al 1618 1 0.1% 412
Ni 10010 80 0.8% 800
Zn 2349 4 0.2% 1253
Pb 1947.5 6.5 0.3% 163
Sn 19270 170 0.9% 24
  Average   0.4%        4,300
Gold 1313.7 -0.4 0.0%  
Silver 18.942 0.047 0.2%  
Platinum 1045.3 -0.7 -0.1%  
Palladium 666.7 2.7 0.4%  
  Average PM   0.1%  


SHFE Prices 05:34 BST RMB Change % Change
Cu 36590 110 0.3%
AL  12205 95 0.8%
Zn 18525 355 2.0%
Pb 14675 505 3.6%
Ni 80430 1730 2.2%
Sn 127890 2780 2.2%
Average change (base metals)     1.8%
Rebar 2455 67 2.8%
Au 283.75 0.8 0.3%
Ag 4230 61 1.5%


Economic Agenda
BST Country Data Actual Expected Previous
12:50am EU Monetary Base y/y 24.2% 23.1% 24.7%
6:00am Japan Consumer Confidence 42.0 41.6 41.3
8:00am EU Spanish Unemployment Change   15.0K -84.0K
10:00am EU PPI m/m   0.1% 0.7%
1:30pm US Average Hourly Earnings m/m   0.2% 0.3%
1:30pm US Non-Farm Employment Change   186K 255K
1:30pm US Unemployment Rate   4.8% 4.9%
1:30pm US Trade Balance   -43.0B -44.5B
3:00pm US Factory Orders m/m   2.1% -1.5%