Metals vulnerable to more downside in near-term

  • Base metals were mixed yesterday – lower risk-appetite prompted some profit-taking.
  • Precious metals performed better thanks to safe-haven flows.
  • Base metals may continue to consolidate amid poor seasonal demand.
  • Precious metals are vulnerable to more profit-taking amid a strengthening US economy.

Base metals were mixed on Monday, with the complex posting a flat performance on average – tin, falling 1.1 percent, was the worst performer, and zinc, up 0.6 percent, performed the best. Dollar strength combined with lower risk-appetite resulting in some profit-taking across the board. Precious metals managed to perform better because stronger risk-aversion boosted some safe-haven flows. Still, the complex remained far below its pre-NFP level.

This morning, base metals on the LME are consolidating slightly amid tiny volumes. Zinc, falling 0.5 percent, is the weakest, while nickel, up just 0.1 percent, is the strongest. Precious metals are also weakening modestly, with gold, edging 0.1 percent lower.

In Shanghai, the October base metals contracts are trading mixed, with the complex up 0.1 percent on average. Lead is the worst performer, dropping 0.3 percent, while tin performs the best, strengthening 0.8 percent.

Meanwhile, spot copper in Changjiang is down 0.1 percent at 37,400-37,520 yuan, while the contango with the futures is at $8.99 per tonne, and the LME/Shanghai copper arb ratio is slightly up from yesterday at 1:7.80.

Bonds – Government bonds were mixed yesterday. The Japanese bond market experienced intense stress, with the 10-year JGB yield moving sharply higher to -0.039 percent. The rout in Japanese bonds could therefore have further to run, which could create negative spillovers in other bond markets and asset classes, including commodities. EU government bonds moved lower, partly driven by encouraging macro data and strong gains in equities. US government closed slightly higher during a sideways session.

Stocks – Broad equities were mixed on Monday. European equities continued to enjoy upward pressure, with the Euro Stoxx up 0.31 percent, in part in response positive investor confidence. But US equities witnessed some profit-taking from their recent highs – the Dow Jones edged 0.08 percent lower while the S&P 500 closed down 0.09 percent – losses from healthcare stocks more than offset gains from energy stocks on stronger oil prices.

In Asia this morning, equities are broadly strengthening, partly due to encouraging indicators about China’s inflation outlook. Apart from the Hong Kong Sand Index, which is down 0.11 percent, other equity markets in Asia are moving higher – the Nikkei 225 is rising 0.63 percent, the Kospi is strengthening 0.55 percent, while the CSI 300 is currently posting a 0.41-percent gain.

FX – The dollar is broadly unchanged today, with the DXY currently trading at 96.46, after appreciating slightly yesterday amid a strengthening US labor market. Recent macro data out of the US suggests that the underlying of the US economy is solid, which should continue to underpin the current rebound in the dollar. This does not bode well for metals prices.

The economic agenda will be fairly busy today. A raft of Asian macro data has already been released earlier this morning. In Japan, M2 money stock rose 3.3 percent in July from last year, in line with expectations. In China, CPI rose by a stronger-than-expected 1.8 percent year-on-year in July while PPI dropped by a lower-than-expected 1.7 percent. This positive surprise from consumer and producer prices is boosting risk-appetite, which could induce some upward pressure in metals. Later today, investors will pay close attention to some US economic indicators, most notably the prelim nonfarm productivity and unit labor costs for the second quarter. This should give important information about the underlying health of the US economy. Any positive surprise may underpin the recent rally in the dollar, which could exert some negative pressure in metals.


Near-term outlook:

Base metals are likely to continue to trade in a sideways fashion with a downward bias, reflecting poor seasonal demand. The room for selling pressure could be consequential judging by the pace at which speculators have accumulated long positions since the start of the year. Some metals that are trading close to their 2016 high and reflect overhyped expectations about the supply/demand balance , such as nickel or tin, could weaken the most in case of a sudden deterioration in sentiment.

Precious metals should remain under selling pressure because of the recent raft of encouraging US macro data releases, which may prompt investors to revise progressively the expected stance of the Fed’s policy, resulting in a steeper expected path of Fed funds rate. Any hawkish Fed statement or positive US macro indicator would reinforce the downtrend, particularly in gold and silver in so far PGMs tend to be more affected by the level of global risk-sentiment.


Overnight Performance
BST 06:00 +/- +/- % Lots
Cu 4800 -9.5 -0.2% 1158
Al 1641.5 0.5 0.0% 246
Ni 10740 10 0.1% 411
Zn 2268.5 -12.5 -0.5% 862
Pb 1792.5 -3 -0.2% 138
Sn 18145 -10 -0.1% 2
  Average   -0.1%   2,817
Gold 1333.74 -0.96 -0.1%  
Silver 19.715 0 0.0%  
Platinum 1145.2 -2.8 -0.2%  
Palladium 687.9 -1.1 -0.2%  
  Average PM   -0.1%  


SHFE Prices 06:00 BST RMB Change % Change
Cu 37460 -50 -0.1%
AL  12330 20 0.2%
Zn 17390 -30 -0.2%
Pb 13825 -45 -0.3%
Ni 84000 300 0.4%
Sn 121790 1000 0.8%
Average change (base metals)     0.1%
Rebar 2591 21 0.8%
Au 287.5 -1.05 -0.4%
Ag 4360 -14 -0.3%


Economic Agenda
BST Country Data Actual Expected Previous
12:50am Japan M2 Money Stock y/y 3.3% 3.3% 3.5%
2:30am China CPI y/y 1.8% 1.7% 1.9%
2:30am China PPI y/y -1.7% -2.0% -2.6%
7:00am EU German Trade Balance   23.2B 22.2B
7:00am Japan Prelim Machine Tool Orders y/y   -19.9%
7:45am EU French Gov Budget Balance   -65.7B
11:00am US NFIB Small Business Index   94.5 94.5
1:30pm US Prelim Nonfarm Productivity q/q   0.5% -0.6%
1:30pm US Prelim Unit Labor Costs q/q   1.8% 4.5%
3:00pm US IBD/TIPP Economic Optimism   46.2 45.5
3:00pm US Wholesale Inventories m/m   0.0% 0.1%