METALS MORNING VIEW 08/08: Base metals under pressure on China’s disappointing trade growth

Base metals traded on the London Metal Exchange are under slight downward pressure this morning, in part owing to the release of disappointing Chinese trade data for July. While nickel (-0.8%) performs the worst, aluminium (+0.1%) is the only base metal in positive territory. Volume has been average with 7,613 lots traded as of 05:47 BST.

This comes after a solid start to the week – the LME base metals recorded an average gain of 1.2% on Monday, while aluminium rallied 3.4%, the strongest performer across the board.

Precious metals prices are under slight upward pressure on the back of a weaker dollar. Platinum and palladium are up 0.4% each, somewhat outperforming gold (+0.3%) and silver (+0.2%). This comes after a mixed session on Monday in which gold and silver experienced intraday weakness due to a lack of haven bids, reflected in the CBOE Volatility Index at a 50-year low, and platinum and palladium proved resilient thanks to their higher correlation with base metals.

On the Shanghai Futures Exchange (SHFE) this morning, the base metals complex enjoys some buying pressure, with an average gain of 0.9%. Aluminium (+2.6%), zinc (+1.8%), and lead (+1.3%) perform the best while tin (-0.7%) is the weakest. Spot copper prices in Changjiang are up 0.5% at 50,250-50,600 yuan per tonne and the LME/Shanghai copper arb ratio has weakened slightly to 7.90, from 7.92 on Monday.

Equities are under slight selling pressure this morning, especially the Nikkei 225 (-0.34%) the CSI 300 (-0.15%) following China’s poor trade data for July (i.e. weaker-than-expected imports and exports). But broad-equities had a good start to the week, with world stocks hitting a new record high on Monday in spite of marked weakness in oil and continuing geopolitical tensions over North Korea.

The dollar index – at 93.33 – witnesses some weakness for a second straight day on Tuesday, although it remains above its recent low of 92.84 on August 3. Although sentiment toward the dollar is presently weak and may point to further downward pressure, the “short dollar” trade is overcrowded, judging by its spec positioning, leading us to think that additional pressure should prove limited. If US macro data surprises to the upside (especially the July consumer price index reading due Friday), the rebound in the dollar may prove sustainable.

The macroeconomic agenda is fairly heavy today. Economic data released earlier this morning in Asia showed that in Japan, the bank lending growth for July and the current account were in line with consensus; while in China, the trade surplus for July was stronger than expected although both imports and exports disappointed. Data expected later today includes Japan’s economy watchers sentiment index for July, the German and French trade balances for June and the USA’s NFIB index for July, Jolts job openings for June and the IBD/TIPP economic optimism for August.

Base metals are likely to digest relatively quickly China’s poor trade data released earlier this morning because although trade growth slowed at a stronger pace than expected in July, macro investors are not overly concerned, as evidenced by the appreciation in the yuan. This suggests to us that investor sentiment toward China remains fairly positive, which should push base metals prices higher. With nickel and tin having meaningfully underperformed in the complex so far this year, they could play some catch-up in this environment.

Precious metals may continue to push higher in the days ahead because the market may focus again on downside risks to the US economy after being caught by surprise by the solid US jobs report released on August 4. But as long as risk appetite remains sound, we may prefer PGMs (especially palladium) over gold and silver.

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