METALS MORNING VIEW 01/02: Metals prices consolidate while poor Chinese PMI data weighs on sentiment

Further weakness in China’s Caixin manufacturing purchasing managers’ index (PMI), that fell to 48.3 in January from 49.7 in the prior month, was enough to dent confidence in the base metals market this morning, Friday February 1, with prices for the most part weaker as a result.

Three-month base metals prices on the London Metal Exchange were down by an average of 0.3% this morning, with aluminium and tin slightly firmer, while the rest were lower by between 0.2% for lead and 0.8% for zinc. Copper was off by 0.4% at $6,137 per tonne.

Volume across the LME base metals complex was average with 6,620 lots traded as at 6.38am London time, with the Lunar New Year holiday (February 4-10) ahead of us now, liquidity in the market is likely to slow.

In the precious metals this morning, gold and silver prices were weaker by 0.3% and 0.7% respectively, with gold at $1,317.58 per oz and silver at $15.92 per oz. The more industrial platinum group metals of platinum and palladium were up either side of 0.2%.

In China, base metals prices on the Shanghai Futures Exchange were mixed with prices ranged between down by 0.8% for the March lead contract and up by 1.7% for the March zinc contract – these two metals are on divergent paths, while on the LME, lead prices are trading sideways and zinc prices are pushing higher. The March aluminium contract was also weaker, while the rest of the complex were up between 0.2% for the March copper contract and 0.8% for the May nickel contract, with the red metal at 48,140 yuan ($7,178) per tonne.

Spot copper prices in Changjiang were down slightly at 47,590-47,710 yuan per tonne and the LME/Shanghai copper arbitrage ratio was firmer at 7.84, having been 7.82 on Thursday morning.

In other metals in China, the May iron ore contract on the Dalian Commodity Exchange was up by an impressive 6.3% at 621.50 yuan per tonne with the price still responding to Vale SA’s announced production cuts following its dam collapse. On the SHFE, the May steel rebar contract was up by 1.3%.

In wider markets, the spot Brent crude oil price was off by 0.28% at $61.01 per barrel – prices are consolidating below resistance that lies between $62 and $63.75 per barrel.

The yield on US 10-year treasuries has drifted again, it was recently quoted at 2.6313%. The yields on the US 2-year and 5-year treasuries remain inverted, they were recently quoted at 2.4647% and 2.4415% respectively. The German 10-year bund yield was recently quoted at 0.1500%.

Asian equity markets were mixed on Friday: Nikkei (+0.07%), Hang Seng (-0.26%), the CSI 300 (+1.43%), the ASX 200 (-0.03%) and the Kospi (-0.06%).

This morning’s mixed performance in Asia follows a slightly weaker performance in western markets on Thursday; in the United States, the Dow Jones Industrial Average closed down by 0.06% at 24,999.67, and in Europe, the Euro Stoxx 50 closed down 0.07% at 3,159.43.

The dollar index has rebounded after the weakness seen following the dovish US Federal Reserve comments on Wednesday – it was recently quoted at 95.62, and as the dollar has strengthened the other major currencies we follow have pulled back to consolidate: the euro (1.1442), the yen (108.95), the Australian dollar (0.7241) and sterling (1.3106).

The yuan has also weakened after its recent show of strength; it was recently quoted at 6.7383, having been as strong as 6.6904 on Thursday. Most of the other emerging market currencies we follow are either still strengthening, or consolidating recent gains.

The economic agenda is extremely busy on Friday, in addition to the Caixin manufacturing data from China, Japan’s manufacturing PMI edged up to 50.3 from 50 while there is further PMI data out across Europe and the US. In addition, there is data on the France’s government budget balance, EU consumer price index (CPI), the US employment report and US data on University of Michigan consumer sentiment and inflation expectations, construction spending, wholesale inventories and total vehicle sales.

This week has generally seen a strong base metals complex but this morning prices are consolidating. Given the poor Chinese Caixin PMI data it is surprising that prices are not weaker – this suggests a degree of price robustness that bodes well for further strength. US-China trade talks reportedly made some progress which is encouraging. For now prices are trending higher and after the long drawn out down trends from the second half of last year, we may well see further gains with price gains also encouraging some restocking.

In the precious metals, prices are consolidating and a slightly firmer dollar is probably capping the advance, but weaker treasury yields mean the opportunity cost of holding gold is falling. Although there is a lot of uncertainty around in the global economy, most of the issues have been around for a long time so there does not seem any urgent need for safe-havens but the steady rise in gold prices since last October does suggest investors are preparing for rougher times ahead.

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