METALS MORNING VIEW 03/09: Mixed start to trading in the metals while market awaits PMI data

The fledgling rebounds in the base metals seen in the second half of August have stalled and in the case of nickel have been reversed with prices setting fresh lows this morning, Monday September 3.

China’s Caixin manufacturing purchasing managers’ index (PMI) disappointed with a drop to 50.6 for August, after a 50.8 reading in July, although Japan’s final manufacturing PMI came in at 52.5, after 52.3 in July.

Three-month base metals prices on the London Metal Exchange were mixed this morning, with price changes ranged between a 0.3% decline in zinc and a 0.2% gain in tin, with copper off by 0.1% at $5,982 per tonne.

Volume has been high with 10,882 lots traded as at 07.40am London time.

Precious metals prices were similarly mixed with gold and silver off by 0.1% and 0.3% respectively, with spot gold prices at $1,200.18 per tonne, while platinum was up by 0.3% and palladium was unchanged.

In China, the base metals prices on the Shanghai Futures Exchange were for the most part lower – the exception being lead, the October contract price of which was up by 0.8%. The others were weaker, led by a 3.1% decline in the November nickel contract, while the rest were down between 0.4% for October aluminium and 0.9% for October copper, which was recently trading at 48,140 yuan ($7,047) per tonne.

Spot copper prices in Changjiang were down by 0.7% at 48,210-48,410 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 8.05.

In other metals in China, the January iron ore contract on the Dalian Commodity Exchange was down by 0.9% at 483 yuan per tonne. On the SHFE, the January steel rebar contract was down by 0.6%, while the December gold and silver contracts were down by 0.2% and 0.6% respectively.

In wider markets, spot Brent crude oil prices are moving higher again and were recently quoted at $77.72 per barrel, up by 0.07% this morning. Falling crude oil stocks and the potential for US sanctions against Iranian oil are in focus and existing financial sanctions against the Middle Eastern country are already impacting Iran’s ability to trade. The yield on US 10-year treasuries was at 2.8603%, while the German 10-year bund yield was at 0.3410%.

Asian equity markets were mixed on Monday: Nikkei (unchanged), Kospi (+0.38%), the ASX200 (-0.51%), the Hang Seng (-0.92%) and the CSI 300 (-0.39%). This follows a weaker performance in western markets on Friday; in the United States, the Dow Jones closed down by 0.09% at 25,964.82, while in Europe the Euro Stoxx 50 closed down by 1.11% at 3,392.90. The weakness seems to be driven by a combination of the potential for an escalation in the scale of US tariffs against China, trade negotiations with Canada and how emerging markets are handling higher US interest rates and the trade disputes.

The dollar index is rising again having rebounded last Friday and was recently quoted at 95.18. The stronger dollar is once again putting downward pressure on metals’ prices. On the chart, the move above 95.66 on August 10 suggested the index had triggered a bullish Head-and-Shoulders Pattern, with a rebound now underway we wait to see if the index can climb back above that breakout level.

With the dollar stronger, the other major currencies we follow are for the most part weaker: sterling (1.2909), the euro (1.1594), the Australian dollar (0.7188), although the yen is flat at 110.95.

The yuan is consolidating and was recently quoted at 6.8266, but most of the emerging market currencies we follow are either weakening, or consolidating in, or near, low ground. Although the problems in a number of the emerging markets are country-specific in the likes of Argentina, Turkey, South Africa and Brazil, there is a danger that these problems could cause nervousness across other emerging markets too.

The economic agenda is busy today, mainly with manufacturing PMI data being released. In addition, there was data on Japan’s capital spending that climbed 12.8% after a 3.4% rise previously. In addition to the PMI data, Bank of Japan governor Haruhiko Kuroda and German Bundesbank president Jens Weidmann are speaking.

At best, the base metals’ rally off the mid-August lows are consolidating, although that is not the case in nickel where prices have sunk to fresh lows. The dominant negative factors are the uncertainty over the drawn-out trade disputes and the stronger dollar. While the general thinking is that a trade deal will come about with China, this might not be done anytime soon and perhaps not until after the US mid-term elections.

The danger is that the prolonged period of negative sentiment may start to undermine investors’ confidence, which could escalate. The area looking most vulnerable at present being the emerging markets.

Industrial activity is now entering a seasonally stronger period, which could boost demand for the metals, but given the uncertainty over trade and Britain’s exit from the European Union, buyers may not feel confident enough to restock.

That said, with some large short positions in the futures, if buying does emerge then that could lead to aggressive short-covering rallies.

Overall, on the basis of recent oversold prices, large short positions, relatively healthy long-term fundamentals and a pick-up in physical interest, we do favor the upside from these levels, but the market may need to build more of a base before buyers are prepared to chase prices higher.

Most of precious metals are following the path of the base metals, which suggests they are also following the dollar and overall market sentiment.

London Metal Exchange, base metals prices

Shanghai Futures Exchange, base metals prices

macroeconomic data