METALS MORNING VIEW 04/01: Metals run into dip-buying after weak start to the year

Three-month base metals prices on the London Metal Exchange were generally firmer this morning, Friday January 4, with copper, nickel, zinc and lead up by an average of 0.8% – with copper up by 1.1% at $5,840 per tonne. Aluminium and tin bucked the trend, however, to decline by 0.5% and 0.1% respectively.

Volume across the complex has been high – as it has been each trading day this week – with 9,964 lots traded as at 06.48am London time.

Thursday’s trading saw three-month LME base metals generally drop intraday, with copper falling to a low of $5,725 per tonne, the lowest since June 2017. But the complex closed with average gains of 0.2%, with a strong rebound in aluminium, while copper closed down by 1.7% at $5,775 per tonne.

Gold prices are off their earlier highs of $1,298.55 per oz and were last at $1,293.90 per oz, but the market is looking robust. Silver prices have started to accelerate higher, with the gold/silver ratio around 1:82, having recently been around 1:86, while the platinum group metals (PGMs) were flat with palladium prices in high ground and platinum prices just above low ground.

In China this morning, base metals prices on the Shanghai Futures Exchange were mixed; copper and lead prices were lower by 0.4% and 0.7% respectively, with the February copper contract at 47,000 yuan ($6,836) per tonne, while the rest were up by between 0.1% for the February aluminium contract and 2.2% for the May nickel contract.

Spot copper prices in Changjiang were down by 0.9% at 46,780-46,980 yuan per tonne and the LME/Shanghai copper arbitrage ratio was recently at 8.06 – the rising ratio suggests LME copper prices are showing more weakness than SHFE prices.

In other metals in China, the May iron ore contract on the Dalian Commodity Exchange was up by 3.3% at 511 yuan per tonne. On the SHFE, the May steel rebar contract was up by 1.7%.

In wider markets, the spot Brent crude oil price was firmer, up by 1.76% at $56.61 per barrel. The yield on US 10-year treasuries has weakened further, it was recently quoted at 2.5754%. The yields on the US 2-year and 5-year treasuries remain inverted with the yields at 2.4159% and 2.3973% respectively. The German 10-year bund yield was, however, firmer at 0.1610%. Most of which suggests continued risk-off sentiment.

Asian equity markets were mostly firmer on Friday: Hang Seng (1.68%), Kospi (0.83%), the CSI 300 (2.36%), although the Australian ASX 200 was down by 0.25% and the Nikkei was off by 2.26% while it plays catch-up having been closed in recent days.

The dollar index rebounded on Wednesday in line with a general flight to safety, which saw the index rise to 96.97, but it retreated on Thursday and was recently quoted at 96.25. The yen has eased following Wednesday’s surge to 105.00, it was recently quoted at 107.92. The euro (1.1402), sterling (1.2635) and the Australian dollar (0.7020) are all firmer.

The yuan was moving sideways around the 6.8671 level and seems to be trending slightly higher since the lows seen in October/November, which suggests some confidence may be returning. The other emerging market currencies we follow are also firmer, suggesting perhaps some risk-on is emerging.

Economic data already out today shows a slight pick-up in Japan’s manufacturing purchasing managers index (PMI) to 52.6, from 52.4 and China’s Caixin services PMI edged higher to 53.9 from 53.8. Other key data out on Friday includes services PMI across Europe and the United States, German unemployment change, UK lending and money supply data, consumer price index (CPI) data in France, Italy and the European Union, the US employment report and US natural gas and crude oil inventories.

In addition, US Federal Reserve chairman Jerome Powell is speaking. One piece of data out late on Thursday was US total vehicle sales, which came in at an annualized rate of 17.6 million units, up from 17.5 million units in November.

Base metals and equity markets have been under pressure this week and the outlook remains uncertain, but the lower prices do seem to be attracting some bargain hunting. With a US trade delegation going to China next week and with some strength showing in Chinese iron ore and steel prices, combined with a yuan that is trending firmer rather than continuing its decline, there may be moves afoot to shore up the slowing global economy. Any improvement in the outlook would likely turn attention to the metals’ fundamentals and if that happens, then the market may view the metals as being oversold.

The weakness in other markets is leading to a flow into haven assets and gold is benefiting from that, along with silver, the yen and tier-one government bonds. Until confidence does return to the broader markets these trends look set to continue.

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