METALS MORNING VIEW 04/12: Metals prices rebound again after Monday’s rally ran into selling

Price gains inspired by the trade developments at the Group of Twenty (G20) summit over the weekend were sold into during afternoon trading on Monday December 3, but likewise the dips have been bought into again this morning.

Three-month base metals prices on the London Metal Exchange were up by an average of 0.5% on Tuesday morning, with all of the metals – bar nickel which was unchanged – in positive territory.

The fact the post-G20 reaction has not led to a huge spike higher means the uptrend may be more sustainable, especially as the dip has been bought into.

Volume across the complex has been above average with 7,536 lots traded as at 7.44am London time.

The precious metals were also stronger this morning with gains averaging 0.4%, helped by a weaker dollar and a stronger crude oil price.

In China this morning, the January contract prices for base metals on the Shanghai Futures Exchange were mixed, with copper off by 0.7% at 49,660 yuan ($7,193) per tonne and lead off by 0.3%, while the rest were up between 0.1% for aluminium and 1.1% for zinc.

Spot copper prices in Changjiang were down by 1.1% at 49,850-50,040 yuan per tonne and the LME/Shanghai copper arbitrage ratio was weaker at 7.91, compared with 7.94 on Monday – suggesting the LME is leading the stronger tone.

In other metals in China, the May iron ore contract on the Dalian Commodity Exchange was up by 1.8% at 472 yuan per tonne. On the SHFE, the June steel rebar contract was up by 1.3%.

In wider markets, spot Brent crude oil prices were stronger, up by 0.73% $62.32 per barrel – the recent low being $57.52 per barrel. The yield on US 10-year treasuries was weaker and has dropped below the 3% level to 2.9561%, while the German 10-year bund yield has dropped to 0.2980%. The weaker yields suggest investors expect the US Federal Reserve to slow the pace of interest rate rises.

The enthusiasm seen in Asian equity markets on Monday has faded – the CSI 300 was up 0.21% on Tuesday, but the other indices we follow were lower: the Nikkei (-2.39%), the ASX 200 (-1.01%), the Kospi (-0.82%) and the Hang Seng (-0.03%).

This follows strong performances in western markets on Monday; in the United States, the Dow Jones closed up by 1.13% at 25,826.43, while in Europe, the Euro Stoxx 50 was up by 1.32% at 3,214.99.

The dollar index is weakening, with weaker US Treasury yields no doubt weighing on sentiment – the index was recently quoted at 96.69. The other major currencies we follow are for the most part firmer: euro (1.1391), the Australian dollar (0.7382) and the yen (113.06), while sterling (1.2765) is consolidating.

The yuan has continued to rebound and was recently quoted at 6.8400 – this suggests confidence in the trade developments. The other emerging market currencies we follow are mixed, suggesting a degree of uncertainty, although the ringgit is stronger, probably reflecting the stronger oil price.

In data already out on Tuesday, Spanish unemployment fell for the first time since July in November, declining by 0.06% from a month earlier. Later, we have data on UK construction spending, the EU’s producer price index, there is an EU Economic and Financial Affairs Council meeting and data on US economic optimism. In addition, Bank of England governor Mark Carney, US Federal Open Market Committee (FOMC) member John Williams and UK Monetary Policy Committee member Gertan Vlieghe are speaking.

Despite the selling that capped Monday’s price spikes, the fact buying has been seen again this morning is encouraging and suggests sentiment has turned more positive. The JP Morgan global manufacturing purchasing managers’ index (PMI) held at 52.0 in November, suggesting the global economy is still expanding – albeit weakly – but this might now pick-up as the trade threat eases. We now wait to see if there is further follow-through buying on the back of the metals’ fundamentals. On balance, we expect a gradual switch to a ‘glass half full’ outlook, from the ‘glass half empty’ – one we have been in since June.

Gold prices are on the climb again and are a few dollars away from breaking above the October highs at $1,243.45 per oz. A weaker dollar and an escalation in US/Iran tensions, following Iran’s test-firing of a medium-range ballistic missile, are providing support. Silver is following gold’s lead, platinum remains weak, while at the other end of the spectrum, palladium prices remain strong having set fresh record highs on Monday.

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