METALS MORNING VIEW 05/09: Metals consolidate, market focus shifts to emerging markets

Three-month base metals prices on the London Metal Exchange were for the most part little changed this morning, Wednesday September 5, with consolidation mode setting in after Tuesday’s losses.

The main exceptions were nickel, which was down by 0.4%, and lead, which was up by 0.4%. Aluminium was up by 0.2%, while the rest were either side of unchanged. Copper was up by 0.1% at $5,846 per tonne.

Volume across the complex has been average with 5,832 lots traded as at 06.54am London time.

Gold, platinum and palladium prices were up by 0.2%, with spot gold prices at $1,193.58 per tonne, while silver prices were down by 0.1% at $14.11 per oz. This follows a day of losses for gold, silver and platinum on Tuesday that saw prices fall by an average of 1.5%, led by a 2.5% drop in silver prices, while palladium prices closed up by 0.1%.

In China, the base metals prices on the Shanghai Futures Exchange were for the most part lower – the exception once again being tin, the January contract price of which was up by 0.5%. The others were weaker, led by a 2.2% decline in October zinc and 2.1% fall in November nickel. Copper, aluminium and lead were down by 1.4%, 0.9% and 1.7% respectively, with the most actively traded October copper contract recently quoted at 47,320 yuan ($6,921) per tonne.

Spot copper prices in Changjiang were down by 1.2% at 47,530-47,730 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 8.09 – the rising ratio suggesting LME copper is leading the weakness compared with SHFE copper prices.

In other metals in China, the January iron ore contract on the Dalian Commodity Exchange was up by 0.1% at 485 yuan per tonne. On the SHFE, the January steel rebar contract was down by 0.8%, while the December gold and silver contracts were down by 0.3% and 2.0% respectively.

In wider markets, spot Brent crude oil prices have eased and were recently quoted at $77.58 per barrel, down by 0.35% this morning. The yield on US 10-year treasuries was firmer at 2.8954%, as was the German 10-year bund yield at 0.3480%.

Asian equity markets were weaker on Wednesday: Nikkei (-0.41%), the ASX 200 (-1.00%), Kospi (-0.99%), the Hang Seng (-2.23%) and the CSI 300 (-1.40%). This follows a weaker performance in western markets on Tuesday; in the United States, the Dow Jones closed down by 0.05% at 25,952.48, while in Europe the Euro Stoxx 50 closed down by 1.05% at 3,359.36.

The dollar index is rising again having rebounded on August 31 and was recently quoted at 95.50. 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. Prices then corrected to test its breakout level and are now rebounding again. We wait to see if the index can climb back above that breakout level again.

With the dollar stronger, the other major currencies we follow are weaker: sterling (1.2842), the euro (1.1573), the yen (111.52) and the Australian dollar (0.7175).

The yuan is slightly weaker and was recently quoted at 6.8378, but most of the emerging market currencies we follow are weakening and as a barometer that suggests investors are getting increasingly nervous.

The economic agenda is busy today but is mainly focused on services purchasing managers’ index (PMI) data out across Europe. Data out already shows China’s Caixin services PMI drop to 51.5 from 52.8. In addition, there is data on the European Union’s retail sales and the US trade balance. Data out overnight showed US total vehicle sales ease to an annualized rate of 16.7 million units, down from 16.8 million units previously.

The weakness in the metals continues, as well as sentiment remaining weak on the trade disputes, investors are now getting nervous about the developing situations in a number of emerging markets. Collectively these are strong headwinds, but with metals prices already low and with the funds short, you have to wonder how much further the sell-off can go. These are dangerous waters as US President Donald Trump could push his “America First” policy too far and trigger a financial crisis, while equally he could announce that a trade agreement is in the making and send everything into reverse.

Overall, 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.

The precious metals are diverging; gold and platinum are consolidating but have managed to hold above recent lows, palladium prices are holding on to strong gains, while silver prices have fallen to levels last seen in February 2016. At these price levels on gold, investors may well see gold as a relatively cheap haven asset, should they need one.

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