METALS MORNING VIEW 05/12: Metal prices consolidate while broader markets show weakness

Three-month base metals prices on the London Metal Exchange were mixed in the morning of Wednesday December 5, with zinc and copper up by 0.4% and 0.3% respectively, while the rest of the complex was little changed or weaker.

This follows a volatile day in markets on Tuesday, when the base metals were mixed, but when US equity markets were hit hard by nervousness over the flattening of the yield curve, which has inverted in some places.

Volume across the complex has been above average with 5,947 lots traded as at 7:20am London time.

The precious metals were weaker on Wednesday. Gold fell by 0.3% to $1,234.50 per oz recently while palladium was 0.5% lower. Silver was off 0.7%.

In China this morning, January contract prices for base metals on the Shanghai Futures Exchange were mixed, with copper off by 1.2% at 49,330 yuan ($7,186) per tonne, nickel off by 0.8% and aluminium off by 0.5%, while the rest were up between 0.2% for tin and 0.5% for lead.

Spot copper prices in Changjiang were down by 0.9% at 49,350-49,630 yuan per tonne and the LME/Shanghai copper arbitrage ratio was firmer at 7.97, compared with 7.91 on Tuesday, this suggests Chinese copper prices have not pulled back to the same extent as LME copper prices.

In other metals in China, the May iron ore contract on the Dalian Commodity Exchange was up by 2.5% at 477.50 yuan per tonne. On the SHFE, the May steel rebar contract was up by 3.9%. The fact these basic building block metals and ore prices are strengthening bodes well and suggests yesterday’s weakness was more to do with the yield curve rather than President Donald Trump’s tweets on trade.

In wider markets, spot Brent crude oil prices were easier, off by 0.2% $61.10 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 2.9109% and the yield on the US 2-year and 5-year treasuries were at 2.7988% and 2.7870% respectively. The German 10-year bund yield has dropped to 0.2600%. The weaker yields suggest investors expect the US Federal Reserve to slow the pace of interest rate rises, but the inverted yield curve is seen as a warning that an economic slowdown may be on the way.

Asian equity markets on Tuesday have followed the US markets lower: the Nikkei (-0.53%), the CSI 300 (-0.48%), the ASX 200 (-0.78%), the Kospi (-0.62%) and the Hang Seng (-1.59%).

This follows extremely weak performances in US markets on Tuesday, where the Dow Jones closed down by 3.1% at 25,027.07, while in Europe, the Euro Stoxx 50 was down by 0.8% at 3,189.25.

The dollar index spiked lower to 96.37 on Tuesday, but closed at 96.95 and was recently quoted at 97.11 – the stronger dollar and weaker US Treasury yields do not go hand-in-hand, suggesting the dollar was up for safe-haven reasons, and yesterday’s stronger yen (113.02) would support that view. The euro is consolidating around 1.3333, while the Australian dollar (0.7297) and sterling (1.2710) are weaker.

The rebound in the yuan has halted for now with the currency recently quoted at 6.8661 – this suggests confidence in the trade developments. The other emerging market currencies we follow are for the most part on a back footing, suggesting risk-off.

In data already out on Wednesday, China’s Caixin Services purchasing managers index (PMI) rebounded to 53.8 from 50.8 previously, later there is data on Spanish, Italian, French, German, European Union and United Kingdom services PMI, EU retail sales and the US beige book. In addition, European Central Bank Mario Draghi is speaking.

Copper prices have been the hardest hit by in recent days. Having spiked up to $6,352 per tonne on Monday on the trade news that came out of the G20 meeting, the selling has returned and prices are back in mid-ground. The other metals have done better at holding on to their gains following the trade developments, which suggests they may be being more reflective of what the trade deal means. It may be that copper has been the hardest hit as Comex copper was open yesterday evening when the Dow Jones was under pressure. Given the trade truce and the tightening fundamentals, we still expect a gradual switch to a “glass half full” outlook, from the “glass half empty” one we have held since June.

Gold prices have pulled back from Tuesday’s highs but the uptrend seems intact. With the US treasury yields falling we expect the dollar to head lower and that in turn is expected to support a firmer gold price.

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