METALS MORNING VIEW 06/02: Base metals prices hit by negative spillover from equity sell-off

Base metals traded on the London Metal Exchange are all under downward pressure this morning, Tuesday February 6, posting an average loss of 1%. Nickel (-2.1%) is the weakest, while aluminium (-0.7%) is proving to be the most resilient.

Volume has been strong with 14,903 lots traded as of 06.05 am London time.

The downward pressure across the complex essentially reflects a negative spillover effect from the equity rout.

After a surge in risk aversion on Monday, with the CBOE Volatility Index (up by 118% in a single day) notching its biggest one-day jump, equities in Asia are experiencing acute weakness today – the Shanghai Composite Index, weaker by approximately 3%, is down the most since June 2016 and the Nikkei 225, down by around 5%, is falling at its quickest pace since November 2016.

That said, the base metals seem to be more resilient than other risk asset classes, principally due to their lower sensitivity (versus equities) to the rise in yields.

On the Shanghai Futures Exchange today, the base metals complex is also experiencing downward pressure (albeit softer), showing an average loss of 0.4%. Similar to LME base metals, nickel (-1%) is the worst performer. In contrast, tin (+0.5%) is the strongest, being the only base metal in positive territory. Copper prices in Changjiang are down by 0.2% at 52,480-52,740 yuan ($8,338-8,379) per tonne and the LME/Shanghai copper arb ratio stands at 7.47, down from 7.49 on Monday.

Turning to precious metals, the complex enjoys only marginal upward pressure, posting an average gain of 0.4%. This comes after a mixed performance on Monday when silver rose by 1.1% and palladium sold by off 2.5%. While the lack of buying pressure in favor of precious metals was driven by an intensifying rise in US real rates until late-December, this is now the result of a stronger dollar, with the currency up for a second straight day. The dollar is bid on expectations of a faster tightening from the US Federal Reserve following the recent signs of stronger inflation dynamics – e.g. US average hourly gains for January (+2.9% year on year) rose the most since June 2009.

On the macro front, the economic calendar is fairly light, with the January retail purchasing managers’ index (PMI) in Europe as well as the December trade balance and the February IBD/TIPP economic optimism from the United States. But given the magnitude of the sell-off in equities and its resulting tightening effect on financial conditions, investors may scrutinize any statement from central banks aiming at calming market turbulence.

Base metals may continue to witness further profit-taking, precisely because of deteriorating macro forces (stronger dollar, weaker risk sentiment). But unless the current sell-off in equities is prolonged and thus has an impact on the real economy, the downward pressure across the base metals should prove contained, especially considering that micro dynamics for most base metals show signs of improving.

Precious metals may enjoy some strength in the immediate term because the macro backdrop could become increasingly friendly for the complex. While the dollar is set to appreciate only modestly, US real rates could weaken more substantially, resulting in some speculative buying. Palladium remains the most vulnerable among its complex, due to its high correlation with risk assets.

Metal Bulletin publishes live futures reports throughout the day, covering major metals exchanges news and prices.

What to read next
Brazil's aluminium industry is further enhancing its sustainability by boosting renewable energy use and recycling, while mitigating risk from high-carbon imports
German copper producer Aurubis is among the least likely to consider reducing capacity despite record low treatment charges (TCs), according to its chief executive officer
European copper demand, particularly for wire rod, remains strong and seems to be outpacing broader macro-economic growth in the region, the chief executive officer of German producer Aurubis has said.
The process to place the smaller and less efficient of the two processing plants at Los Bronces on care and maintenance is expected to be completed by mid-2024 and comes as the company pushes value over volume, the chief executive officer of Anglo American Chile said
The near-term prospects for Chinese copper smelting capacity amid near-zero treatment charges (TCs) will, to a certain extent, depend on plants’ exposure to spot TCs, the chief executive officer of Rio Tinto’s copper division said on Tuesday, April 16
It will be very difficult for many Chinese copper smelters to compete with treatment and refining charges (TC/RCs) at record lows, according to the chairman of Chile’s state-owned copper producer Codelco