METALS MORNING VIEW 13/09: Short-term buying returns on easing trade tensions, weaker dollar

Following a strong close in the previous session, the three-month base metals prices on the London Metal Exchange were mostly consolidating their recent gains during early trading on Thursday September 13.

Copper and lead were largely unchanged, while the rest of the complex has consolidated lower; aluminium (-0.5%) led the decline, closely followed by zinc (-0.4%), while nickel and tin were both down by 0.1%. As a result, the overall market configuration of the LME base metals was a touch weaker this morning, down by 0.2% on average.

Volume has been low with a total of 3,309 lots traded across the LME base metals complex as at 6.25am London time this morning. This compares with 3,942 lots and 4,867 lots traded at roughly the same time on Tuesday and Wednesday respectively.

In the precious metals space, some selling has emerged in gold and silver, with both metals’ prices down by 0.1%. The more industrial precious metals of platinum and palladium fared better, with prices up by 0.7% and 0.1% respectively.

With the United States keen to get China back to the negotiating table and the postponement of an additional $200 billion worth of tariffs on Chinese goods, a relief rally got underway across the base metals traded on the Shanghai Futures Exchange this morning.

Nickel was the outperformer of the SHFE base metals, with its most-traded November contract rising by 2.4% to 103,960 yuan ($15,136) per tonne, with the November copper and October zinc contracts close behind with gains of 2% and 1.7% respectively. The October lead contract secured an increase of 0.5%, while the November aluminium and January tin contracts bucked the general strength to drop by 0.5% and 0.2% respectively. On balance, the SHFE base metals achieved a solid 1% gain.

Spot copper prices in Changjiang were up by 1.5% at 48,550-48,690 yuan per tonne and the LME/Shanghai copper arbitrage ratio has dipped lower to 7.25.

In other metals in China, the January iron contract traded on the Dalian Commodity Exchange rose 2% to 499 yuan per tonne. On the SHFE, the December gold and silver contracts ticked up by 0.5% and 0.6% respectively.

In wider markets, the spot Brent crude oil price has retreated lower from its September high at $80.09 per barrel, it was down by 0.46% to trade at $79.31 per barrel this morning. In the bond market, the yield on US 10-year treasuries was up by 0.16% to 2.9663, while the German 10-year bund yield was steady at 0.4000%.

Wednesday’s positive close for equities in the US and Europe has boded well for their Asian counterparts this morning. The Dow Jones Index closed up by 0.11% on Wednesday, while the S&P 500 Index managed to eke out a mild gain of 0.04%. In Europe, the Euro Stoxx 50 Index ended yesterday up by 0.45%, while the FTSE 100 Index registered a gain of 0.55%.

As such, risk-on sentiment has filtered through to the Asian indices this morning; the Nikkei 225 gained 0.97%, Topix rose by 1.1%, the Hang Seng Index jumped 1.54% and some bargain buying returned to China’s CSI 300 Index, which ticked up by 0.2%. The ASX 200 Index was an exception to the stronger showing in Asia, with a decline of 0.76% this morning.

A weaker dollar is a tailwind for the commodity sector, with both base and precious metals benefitting from this weakness. The dollar index was trading below 95.00 this morning and based on its daily technical configuration, further downside could emerge if the potentially bearish Head and Shoulder Formation is triggered.

It is a busy day on the economic front, with Japan core machinery orders up by a solid 11%, but the country’s producer price index (PPI) was below expectations at 3%. Data from the European Union on Thursday will focus on consumer prices from Germany and France, while the Bank of England (BoE) will report on its official bank rate, asset purchase facility and provide a summary on its monetary policy. Brexit remains the biggest factor that will continue to undermine the BoE’s ability to normalize rates. Later on Thursday, we have consumer prices and unemployment claims from the US.

The US’ latest invitation for China to resume trade talks has provided much-needed relief for base and precious metals. With so much negativity generated by the escalating trade tensions between the two countries, the move was a welcomed sign in the market. This again highlights how sensitive the metals remain to macro risk events, which seemingly continue to trump fundamentals. The base metals complex has so far managed to keep a hold of the gains made on Wednesday, but the big question that remains is if they can sustain the rebound momentum or whether this is just another short-term relief rally that will soon fizzle out?

The same view can be applied to the precious metals. As the dollar index retreats lower, gold and silver prices have managed to bounce higher. We said before that at these low prices, investors may well turn to these metals as a relatively cheap haven asset at a time when global market confidence remains fragile.

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