METALS MORNING VIEW 15/01: Monday’s metal price weakness attracts dip-buying after China stimulates its economy

Three-month base metals prices on the London Metal Exchange were firmer across the board this morning, Tuesday January 15, with prices up by an average of 0.3%.

Bargain hunting stepped in to take advantage of Monday’s price weakness and markets received a confidence boost after China cut some taxes.

The three-month copper price on the LME was up by 0.4% at $5,934 per tonne, nickel and lead prices were also up by 0.4%, while zinc and tin prices were up by 0.3% and the aluminium price lagged behind with a 0.1% gain.

Volume across the complex has been average with 5,591 lots traded as at 6.45am London time.

Precious metals prices were little changed this morning, with gold off by 0.1% at $1,290.45 per oz, silver was unchanged, while the platinum group metals (PGMs) were up by 0.2%.

In China, base metals prices on the Shanghai Futures Exchange were mixed; the February copper, aluminium and May nickel contracts were little changed, while February lead, zinc and May tin were up by around 0.5%. The February copper contract was recently quoted at 46,970 yuan ($6,941) per tonne.

Meanwhile, spot copper prices in Changjiang were weaker by 0.4% at 46,880-47,020 yuan per tonne and the LME/Shanghai copper arbitrage ratio has eased to 7.91 this morning from 7.93 on Monday.

In other metals in China, the May iron ore contract on the Dalian Commodity Exchange was up by 0.7% at 512 yuan per tonne. On the SHFE, the May steel rebar contract was down by 0.6%.

In wider markets, the spot Brent crude oil price was firmer by 0.74% at $59.79 per barrel – so prices are consolidating after the strong rally to $62.51 per barrel on January 11, from $50.27 per barrel on December 26, 2018.

The yield on US 10-year treasuries has strengthened again, implying less demand for treasuries, it was recently quoted at 2.7155%. The yields on the US 2-year and 5-year treasuries remain inverted, but the spread has narrowed, they were recently quoted at 2.5429% and 2.5354% respectively. The German 10-year bund yield was unchanged at 0.2300%.

Asian equity markets were firmer on Tuesday, helped by China’s stimulus efforts: Nikkei (0.96%), Hang Seng (1.80%), the CSI 300 (1.96%), Kospi (1.58%) and the Australian ASX 200 (0.71%).

This morning’s performance in Asia follows weakness in western markets on Monday; in the United States, the Dow Jones Industrial Average closed off by 0.36% at 23,909.84, while in Europe, the Euro Stoxx 50 was down by 0.48% at 3,056.18.

The dollar index is consolidating recent gains and was recently quoted at 95.54 – the recent low being 95.03 on January 10. The other major currencies we follow are mixed: the Australian dollar (0.7220) is strengthening, the yen (108.64) is weaker, the euro (1.1482) is consolidating, while sterling is firmer (1.2900) – this despite today’s all-important vote in UK parliament on Prime Minister Theresa May’s plan for the UK’s exit from the European Union (in the process known as Brexit).

The yuan is consolidating recent gains but remains near multi-month highs and was recently quoted at 6.7517. We view the overall strengthening in the yuan as a sign of growing confidence. The other emerging market currencies we follow, with the exception of the rupee that continues to weaken, are if anything showing strength, which is another encouraging sign if you are in the camp that sees the glass as “half full” as opposed to “half empty”.

Economic data already out on Tuesday showed Japanese machine tool orders fell for the second month running, this after 22 months of growth. With recent data also highlighting weakness in Europe, the global economy badly needs help if it is to avoid moving into recession. Data out later includes French consumer price index (CPI), EU trade balance as well as US releases that include producer price index (PPI), Empire State manufacturing and economic optimism.

In addition to today’s parliamentary vote in the UK on whether to accept the government’s Brexit deal, European Central Bank president Mario Draghi and US Federal Open Market Committee member Esther George are speaking.

Poor Chinese trade data on Monday temporarily pulled the rug from under most of the base metals’ prices, but the dips ran into buying. While the larger LME contracts are still heavily influenced by what is happening in the broader markets, the smaller markets seem to be starting to reflect their fundamentals more, led by tin and followed by nickel.

Overall the supply fundamentals across most of the base metals continue to tighten, or remain tight, but the outlook for demand is where the weakness is. The more the global economy (excluding the US) slips toward recession, the less impact tightening supply fundamentals will have on prices, but should the demand outlook get a meaningful boost then we expect the market will soon start to refocus on supply side factors. Given the deteriorating global economic data the pressure to find a new trade deal is growing more urgent.

Gold and silver are consolidating near recent highs and there are still enough uncertainties and risks around to provide some haven demand, and prices should also benefit as treasuries yields and the dollar are weaker than of late. Platinum prices continue to struggle to hold on to gains, which highlights how out of favor it is, while palladium is consolidating recent price gains – underpinned by strong fundamentals.

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