METALS MORNING VIEW 15/11: Base metals undermined by China’s slowing growth
Base metals traded on the London Metal Exchange extended lower on the morning of Wednesday November 15, falling 0.5%, with nickel (-1.0%) and zinc (-1.0%) the weakest performers and tin (+0.2) the most resilient.
The general decline reflects weaker investor sentiment after Chinese activity data for October disappointed and credit growth slowed at a stronger pace than expected. This has resulted in a yield rally and an equity sell-off, which has had a knock-on effect on base metals.
Trading volumes have been healthy, with 10,148 lots traded as of 07:08 GMT.
Precious metals are slightly stronger today, rising 0.2% on average so far. Platinum (+0.5%) is the most bid while palladium (-0.1%) is the only precious metal to fall. This is due to the rising risk aversion where investors tend to favor safe havens at the expense of riskier assets.
While palladium is a precious metals, its safe-haven characteristics are weaker than those of the other precious metals - it has a stronger correlation with risk assets, including base metals. Apart from softer macro data out of China, rising geopolitical tensions (especially in Saudi Arabia) and investor disappointment over the US tax plan due have contributed to the drop in global risk appetite.
On the Shanghai Futures Exchange today, the base metals are under heavy downward pressure, falling 2.3% on average. Nickel (-5.8%) is the weakest while aluminium (-0.4%) and tin (-0.4%) are the most resilient.
Spot copper prices in Changjiang are down 2.1% at 57,210-52,910 yuan per tonne and the LME/Shanghai copper arb ratio stands at 7.86, little changed from yesterday.
Equities are weaker this morning. The Shanghai composite index is down 0.79% at 3,402, Euro Stoxx 50 futures are down 0.59% at 3,531 and Dow Jones futures are down 0.30% at 23,305. This follows a weaker session yesterday, reflecting stronger risk aversion, despite reassuring rhetoric from major central banks.
Yesterday, the MSCI world equity index closed down 0.19% at 496. The VIX, our preferred fear indicator, rose 0.78% to 11.59, also up from an extreme low of 9.14 on November 3. In line with our expectations, the deep complacency across the markets was untenable; investors are now pricing risk more accurately.
The dollar index is down -0.14% at 93.69 this morning, having peaked at 95.15 on October 27. Its weakness has been partly driven by investor relief over the nomination of Federal Reserve governor Jerome Powel’ as the next chair of the US central bank, underpinning continuity in US monetary policy. While the dollar weakness has been supportive of precious metals, the negative correlation between the dollar and base metals prices has broken down this month.
The economic calendar is particularly interesting today. After the release of a stronger-than-expected industrial production in Japan, investors will pay close attention to US CPI and retail sales, which could have implications for monetary policy. Stronger-than-expected inflation dynamics could revive the reflation trade, pushing base metals higher and precious metals lower.
For base metals, we would not be surprised by further weakness in the immediate term - investors may continue to take profit due to weaker sentiment toward China following softer macro data releases.
But we do not think investors will become aggressively bearish despite the strong year-to-date gains; rather, we think the market will continue to buy on the dips. The latest LME COT data corroborates this view - it shows that last week’s broad-based weakness across the base metals was mostly the result of long liquidation rather than short accumulation.
For precious metals, we expect further upside in the immediate term, supported by a friendlier macro backdrop, namely a weaker dollar and lower US real rates.
With the market repricing risk more accurately, investors may attempt to boost their risk-unfriendly positions to protect their portfolios against equity declines so the precious metals complex could attract some bids. The recent market action corroborates this.
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