METALS MORNING VIEW 16/01: Metals prices robust following Chinese stimulus

Three-month base metals prices on the London Metal Exchange were firmer across the board this morning, Wednesday January 16, with prices up by an average of 0.8%. This after further temporary stimulus measures from China gave sentiment a boost.

Zinc led the advance with a 1.7% increase to $2,497 per tonne, followed by copper that was up by 1.1% at $5,973 per tonne. Tin was the laggard with a 0.1% gain, but it has been the most energetic on the upside for the three-month LME base metals, with prices up by 14% since late-November last year.

Volume across the LME base metals complex has been high with 10,153 lots traded as at 6.55am London time – across-the-board gains and high volume bode well.

Precious metals prices were also firmer this morning – led by a 0.6% in platinum, while the rest were up between 0.1% and 0.2%, with gold recently quoted at $1,291.50 per oz.

In China, base metals prices on the Shanghai Futures Exchange were also up across the board with gains averaging 1.2% – led by a 2.4% rise in the February zinc contract, with the May nickel contract up by 1.7% and the February copper contract up by 1.1% at 47,390 yuan ($7,006) per tonne.

Meanwhile, spot copper prices in Changjiang were up by 0.5% at 47,130-47,260 yuan per tonne and the LME/Shanghai copper arbitrage ratio has firmed to 7.94 this morning from 7.91 on Tuesday.

In other metals in China, the May iron ore contract on the Dalian Commodity Exchange was up by 0.5% at 511 yuan per tonne. On the SHFE, the May steel rebar contract was 0.1% firmer.

In wider markets, the spot Brent crude oil price was firmer by 0.49% at $60.90 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/havens, it was recently quoted at 2.7179%. The yields on the US 2-year and 5-year treasuries remain inverted, but the spread has narrowed further, they were recently quoted at 2.5398% and 2.5358% respectively. The German 10-year bund yield was weaker at 0.2100%.

Asian equity markets were for the most part firmer on Wednesday, the exception was the Nikkei (-0.55%), while the rest were stronger: Hang Seng (0.15%), the CSI 300 (0.02%), Kospi (0.43%) and the Australian ASX 200 (0.35%).

This morning’s performance in Asia follows strength in western markets on Tuesday; in the United States, the Dow Jones Industrial Average closed up by 0.65% at 24,065.59, while in Europe, the Euro Stoxx 50 was up by 0.42% at 3,068.05.

The dollar index, at 96.02 recently, is rebounding, which makes the rebound in metal prices look even more robust. Despite the stronger dollar index, sterling (1.2876) has held up surprisingly well given the defeat of the government’s plan for the United Kingdom’s exit from the European Union (in the process known as Brexit) in parliament on Tuesday and a vote of no confidence later today. The Australian dollar (0.7207) is also holding up relatively well, but that may be due to firmer commodity prices. The yen (108.61) is consolidating, while the euro (1.1399) is the currency showing the bulk of the weakness against the dollar index

The yuan has taken a step back from its stronger tone and at 6.7579 seems to be reflecting the increased liquidity following the government’s record injection of 570 billion yuan into the banking system. The fact the government has needed to inject so much, highlights the weak state of the economy, as indeed recent economic data has been showing.

Despite the stronger dollar and slightly weaker yuan, 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.

Economic data already out on Wednesday showed Japanese tertiary industrial activity slip 0.3%, after a previous gain of 2.2%, but the data series is volatile. In addition, Germany’s consumer price index (CPI) climbed 0.1%, unchanged from the previous reading. Later there is a host of UK price data including CPI, producer prices, retail prices and house prices, while US data includes import prices, crude oil inventories, housing market index and the Beige Book. In addition, Bank of England’s governor Mark Carney is speaking at 9.15am London time.

With LME and SHFE base metals prices firmer despite the stronger dollar, it suggests a broad-based pick-up in sentiment, although tin and nickel prices have been showing some strength for some time – driven by tightening fundamentals. Even though we see the fundamentals as being supportive, the continuing uncertainty over a US/China trade deal means the market is unlikely to have the confidence to get too bullish.

That said, with consumers likely to be destocked, given the long drawn out price weakness, any sustained run-up in prices may well start to prompt restocking that could then become self-fulfilling for a while. But, it may be wishful thinking to expect that; the more normal trend is for attempted rallies to be capped as short-covering peters out and buyers do not feel the need to chase prices higher.

Gold and silver are consolidating near recent highs and there are still enough uncertainties and risks around to provide some haven demand, but the stronger dollar may prove too strong a headwind. Platinum prices continue to struggle, which highlights how out of favor it is, while palladium is consolidating recent price gains – underpinned by strong fundamentals.

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