METALS MORNING VIEW 16/08: Dip-buying emerges on China-US trade talks

News that trade talks between China and the United States will take place later this month has sparked risk-on sentiment in the London Metal Exchange base metals complex this morning.

Also, the risk of a ‘Lira contagion’ has subsided considerably after Turkish central bank intervened. Further support arrived in the form of $15 billion investment from Qatar into the Turkish economy, shoring up stability and causing risk sentiment to improve.

Following Wednesday’s vicious sell-off amid rising concerns over the health of the Chinese economy, the LME’s three-month base metal prices have rebounded strongly from their 2018 lows this morning with an average gain of 1.9% across the complex.

Zinc led the gains with a solid increase of 3.2%, followed by a 2.5% rise in sister-metal lead. The rest of the base metals were stronger across the board: nickel (+2%), tin (+1.5%), aluminium (+1.2%) and copper (+0.9%).

A total of 14,984 lots had been traded across the LME base metals complex as at 6.02am London time, suggesting a flurry of market activity, with this morning’s volume already much higher than the 5,365 lots traded at roughly the same time on Tuesday.

Gains were also seen in the more industrial precious metals; platinum was up by 0.9% at $773.60 per oz, while palladium surged 1.7% to $857.70 per oz. This again reflects investors’ preference toward palladium over platinum’s less bullish fundamentals, with the gap between the two metals’ prices at around $84 per oz.

In other precious metals, the price of gold dipped as low as $1,160 per oz early on Thursday morning, near the yellow metal’s January 2018 low, while silver edged to a fresh 2018 low of $14.33 per oz – a level last seen in January 2016. But both metals are now rebounding from these earlier losses, with gold down just 0.1% and silver up by 0.4%. Both metals’ prices continue to inch back toward positive territory while the dollar index retreats from this year’s peak of 96.99 to 96.42 at the time of writing.

Still, the strong dollar and fragile market confidence continues to negatively affect base metals prices on the Shanghai Futures Exchange, with prices down across the board with an average loss of 2.3%. Zinc led the decline with its most-traded October zinc contract declining by 4.1%, while the rest followed lower: lead (-2.9%), copper (-2.5%), nickel (-2.1%), tin (-1.2%) and aluminium (-1.1%). The most-traded October contract recently traded at 47,640 yuan ($6,886) per tonne.

In other metals in China, precious metals on the SHFE similarly struggled this morning, with the December gold and silvers down by 1.4% and 3% respectively.
The October steel rebar contract on the SHFE was down by 0.3% at 4,141 yuan per tonne, retreating lower amid rising concerns that the Chinese economy has started to cool down. The January iron ore contract traded on the Dalian Commodity Exchange was down 2% to 494 yuan per tonne.

Spot Brent crude oil prices found support near the psychological support level at $70 per barrel and has rebounded higher this morning to $71.19 per barrel at the time of writing. In the bond market, US 10-year treasuries were higher this morning, up 0.44% to 2.8750%. In Europe, the German 10-year bund yield was recently trading at 0.3200%, up an astonishing 5.9% so far after worries over Turkey’s currency crisis have eased and the resumption of trade talks between the US and China has given market participants’ appetite for risk a boost.

In equities, the Dow Jones Industrial Average dropped 137 points or 0.54% on Wednesday, while the S&P 500 Index also edged lower – down 0.76% to trade near 2,818. Similarly, European equities failed to register any gains on Wednesday with the Euro Stoxx 50 down 1.48% to around 3,359.

That said, pre-market trading activity in US and European equities this morning have turned positive alongside a mixed picture in Asian equity markets: risk-on sentiment has supported the Nikkei 225 and the CSI 300 to record a slight gains of 0.01% and 0.05% respectively. Other indices in Asia struggled however, with the Topix down 0.61%, the Hang Seng weaker by 0.59% and the ASX 200 down by 0.01%.

In the currency market, the dollar index has retreated from its 2018 high at 96.99 and currently trades near 96.50. This has provided relief in both emerging and commodity currencies this morning, while the Turkish Lira has garnered more support as it strengthens towards 5.78 – a stark contrast to its performance in the past few days when it slid toward 7.00 against the dollar.

Data out on Thursday includes UK retail sales, the European Union’s trade balance and US releases that include building permits, housing starts and the Philadelphia Fed manufacturing index.

Even though the LME base metals prices have reacted higher this morning, it is far too early to confirm that the bearish rout is over. Previous talks between the US and China took place in May but US President Donald Trump backed out after what looked like a potential trade deal had gone sour. Expectations are that the two sides may have better chance of reaching a deal this time around after the US and EU reached a conciliatory deal during their July meeting.

The dollar index continues to dictate precious metals price action, with gold and silver under intense downside pressure that has yet to subside since the June high at $1,309.50 per oz and $17.32 per oz respectively. Still, demand for haven assets should increase in due course amid the simmering geopolitical tensions in Turkey, Iran and Russia. With the precious metals and platinum group metals overly bearish in net speculative funds positioning and exchange-traded fund investment, a contrarian trade now looks more attractive.