METALS MORNING VIEW 18/01: Metals prices strengthen while optimism on US-China trade deal grows

Growing optimism over the outlook for a trade agreement between the United States and China has led to a stronger tone across risk markets, including those for metals.

Three-month base metals prices on the London Metal Exchange were for the most part firmer this morning, Friday January 18. The exceptions were tin and lead, with the former down by 0.1% and the latter unchanged. The rest were up by between 0.3% and 0.6%, with copper up by 0.5% at $6,023 per tonne.

Indeed copper prices have gapped higher, which could be a break-away move – we did point out recently that copper prices were trading sideways in a narrow range like a coiled spring waiting for a breakout, so maybe this is it.

Volume across the LME base metals complex was average with 5,788 lots traded as at 6.37am London time.

Precious metals prices were split into two camps with gold and silver prices consolidating in relatively high ground – the yellow metal was recently at $1,292.02 per oz. The platinum group metals were firmer, albeit polarized, with palladium up by 1.7% at $1,420.70 per oz and platinum up by 1% at $815 per oz.

In China, base metals prices on the Shanghai Futures Exchange were up across the board with gains ranged from 0.4% for the March aluminium contract and 2.6% for the March zinc contract. The most-traded March copper contract was up by 1% at 47,840 yuan ($7,064) per tonne.

Spot copper prices in Changjiang were up by 0.6% at 47,630-47,780 yuan per tonne and the LME/Shanghai copper arbitrage ratio was little changed at 7.94.

The ferrous-orientated metals in China were up strongly this morning; the May iron ore contract on the Dalian Commodity Exchange was up by 3.3% at 528.50 yuan per tonne. On the SHFE, the May steel rebar contract was up by 1.9%.

In wider markets, the spot Brent crude oil price was stronger by 0.8% at $61.63 per barrel – so prices are attempting to push higher again – the recent high being $62.51 per barrel on January 11.

The yield on US 10-year treasuries has strengthened, indicating less haven demand, it was recently quoted at 2.7517%. The yields on the US 2-year and 5-year treasuries are in contango again, they were recently quoted at 2.5699% and 2.5758% respectively. The German 10-year bund yield was also firmer at 0.2500%.

Asian equity markets were stronger across the board on Friday: Nikkei (+1.29%), Hang Seng (+1.15%), the CSI 300 (+1.82%), the ASX 200 (+0.50%) and Kospi (+0.82%).

This morning’s performance in Asia follows mixed trading in western markets on Thursday; in the United States, the Dow Jones Industrial Average closed up by 0.67% at 24,370.10, while in Europe, the Euro Stoxx 50 was down by 0.26% at 3,069.35.

The dollar index, at 96.08, is consolidating recent rebound gains, while the firmer yields and non-inverted yield curve may be providing confidence. The euro (1.1396), the Australian dollar (0.7191) are also consolidating, the yen (109.42) is weaker, while sterling (1.2968) is consolidating recent gains.

The yuan is consolidating after its recent show of strength, it was recently quoted at 6.7679. The other emerging market currencies we follow are either consolidating recent strength, or showing slight weakness.

Economic data already out on Friday shows Japan’s revised industrial production falling 1% – previously it had been down 1.1%. Data out later includes the EU current account and UK retail sales, with US data scheduled including industrial production, capacity utilization and preliminary University of Michigan consumer sentiment and inflation expectations. In addition, US Federal Open Market Committee member John Williams is speaking and there is a G20 meeting taking place in Japan.

While tin and nickel prices have led on the upside in recent weeks, copper’s opening gap on Friday and a stronger zinc price show more concerted strength, while lead and aluminium prices remain rangebound – albeit with some upside momentum. Stronger iron ore and steel prices in China, combined with firmer oil prices add to the feel of concerted commodity strength.

We said on Thursday that bases seem to be in place so that should make for a good launching pad should sentiment improve – that seems to be unfolding, but like previous upside initiatives it may well be fragile. We should be braced for more volatile trading in the run up to the Lunar New Year holidays as liquidity dries up. The holiday period begins on February 4.

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 and more risk-on may prove too strong a headwind. Platinum prices are getting some lift on the back of the stronger industrial metals, while palladium prices are riding their strong fundamental wave.

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