METALS MORNING VIEW 19/12: Base metals witness some profit-taking in spite of ‘Goldilocks’ conditions

Base metals traded on the London Metal Exchange are edging lower this morning, Tuesday December 19, posting a small drop of 0.5%, with nickel (-1.1%) the weakest and tin (-0.1%) the most resilient.

Trading volumes have been weak with just 3,981 lots traded as of 05:11 GMT. This bout of profit-taking comes in spite of a risk-on mood across the Chinese financial markets (Shanghai Composite Index: +0.7%) following an overall positive session yesterday when the LMEX posted a gain of 0.4%.

Precious metals are marginally stronger, with the complex showing an average gain of 0.2%, mainly driven by platinum (+1.9%). This follows an average gain of 0.6% on Monday. Yet, the recent rebound in momentum is hard to justify considering that the macro backdrop remains unfriendly toward the precious metals complex, principally because investors are clearly in a risk-on mood and overweighting risk assets in their portfolios ahead of the imminent tax reform in the United States.

On the Shanghai Futures Exchange (SHFE) today, the base metals complex is ticking higher, up an average 0.4%. Nickel (+1.6%) and tin (+1.0%) are the outperformers while zinc is the poorest performer. It seems that the surge in SHFE tin outflows has elicited some tightness in the market, pushing its price higher. Spot copper prices in Changjiang are down 0.2% at 53,210-53,450 yuan per tonne and the LME/Shanghai copper arb ratio stands at 7.76, slightly down from 7.95 yesterday.

Equities enjoyed robust gains this morning. In Asia, risk is “on”, with the CSI 300 (+1%) and the Hang Seng (+0.9%) up. The exception is Japan’s Nikkei 225, which is down 0.1% as investors take some profits after strong gains made yesterday. US equity futures are just about flat.

The dollar index – at 93.64 this morning - is under slight downward pressure (-0.06%) today after falling 0.25% on Monday, as investors seem to interpret the imminent US tax reform as dollar-negative. This follows three weeks of consecutive gains. The dollar weakness seems to be exerting some upward pressure on the metals complex.

The economic calendar is fairly quiet today. While investors will continue to watch closely the progress made on the imminent US tax reform bill, they will also pay attention to the release of the Ifo business climate survey in Germany, as well as building permit, current account, and housing start numbers in the US. They will also be keeping an eye on the speech by Federal Reserve Bank of Minneapolis President Neel Kashkari, who dissented for a second time on the Fed rate increase delivered earlier in December.

Base metals are likely to enjoy further upward pressure thanks to overall positive sentiment in China and growing tax cut expectations in the US, which initially pushed equities higher and exerted subsequent upward pressure on other cyclical assets, such as base metals. Financial players seem to have already rebuilt some long positioning across the complex, judging by the increase in open interest. This suggests to us that base metals should enjoy a strong finish to 2017 in spite of low trading volumes.

Precious metals may continue to rebound in the immediate term thanks to the ongoing weakness in the dollar. Also, a possible “buy the rumour, sell the news” kind of move in equities could occur once the US tax reform is voted, which would in turn elicit some safe-haven flows. The main downside risk in the precious metals complex (with the exception of palladium) is that the speculative community is in the process of normalizing its heavy long positioning, which could result in marked selling pressure.

Metal Bulletin publishes live futures reports throughout the day, covering major metals exchanges news and prices.

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