METALS MORNING VIEW 20/09: Metals prices firmer, but light volumes so far

Three-month base metals prices on the London Metal Exchange were higher across the board by an average of 0.7% on the morning of Thursday September 20. For now, the market seems to be grateful that the latest round of tariffs from the United States stood at 10% and not the 25% initially threatened.

Lead and zinc were the outperformers with gains of 1.1%, followed by copper, aluminium and nickel which were up between 0.5% and 0.5%. Tin was the laggard with an increase of 0.3%.

Volume across the complex has been low with 3,952 lots traded as at 06.41am London time – price gains on low volume do not necessarily bode well.

Gold prices were slightly firmer, up by 0.1% at $1,204.95 per oz, while the more industrial precious metals of silver, palladium and platinum were up between 0.4% and 0.5%.

In China, the base metals prices were also up across the board on the Shanghai Futures Exchange; the most actively traded November copper contract price was up just 0.1% at 49,510 yuan ($7,223) per tonne, but the rest were stronger with gains between 0.6% for November aluminium and 2.2% for November zinc.

Spot copper prices in Changjiang were down by 0.2% at 49,850-49,980 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 8.09.

In other metals in China, the January iron ore contract on the Dalian Commodity Exchange was down by 1% at 504 yuan per tonne. On the SHFE, the January steel rebar contract was up down by 0.7%, while the December gold and silver contracts were up by 0.3% and 1.3% respectively.

In wider markets, spot Brent crude oil prices have strengthened and were recently quoted at $79.67 per barrel, up by 0.49% this morning. The yield on US 10-year treasuries continues to firm and was recently quoted at 3.0600%, which suggests the market is expecting another rate rise when the US Federal Open Market Committee meets next week. Indeed the market expects a 92% chance of a 25 basis point rise to 2.25%. The German 10-year bund yield was also stronger at 0.4800%.

Asian equity markets were for the most part stronger on Thursday; the exception was the ASX 200 that was down 0.31%, while the rest were up: Nikkei (+0.20%), Kospi (+0.78%), the Hang Seng (+0.21%) and the CSI 300 (+0.11%). This follows a firmer performance in western markets on Wednesday; in the United States, the Dow Jones closed up by 0.61% at 26,405.76, while in Europe the Euro Stoxx 50 was up by 0.30% at 3,368.56.

The dollar index is under pressure and is looking vulnerable. It was recently quoted at 94.50, with recent support in the 94.30 to 94.43 range. A break lower could lend support to the metals, many of which seem to be looking for an excuse to rally from oversold levels.

With the dollar weaker, most of the other major currencies we follow have an upside bias, especially the Australian dollar (0.7258), while sterling (1.3146) and the euro (1.1682) are consolidating in recent high ground, although the yen remains weak at 112.16.

The yuan is treading water around recent levels and was recently quoted at 6.8488 and most of the emerging market currencies we follow are rebounding after recent weakness. This suggests a degree of risk-on is returning.

On the economic agenda there is data on UK retail sales along with US releases including the Philadelphia Fed Manufacturing Index, initial jobless claims, consumer confidence, leading indicators, existing home sales and natural gas storage. In addition, German Bundesbank President Jens Weidmann is speaking.

Once again, most of the base metals seem to be getting some lift off of recent lows, with the recent lows holding above those reached in mid-August. This suggests bases have been built and buying dominates at the lower numbers – we have to see whether the sellers still dominate at the higher numbers. Physical trading is reportedly strong, seasonally this is also a strong time of year for industrial demand and there are reportedly large short positions in the metals – so prices have numerous reasons to rise, but sentiment remains depressed by the continuing trade disputes.

The fact the dollar is looking weak and the market has not had too negative a reaction to the latest round of tariff increases suggests a lot of the bad news is in the price. Until the trade disputes are settled, which may not be until around the US mid-term elections, it may be hard for the metals to reflect their tightening fundamentals. As such for now, we expect choppy trading with attempted rallies, short-covering and further shorting into strength.

Longer term, we do favor the upside from these levels.

Gold prices have followed in the tracks of the base metals and prices are consolidating above recent lows, as are silver prices. Palladium prices lead on the upside and platinum prices are following its lead. The gold/silver ratio remains weak at 84.30, should gold prices start to move higher, we would expect silver prices to follow at a faster pace.

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