METALS MORNING VIEW 21/08: Base metals continue to enjoy bright sentiment after last week’s solid gains

Base metals traded on the London Metal Exchange are off to a good start to the week this morning, Monday August 21, posting an average gain of 1.0% as we write. This reflects a slight pick-up in sentiment, perhaps stemming from easier Chinese financial conditions after the People’s Bank of China (PBOC) injected a net 50 billion yuan ($7.49 billion) into the country’s financial institutions earlier today.

Nickel (+1.8%) is the strongest performer while tin (+0.4%) remains the laggard of the complex. Volume has been average with 9,046 lots traded as of 05:48 BST.

This comes after a mixed session on Friday, with the London Metal Exchange Index (LMEX) closing up 0.1%, where nickel (+3.0%) and zinc (+2.9%) outperformed, while lead (-2.0%) underperformed. Last week, despite a surge in global risk aversion caused by concerns over the Trump administration’s pro-business agenda, the LMEX registered a solid gain of 1.9%, with zinc (+8.1%) being the star performer.

Precious metals prices start the week on a quiet note, with gold (+0.1%), platinum (+0.1%) and palladium (+0.1%) up, while silver (-0.1%) is lower, which probably reflects a lack of haven demand as investors appear risk-on at the start of the week in spite of a continuingly tense geopolitical climate.
This follows a mixed session on Friday in which gold (-0.4%) and silver (-0.4%) were weaker compared with platinum (+0.2%) and palladium (+0.3%). Last week, palladium (+3.5%) was the star performer across the board in spite of the risk-off environment, which was probably owing to its relatively stronger correlation with the base metals.

On the Shanghai Futures Exchange (SHFE) this morning, the base metals complex is posting a decent average gain of 1.2% as we write. Nickel (+4.0%) is the outperformer while lead (-1.2%) is the only base metal in negative territory. Spot copper prices in Changjiang are up 0.9% at 50,820-51,020 yuan per tonne and the LME/Shanghai copper arb ratio stands at 7.85 (compared with 7.86 on Friday).

Equities are edging higher today – the Hong Kong Hang Seng Index (+0.52%) the CSI 300 index (+0.29%) are up with the exception of the Nikkei 225 (-0.35%) and the KOSPI index (unchanged) – after a weak trading session on Friday. In the USA, the Dow Jones closed down 0.35% at 21,675. In Europe, the Euro Stoxx 50 closed down 0.46% at 3,446. Although macro data releases surprised to the upside from both sides of the Atlantic, investors adopted a cautious attitude due to political worries in the USA following rumours of Cohn’s departure.

The dollar index is little changed (+0.03%) at 93.46 this morning after closing down 0.2% on Friday. The depreciation in the dollar against most currencies was caused primarily by the unwinding of carry trades due to the drop in risk appetite, while the expected path of US monetary policy remained broadly unchanged.

Looking at the day ahead, there will be no major macroeconomic data. Investors will therefore continue to scrutinise the political developments in the USA to make their investment decisions. Later this week, investors will turn their attention to the speeches of central bank officials at the Jackson Hole Economic Symposium (August 24-26), including European Central Bank president Mario Draghi and US Federal Reserve chair Janet Yellen on August 26.

Base metals may continue to push still higher in the coming days in spite of a possible return to risk aversion, principally because sentiment in base metals is primarily driven by China’s financing conditions, as we saw last week. In this vein, as long as the PBOC continues to inject steady liquidity in the economy, macro investors are likely to stay overweight for base metals, which should in turn attract momentum-based investors in light of a solid upward trend.

Precious metals may catch some bids in the days ahead due to a likely resurgence of risk aversion caused by geopolitical tensions between the USA and North Korea. Over the weekend, North Korean leader Kim Jong-un warned of a “second Korean War” as US-South Korea military exercises, viewed as “reckless behaviour” by the North Korean leader, start today. While investors are presently calm, a sudden spike in volatility across risk assets cannot be ruled out later this week, which should produce a positive environment for the complex, especially gold.

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

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