METALS MORNING VIEW 21/09: Metals see follow-through buying, weaker dollar providing support

Three-month base metals prices on the London Metal Exchange were once again higher across the board by an average of 0.5% on the morning of Friday September 21. This follows Thursday’s generally bullish performance that saw the base metals complex close with gains averaging 0.7%.

Nickel and copper led on the upside this morning with gains of 1.3% and 0.9% respectively, with the red metal recently quoted at $6,173 per tonne.

Volume across the complex has been high with 11,481 lots traded as at 07.06am London time – price gains on high volume bode well.

The precious metals were stronger too with prices up by an average of 0.4%, with spot gold prices up by 0.2% at $1,209.20 per tonne. The drop in the dollar is no doubt helping sentiment.

In China, the base metals prices were for the most part stronger this morning, the exception was lead where the October contract was down by 0.5%, while the rest were firmer. November aluminium was up by 0.5%, the rest of the metals were up between 1.1% for copper and 1.9% for nickel. The most actively traded November copper contract was recently quoted at 49,970 yuan ($7,294) per tonne.

Spot copper prices in Changjiang were up by 0.2% at 49,870-50,200 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 8.10.

In other metals in China, the January iron ore contract on the Dalian Commodity Exchange was down by 0.1% at 502 yuan per tonne. On the SHFE, the January steel rebar contract was down by 0.1%, while the December gold and silver contracts were up by 0.3% and 1.7% respectively. Silver prices have been climbing at a faster pace than gold prices for the second consecutive day now.

In wider markets, spot Brent crude oil prices were recently quoted at $78.92 per barrel, up by 0.36% this morning, but prices are down from where they were at a similar time on Thursday when they were quoted at $79.67 per barrel. The yield on US 10-year treasuries continues to strengthen and was recently quoted at 3.0759%, 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 has eased and was recently quoted at 0.4760%.

Asian equity markets were for the most part stronger on Friday: Nikkei (+0.82%), Kospi (+0.68%), the Hang Seng (+1.25%) and the CSI 300 (+2.54%). This follows a strong performance in western markets on Thursday in the United States; the Dow Jones closed up by 0.95% at 26,656.98, with the index earlier in the day setting a fresh record high at 26,697.49, while in Europe the Euro Stoxx 50 was up by 1.03% at 3,403.12.

The dollar index has broken below support at 94.30 and was recently quoted at 93.96. On the chart it has triggered a bearish head-and-shoulder pattern. The break lower is expected to 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 are strengthening: the Australian dollar (0.7292), sterling (1.3253) and the euro (1.1779), although the yen remains weak at 112.84.

The yuan is slightly firmer, and was recently quoted at 6.8360, 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, data already out in Japan has generally shown some strength, compared with previous readings. Data out later includes flash manufacturing and services purchasing managers’ index (PMI) releases which are out across Europe and the United States, as well as UK data on public sector borrowing and the Bank of England quarterly bulletin.

The base metals are looking well placed to extend gains having recently put in and tested support since the mid-August lows. The combination of oversold markets, a weakening dollar, strong equities and an apparent return of risk-on sentiment in emerging markets all bode well for the metals.

The fact equities are strong despite the continuing uncertainty over global trade tensions and Brexit, either suggests a lot of complacency, or confidence that eleventh-hour deals will be sorted. Whether fully fledged rebounds can get underway ahead of a trade agreement remains to be seen, but a stronger tone may well unnerve some of the shorts that could lead to short-covering rallies.

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

Gold prices are also looking firmer and well placed to rebound and the weaker dollar may well fuel that. The other precious metals may well benefit from a firmer gold as well as the stronger industrial metals.

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