METALS MORNING VIEW 22/01: Metals prices suffer after global growth outlook lowered

Once again the upside initiatives in three-month base metals prices on the London Metal Exchange have run into overhead resistance, with the complex down by an average of 0.4% this morning, Tuesday January 22.

Other commodity prices have also shown weakness, which we put down to the focus of slower global growth after the International Monetary Fund (IMF) lowered its global growth outlook to 3.5% in 2019, from its previous forecast of 3.7%.

On the LME, the three-month nickel price led the decline with a 1.1% fall to $11,680 per tonne. This was followed by losses of 0.7% in zinc and 0.4% in lead, while tin and copper were off by 0.1% and 0.2% respectively, with copper at $5,964 per tonne, while aluminium bucked the trend with a 0.1% gain.

Volume across the LME base metals complex was average with 5,828 lots traded as at 6.47am London time.

Precious metals prices were weaker with gold ($1,279.03 per oz) and palladium ($1,360.50 per oz) little changed, while silver and platinum were both down by 0.4%.

In China, base metals prices on the Shanghai Futures Exchange were down across the board, with the exception of tin that was up by 0.1% – the rest were down by an average of 0.8% while they follow the weaker tone set by the LME base metals on Monday and react to weaker Chinese data. The March copper contract was down by 0.8% at 47,560 yuan ($6,998) per tonne.

Spot copper prices in Changjiang were down by 0.8% at 47,370-47,610 yuan per tonne and the LME/Shanghai copper arbitrage ratio was firmer at 7.97, compared with 7.94 on Monday.

In other metals in China, the May iron ore contract on the Dalian Commodity Exchange was weaker by 1.3% at 526 yuan per tonne. On the SHFE, the May steel rebar contract was off by 0.1%. With road transport expected to slow down later this week, ahead of the Lunar New year holidays (February 4-10), activity is also likely to slow, which is expected to lead to consolidation.

In wider markets, the spot Brent crude oil price was weaker by 0.86% at $62.11 per barrel – so prices are consolidating after having pushed higher on Monday.

The yield on US 10-year treasuries has drifted again, it was recently quoted at 2.7500%. The yields on the US 2-year and 5-year treasuries remain in contango, they were recently quoted at 2.5766% and 2.5841% respectively. The German 10-year bund yield was also weaker at 0.2500%. The weaker yields suggest less risk-on appetite, which ties in with the weaker commodity and equity prices.

Asian equity markets were weaker across the board on Tuesday: Nikkei (-0.47%), Hang Seng (-0.92%), the CSI 300 (-1.33%), the ASX 200 (-0.54%) and Kospi (-0.32%).

This morning’s performance in Asia follows a weaker performance in western markets on Monday; in the United States, the Dow Jones Industrial Average was closed, but in Europe, the Euro Stoxx 50 was down by 0.31% at 3,125.07.

The dollar index (96.46) is climbing again and is testing the lower ranges of the late-November to late-December 2018 high ground. This could be a test of the breakdown level, or the overall upward trend reasserting itself. Given the more dovish US Federal Reserve stance of late, we would not be surprised if this rebound in the dollar peters out.

The recent strength in dollar is weighing on most of the other major currencies we follow: the euro (1.1350), the Australian dollar (0.7125) and sterling (1.2857) are weaker, although the yen is slightly firmer at 109.42, which is in line with the mild risk-off theme running though markets this morning.

The yuan (6.8058) has weakened, this no doubt not helped by either the recent weaker gross domestic product data, or the money supply boost ahead of the holiday period. The other emerging market currencies we follow are also on a back footing again.

Economic data already out on Tuesday shows Japan’s core consumer price index easing to 0.4%, from 0.5% previously. Data out later includes a range of UK employment data, German and EU ZEW economic sentiment and US existing home sales.

While the base metals’ price charts looked constructive on Monday morning, the lack of follow-through buying on Monday and weakness this morning means they are now looking rangebound again. There seems to be a bit of a race against time in the markets – global growth is slowing, a new US/China trade deal could change that, but its taking a long time in coming. The key is whether the global economy slips into recession before the trade deal comes to the rescue.

We have said recently that bases seem to be in place so that should make for a good launching pad should sentiment improve – this has not changed. But we also pointed out we have been here before and that previous upside initiatives have proved fragile as indeed has this latest one. Overall, we remain quietly confident that politicians will reach deal before it’s too late.

The limited pullbacks in gold and palladium prices still show underlying robustness, but that cannot be said for silver and platinum prices that remain the weak cousins. For now, the firmer dollar seems to be weighing on prices and risk-off is not strong enough to boost god prices.

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