METALS MORNING VIEW 24/05: China’s debt downgrade weighs on metals’ prices

Base metals prices are weaker this morning, Wednesday May 24, with prices down an average of 1.1% on the London Metal Exchange, as Moody’s Investors Services has cut China’s debt rating to A1 from Aa3 – the first cut since 1989.

Nickel prices are down the most, off 1.7%, zinc prices are down 1.5% and three-month copper prices are off 1.1% at $5,661 per tonne, while the rest are off between 0.6% and 0.9%. Volume has been above average at 7,576 lots.

This comes after a mixed performance on Tuesday that saw zinc prices rise 0.8%, aluminium prices were up 0.6% and nickel prices dipped 0.6%, while the rest were little changed, although the overall trends in most of the metals have had an upside bias of late, the exception being lead.

Gold prices are little changed this morning at $1,251.92 per oz, as are palladium prices at $772.50 per oz, while silver prices are off 0.6% and platinum is off 0.4%. On Tuesday, gold and silver prices closed down either side of 0.6%, platinum prices were off 0.2% and palladium prices rebounded 0.5%.

In Shanghai this morning, most of the base metals prices trading on the Shanghai Futures Exchange are weaker, the exception is aluminium that is little changed, while the rest are down by an average of 0.9%. This is skewed by a 2.4% fall in nickel prices, with tin prices down 1%, lead and zinc prices off 0.3% and copper prices off 0.4% at 45,770 yuan per tonne. Spot copper prices in Changjiang are down just 0.1% at 45,750-45,950 yuan per tonne, while the LME/Shanghai copper arb ratio is little changed at 8.09. Given the Moody’s news, it is perhaps surprising that prices are not down more, but the country as a whole is not dependent on external financing.

September iron ore prices on the Dalian Commodity Exchange continue their volatile trading, prices are down 6.7% today at 456.50 yuan per tonne, while on the SHFE, steel rebar prices are down 3.1% and gold and silver prices are off 0.7%.

In international markets, spot Brent crude oil prices are up 0.3% at $54.30 per barrel, this as Organization of the Petroleum Exporting Countries (OPEC) ministers meet on Thursday and the yield on the US ten-year treasuries is firmer at 2.28%, suggesting some relaxing in haven demand.

Equities were firmer on Tuesday with the Euro Stoxx 50 closing up 0.5% and the Dow closed up 0.2% at 20,937.91. Asia is mixed, the CSI 300 is off 0.6%, the Hang Seng is off 0.1%, so the Chinese focused markets are weaker following Moody’s downgrade but not meaningfully so, conversely, the Nikkei is up 0.6%, the Kospi is up 0.2% and the ASX 200 is little changed.

The dollar index got some lift on Tuesday and has seen some follow-through buying to 97.42 this morning, this after a low of 96.79 on Monday May 22. Key now will be whether the dollar’s correction has run its course – given that the US Federal Open Market Committee’s (FOMC’s) May meeting minutes are out this evening and the market is still expecting a rate rise in June, it may well be that the dollar rebounds some. As the dollar rises, the euro has turned lower, last at 1.1176, the sterling is flat at 1.2969, the yen is weaker at 111.97, as is the Australian dollar at 0.7448 – which is not surprising given the drop in iron ore prices and Moody’s downgrade of Chinese debt.

The yuan is little changed at 6.8802 and most of the other emerging market (EM) currencies are generally consolidating, with a slightly weaker bias.

The economic agenda is fairly light but influential all the same with data including GfK German consumer climate and with US data including house prices index, existing home sales and crude oil inventories. The focus will be on the FOMC meeting minutes and later FOMC member Robert Kaplan is speaking. See table below for more details.

Moody’s downgrade has knocked the wind out of the rising base metals prices’ sails this morning but Chinese markets have not reacted too negatively so far, so it may be that we are seeing early knee-jerk reactions. Key now will be whether there is follow-through selling, or whether the dips are seen as a buying opportunity in line with the firmer trends of late. However, the downgrade is a warning that China’s move to reduce risk in the financial sector could worsen the debt situation in the months ahead. On balance, we still view the underlying economic trends as being bullish for base metals prices, the weakness seen since February seems to be the market having to adjust as it absorbs the extra supply that high prices between November and February prompted. But, once absorbed supply is expected to tighten again. Prices still have more work to do on the upside before they will look bullish though and any pullback now could further delay that.

Gold prices are consolidating again. Political uncertainty in the USA continues, but the rhetoric has died down while US president Donald Trump is on his foreign tour. In addition, generally firmer equities increase the opportunity cost of holding gold, so we are not surprised the market is not overly bullish at the moment. That said, Moody’s downgrade will focus attention on Chinese debt and that may encourage some investors to diversify their portfolios more as an insurance against corrections in other markets. As such, we expect precious metals to remain well supported.

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

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