METALS MORNING VIEW 25/01: Metal prices work higher in absence of negative news

Three-month base metals prices on the London Metal Exchange were up across the board by an average of 0.4% this morning, Friday January 25 - this despite Thursday’s generally weak flash manufacturing purchasing managers' index (PMI) data in Asia and Europe, although the United States showed a stronger number.

Copper led the way with a 0.9% gain to $5,967 per tonne, followed by a 0.6% gain in nickel ($11,820 per tonne), while the rest ranged between little changed for lead and up by 0.3% for zinc and tin.

Volume across the LME base metals complex was average with 6,042 lots traded as at 6.48am London time.

Precious metals prices were also firmer; gold was up by 0.2% at $1,284.16 per oz, while palladium was little changed and silver and platinum, normally the laggards, were up by 0.5% and 0.6% respectively.

In China, base metals prices on the Shanghai Futures Exchange were for the most part stronger, the exception being the March aluminium contract that was off by 0.3%, while the May nickel contract led the gains with a 1.1% rise. The rest were up by between 0.1% for the March copper contract at 47,430 yuan ($6,984) per tonne and 0.4% for the May tin contract.

Spot copper prices in Changjiang were little changed at 47,070-47,260 yuan per tonne and the LME/Shanghai copper arbitrage ratio, at 7.95, was off from Thursday’s level of 7.97.

In other metals in China, the May iron ore contract on the Dalian Commodity Exchange was firmer by 0.3% at 534 yuan per tonne. On the SHFE, the May steel rebar contract was up by 1.7%.

In wider markets, the spot Brent crude oil price was stronger by 0.76% at $61.61 per barrel – prices are working higher again having been consolidating after Monday’s push higher stalled.

The yield on US 10-year treasuries has drifted again, it was recently quoted at 2.7305%. The yields on the US 2-year and 5-year treasuries remain inverted, they were recently quoted at 2.5830% and 2.5675% respectively. The German 10-year bund yield was also weaker at 0.1798%. The weaker yields suggest less risk-on appetite, but metals and equity markets suggest risk is returning this morning.

Asian equity markets were stronger on Friday: Nikkei (+0.97%), Hang Seng (+1.37%), the CSI 300 (+0.81%), the ASX 200 (+0.68%) and the Kospi (+1.52%).

This morning’s performance in Asia follows a mixed performance in western markets on Wednesday; in the United States, the Dow Jones Industrial Average closed down by 0.09% at 24,553.24, but other main US indices closed firmer, and in Europe, the Euro Stoxx 50 was stronger – it closed up 0.46% at 3,126.31.

The dollar index continued to climb on Thursday, it reached 96.68, but is consolidating this morning and was recently quoted at 96.41. Given the more dovish US Federal Reserve stance of late, we would not be surprised if this rebound in the dollar peters out.

Most of the other major currencies we follow are consolidating on a back footing: the euro (1.1322), the yen (109.80) and the Australian dollar (0.7098), while sterling at 1.3107 continues to work higher.

The yuan started to weaken last week, but has now turned stronger again and was recently quoted at 6.7610, the recent high being 6.7336. Most of the other emerging market currencies we follow are also either strengthening, or consolidating. All of which seems encouraging.

The economic agenda is light as the US government shutdown means US data releases are being delayed and it is uncertain when data will be released. Today’s data includes German Ifo business climate, UK high street lending and UK realized sales. It is also day three of the World Economic Forum’s annual meeting in Davos, Switzerland.

The base metals are for the most part taking it in turns to edge higher, but overhead resistance is frequently being encountered and that is causing a stop-start upward movement. Today’s runners are zinc, lead, nickel and tin, while copper and aluminium are oscillating sideways. As well as aluminium seeing an increase in warrant cancellations, zinc has also seen warrant cancellations jump and with tin stocks below 1,000 tonnes, the market has tightened up considerably with the cash/three-month tin spread in a backwardation of around $200 per tonne.

The overall picture therefore is quietly bullish – we wait to see if less liquidity over the Lunar New Year holidays in early February leads to a faster move higher, or whether it prompts more volatility. Overall, we feel the markets will remain nervous until a US/China trade deal is signed, but while we wait for that, the underlying fundamentals continue to tighten.

The limited pullbacks in gold prices still shows underlying robustness and with considerable uncertainty in the financial markets that seems warranted. Silver and platinum remain the weaker precious metals, but they are likely to follow gold’s lead to varying degrees, while palladium prices, although off their highs, are trading basis their strong fundamentals.

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