METALS MORNING VIEW 25/09: Metals dip while China takes advantage of higher prices

With Chinese participants returning from holiday, they have taken to selling into the recent metal price gains, with the three-month base metals prices on the London Metal Exchange for the most part weaker during morning trading on Tuesday September 25.

Nickel bucked the general weakness with a 0.3% gain and tin was untraded, while the rest of the LME base metals were down by an average of 0.6%. Copper fell by 0.8% to $6,245 per tonne.

Total volume across the complex has been high with 11,609 lots traded as at 06.13am London time.

The precious metals gave a mixed performance this morning; gold and silver spot prices were little changed, with the former at $1,199.15 per oz, palladium prices were up by 0.2% and platinum prices were up by 0.5%. Palladium remains the only precious metal with an upside agenda, with prices trading at multi-month highs.

In China, the base metals prices were similarly mixed; the November contracts for copper and nickel were higher by around 1%, with copper at 50,170 yuan ($7,315) per tonne, the November zinc contract was little changed, while the November aluminium and lead contracts were down by 0.4% and 0.7% respectively and the January tin contract was off by 0.2%.

Spot copper prices in Changjiang were up by 0.9% at 50,390-50,620 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 8.04.

In other metals in China, the January iron ore contract on the Dalian Commodity Exchange was down by 1% at 500.50 yuan per tonne. On the SHFE, the January steel rebar contract was down by 1.2%, while the December gold and silver contracts were down by 0.3% and 0.5% respectively.

In wider markets, spot Brent crude oil prices were little changed but at high levels and were recently quoted at $81.35 per barrel. The yield on US 10-year treasuries continues to firm and was recently quoted at 3.0975%, which suggests the market is expecting another rate rise when the US Federal Open Market Committee (FOMC) meets on Wednesday. The German 10-year bund yield has strengthened and was recently quoted at 0.5082%.

Asian equity markets were for the most part weaker on Tuesday: Nikkei (+0.10%), Kospi (closed), the Hang Seng (-1.62%), the CSI 300 (-1.12%) and ASX200 (-0.10%). This follows a weaker performance in western markets on Monday that were rattled by an escalation in global trade tensions, with China saying it would not join trade talks unless the United States stops threatening to increase tariffs. In the US, the Dow Jones closed down by 0.68% at 26,562.05, while in Europe, the Euro Stoxx 50 was down by 0.59% at 3,410.44.

The dollar index is consolidating above its recent low and was recently quoted at 94.31, the low on September 21 was 93.81. The move below support at 94.30 had triggered a bearish Head-and-Shoulder Pattern and the rebound is now testing the breakdown level. We may not get a clear direction for the dollar until after the FOMC rate decision and statement on Wednesday. Given US President Donald Trump wants a weaker dollar and the potential damage the trade disputes are having on global confidence, it may be that the FOMC is seen to be less hawkish in Wednesday’s statement.

With the dollar consolidating, most of the other major currencies we follow are consolidating too: the Australian dollar (0.7244), sterling (1.3107) and the euro (1.1747), although the yen continues to weaken (112.86).

The yuan has also weakened and was recently quoted at 6.8635 and most of the emerging market currencies we follow are either weakening or are consolidating recent gains. The exception is the Russian rouble that is strengthening, no doubt benefitting from the stronger oil price.

On the economic agenda, data already out in Japan showed the services producer price index (PPI) rise 1.3%, after a previous increase of 1.1%. Later, there is the German wholesale price index (WPI) and US releases that include two house price indices, consumer confidence and the Richmond manufacturing index. In addition, UK Monetary Policy Committee member Gertjan Vlieghe is speaking.

We have expected the rebounds to be nervous while the trade disputes linger and that has been the case. What we have seen is some initial short-covering and there is likely to be more to be done, but while the rallies struggle to attract follow-through buying, the shorts may not feel too vulnerable.
Also in this climate of uncertainty, consumers and would-be buyers may not feel in any hurry to chase the market higher. As such, we expect choppy trading to continue. With a week-long holiday in China in early October and with LME Week following that, liquidity may tighten up and that could increase the risk of some fast moving markets.

Longer term, we do favor the upside from these levels, but some progress on trade talks is likely to be needed before the confidence really returns.

Gold prices are stuck in a sideways trading pattern and we wait to see the next direction for the dollar to see which way gold prices travel from here. Given escalating trade tensions, rising oil prices and some record breaking US equity markets, it may be that safe-havens will be needed again before too long and at these price levels gold may look a cheaper safe-haven. Silver remains weak with the gold/silver ratio at 1:84, palladium is standing out as the precious metal being driven by strong fundamentals and platinum seems to be getting a boost having been oversold.

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