METALS MORNING VIEW 29/12: Base metals sent a clear message in 2017

Base metals traded on the London Metal Exchange are edging lower this morning, Friday December 29, posting a marginal average drop of 0.2%, with aluminium (-0.6%) the weakest and lead (+0.2%) the most resilient, on fairly low trading volumes due to the holiday season.

This comes after an overall positive session yesterday in which the LMEX recorded a gain of 0.9%. Some industrial metals show an extreme steadiness, such as copper, which is up for a 16th day in a row, or aluminium, up for ten straight days. This is most likely the result of momentum-oriented traders, pushing prices still higher.

Precious metals are marginally stronger, with the complex showing an average gain of 0.2%, mainly driven by platinum (+0.4%).This follows an average gain of 0.6% on Thursday. The macro backdrop for precious metals complex has become clearly friendlier since Monday, with the dollar and US real rates moving sharply lower. But palladium continues to perform the best as investors remain risk-on. The white metal reached this week a 2017 high of $1,074 per oz, its highest since it reached its all-time high of January 2001 ($1,110 per oz). Palladium is set to outperform the metals complex this year, up ~+57% YTD (versus +~29% for the LMEX, ~+13% for gold).

On the Shanghai Futures Exchange (SHFE) today, the base metals complex is ticking higher, up an average 0.6%. Aluminium (+1.2%) and tin (+1.0%) are the outperformers, while lead (-0.6%) is the only industrial metal under water. Spot copper prices in Changjiang are up 0.7% at 55,222-55,332 yuan per tonne and the LME/Shanghai copper arb ratio stands at 7.63.

Equities continue to push higher this morning. In Asia, risk is “on”, with the Shanghai Composite Index up a small 0.10% amid tighter financial conditions. US equity futures are also creeping higher, probably due to ongoing dollar weakness.

The dollar index – at 92.60 this morning - is down for a third day in a row, reflecting a slump in Treasury yields and weaker demand for dollar funding globally. This is supportive of risk assets, including equities and commodities. The dollar is likely to continue to weaken a little further amid illiquid conditions, which could push base metals still higher.

The economic calendar is fairly quiet today. Investors will pay a close attention to the year-on-year growth in M3 money supply and private loans in the Eurozone.

Base metals are likely to enjoy further upward pressure thanks to an overall positive sentiment and the growing presence of momentum-based traders. But we acknowledge that the moves are exacerbated by low liquidity conditions, which could result in a bout of profit-taking at the start of next year. But the message for 2017 is clear: the reflation cycle has continued, leading the LMEX to perform stronger than 2016 (LMEX: ~+29% in 2017 vs ~+21% in 2016). This should continue in 2018.

Precious metals may continue to rebound in the immediate term thanks to the ongoing weakness in the dollar and the fall in the dollar. We like silver due to its excessive bearish positioning. We think that silver is the best positioned to enjoy a strong wave of profit-taking. Its strong performance this week (~+3%) reinforces our view. In contrast, palladium has the most stretched positioning on the long side, making it vulnerable to a strong sell-off once speculators decide to stop riding the wave.

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

Our next Metals Morning View (MMV) will be released on Tuesday January 2, 2018. In the meantime, we wish our readers a healthy and happy New Year.




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