METALS MORNING VIEW 30/01: Metals looking brighter ahead of US-China trade talks

Three-month base metals prices on the London Metal Exchange were for the most part still consolidating the gains seen at the end of last week, following weakness on Monday January 28, an up day on Tuesday, and now awaiting further direction.

Three-month LME prices were up by an average of 0.2% on Wednesday morning, with the majority up between 0.1% and 0.3%, but with nickel up by 0.9% and aluminium off by 0.5%. Copper was up by 0.1% at $6,070 per tonne – the high so far this morning being $6,085 per tonne, which is also the high for the year.

Volume across the LME base metals complex was above average with 7,520 lots traded as at 7.09am London time.

Precious metals prices were also stronger by an average of 0.5% on Wednesday morning, with gold prices pushing higher and up by 0.3% at $1,314.78 per oz. Silver has been following gold’s lead with prices up by 0.8% at $15.93 per oz, while the platinum group metals (PGMs) were rangebound.

In China, base metals prices on the Shanghai Futures Exchange were for the most part stronger, the exception being the March lead contract that was off by 1.2%, while the May nickel contract led the gains with a 2.7% rise. The March zinc and aluminium contracts were little changed, while the May tin contract was up by 0.5% and the March copper contract was up by 0.4% at 47,700 yuan ($7,078) per tonne.

Spot copper prices in Changjiang were up by 0.4% at 47,340-47,540 yuan per tonne and the LME/Shanghai copper arbitrage ratio was weaker at 7.86, suggesting the strength in the market is being driven by LME prices.

In other metals in China, the May iron ore contract on the Dalian Commodity Exchange was up strongly by 5.6% at 587 yuan per tonne in response to the Vale’s dam collapse. On the SHFE, the May steel rebar contract was up by 0.1%.

In wider markets, the spot Brent crude oil price was weaker by 0.28% at $61.08 per barrel – prices are consolidating ahead of chart resistance that lies between $62 and $63.75 per barrel.

The yield on US 10-year treasuries has drifted again, it was recently quoted at 2.7167%. The yields on the US 2-year and 5-year treasuries remain inverted, they were recently quoted at 2.5757% and 2.5527% respectively. The German 10-year bund yield was recently quoted at 0.1900%.

Asian equity markets were mixed on Wednesday: Nikkei (-0.52%), Hang Seng (+0.23%), the CSI 300 (-0.80%), the ASX 200 (+0.21%) and the Kospi (+1.05%).

This morning’s performance in Asia follows a firmer performance in western markets on Tuesday; in the United States, the Dow Jones Industrial Average closed up by 0.21% at 24,579.96, and in Europe, the Euro Stoxx 50 closed up 0.10% at 3,156.72.

The dollar index is flat and was recently quoted at 95.82. The other major currencies we follow are mixed: the euro (1.1434) and yen (109.32) are consolidating, the Australian dollar (0.7193) is strong, while sterling (1.3077) is drifting after a strong start to the year.

The yuan is strengthening again and was recently quoted at 6.7132, the highest it has been since July last year. Most of the other emerging market currencies we follow are also either strengthening, or consolidating. All of which seems encouraging.

The economic agenda is busy on Wednesday with data already out showing slightly weaker Japanese consumer confidence, unchanged French gross domestic product (GDP) at 0.3%, a slight improvement in German GfK consumer climate, while German import prices fell more than expected. Data out later includes German consumer price index (CPI), French consumer spending, data on UK lending as well as US releases that include the ADP non-farm employment change, pending home sales and crude oil inventories. In addition, the US Federal Open Market Committee (FOMC) is meeting to decide on interest rates, the committee will also deliver a statement and hold a press conference.

The base metals are for the most part on a front footing and are looking well placed to extend higher. Much will no doubt depend on how China-US trade talks progress this week. As such, we should be braced for some volatile trading, especially as liquidity is likely to start to shrink ahead of the Lunar New Year holiday (February 4-10). Any real progress on trade could give the market a significant boost because we think industry has been running with low stocks.

Gold prices are leading on the upside and with the dollar flat that suggests gold is running higher on its own and that may be due to a pick-up in fears about possible recession. We would be wary because any improvement in the US-China trade situation could put recessionary fears on a back burner. That said, the opposite is also true, so perhaps investors are buying into gold as insurance. Gold’s strength may also be tied into today’s FOMC decision because no rate rise could weaken the dollar.

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