METALS MORNING VIEW 30/01: Risk-off sweeps through the metals

Base metals prices on the London Metal Exchange are weaker across the board by an average of 0.9% this morning, Tuesday January 30.

Nickel prices lead the way with a loss of 1.8%, with the rest of the complex trailing in their wake: tin (-1.1%) zinc (-0.9%), copper (-0.8%, at $7,035 per tonne), aluminium (-0.4%) and lead (-0.1%).

Volume has been strong with 12,588 lots traded as of 06.50 am London time. On Monday morning, we had strong gains and high volume, this morning we are seeing weak prices and high volume - in addition, most markets are looking weaker, with equities rattled by rising bond yields and with the dollar rebounding on the back of the higher yields too. This seems to be prompting a bout of risk-off.

On Monday, the base metals closed up by an average of 0.5%, but aluminium and lead gave back their earlier gains and ended the day lower, with copper prices also giving back their initial gains.

The precious metals are down across the board this morning with prices off an average of 0.6%, led by a 0.9% fall in platinum to $993.90 per oz, while gold prices are off by 0.4% at $1,335.02 per oz. This follows a day of weakness on Monday that saw prices close down by an average of 0.7%.

Weakness is also being seen on the Shanghai Futures Exchange today, where base metals prices are down an average of 0.8% - aluminium prices lead on the downside with a 1.7% drop, nickel prices are off by 1.3%, copper prices are down by 1% at 52,920 yuan ($8,357) per tonne, with lead prices off by 0.8%, zinc off by 0.2% and tin bucking the trend with a 0.1% gain. Spot copper prices in Changjiang are down by 0.4% at 53,050-53,200 yuan per tonne and the LME/Shanghai copper arbitrage ratio has edged up to 7.53, from 7.50 on Monday.

In other metals in China, iron ore prices are down by 0.1% at 515.50 yuan per tonne on the Dalian Commodity Exchange. On the SHFE, steel rebar prices are down by 0.8%, while gold and silver prices are off by 1% and 1.6% respectively.

In wider markets, spot Brent crude oil prices are easier, off by 0.57% at $69.01 per barrel, the yield on US 10-year treasuries is strong at 2.72%, and the German 10-year bund yield has climbed to 0.69%.

Equities in Asia are weaker today: Nikkei (-1.43%), Kospi (-1.17%), CSI 300 (-1.07%), Hang Seng (-1.01%) and ASX 200 (-0.87%). This follows a weak performance in western markets on Monday, where in the United States the Dow Jones closed down by 0.67% at 26,439.48, and in Europe where the Euro Stoxx 50 closed down by 0.12% at 3,643.04.

The dollar index at 89.50 is seeing some follow-through buying after the recent weakness halted on January 25. It does appear as though the elastic band between the weakening dollar and strengthening US treasury yields became overstretched and higher yields are now pulling the dollar higher, which is what you would expect. The dollar strength is turning other currencies lower: euro (1.2356), sterling (1.4016), Australian dollar (0.8057), although the yen at 108.70 is managing to hold on to most of its recent gains. The yuan’s rally has also halted with the currency slightly weaker at 6.3346 and the other emerging currencies we follow are also giving back some of their recent gains in the face of the firmer dollar. All of which suggests a degree of risk-off is flowing through markets.

On the economic agenda today Bank of Japan’s consumer price index (CPI) reading climbed by 0.7%, compared with 0.5% previously, and French flash gross domestic product (GDP) for the fourth quarter of 2017 came in at 0.6%, with the reading for the prior quarter revised up to 0.6% from 0.5%. Later there is data on German CPI, French consumer spending, Spanish and EU GDP, UK lending and money supply data, with US data including house prices and consumer confidence. In addition, Bank of England Governor Mark Carney is speaking.

After general strength in the base metals with prices either pushing the envelope on the upside (nickel, zinc, lead and tin), or holding up well (copper and aluminium), the base metals prices are starting to correct. The correction seems broad based, with equities, bonds and precious metals all suffering - so we see this as risk-off hitting the markets and do not see it as base-metals specific. We would not be surprised to see the correction run for a while as we move into February and attention turns to the Chinese Lunar New Year. We should get a feel for how bullish underlying sentiment is by seeing how far the pullbacks run and how long they last. We remain bullish basis the fundamentals so expect good dip buying.

After strong runs to the upside, the precious metals prices are pulling back as profit-taking sets in. With stronger US treasury yields supporting the dollar, the precious metals may remain under pressure for a while, but if the correction in equities and bonds gathers momentum then gold may well start to attract safe-haven buying. We should now get a feeling for how strong underlying sentiment is by seeing how far prices pullback and how long the correction lasts. Overall, we think there is a broad-based move into commodities, so we expect dips to be short-lived.

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