METALS MORNING VIEW 31/08: Pick-up in China’s PMI data fails to excite base metals prices

The rebounds in the base metals have paused in recent days; we wait to see if the better-than-expected Chinese official manufacturing purchasing managers’ index (PMI) acts as a boost as we approach September and the end of the summer slowdown.

The PMI edged up to 51.3 in August from 51.2 in July, but it also came in better than the 51.0 that was expected.

Three-month base metals prices on the London Metal Exchange were for the most part in positive territory on the morning of Friday August 31, led by a 2% gain in zinc ($2,513 per tonne), a 1.2% rally in lead ($2,099 per tonne) and a 0.7% rise in aluminium ($2,143 per tonne). The rest were little changed with nickel prices up 0.1%, while tin and copper were both down by 0.2%, with the former at $6,063 per tonne.

Volume has been high at 10,636 lots traded as at 06.47am London time.

This morning’s performances follow a general down day on Thursday, where only tin prices closed higher with a gain of 0.8%, while the rest were down by an average of 1%.

Precious metals prices were up across the across the board with gains averaging 0.8%, ranged between 0.4% for spot gold at $1,204.47 per oz and 1.2% for palladium at $977.40 per oz.

In China, base metals prices on the Shanghai Futures Exchange were mixed with the October contracts for zinc and lead and the January contract for tin up by an average of 1.1%, while October contracts for copper and aluminium and the November contract for nickel were down by an average of 0.7%. The most actively traded October copper contract was recently quoted at 48,610 yuan ($7,126) per tonne.

Spot copper prices in Changjiang were down by 03% at 48,530-48,770 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 8.02.

In other metals in China, the January iron ore contract on the Dalian Commodity Exchange was up by 1.1% at 486.50 yuan per tonne. On the SHFE, the January steel rebar contract was down by 1.2%, while the December gold contract was up by 0.1% and the December silver contract was down by 0.5%.

In wider markets, spot Brent crude oil prices are moving higher again and were recently quoted at $77.94 per barrel, up by 0.29% this morning. Falling crude oil stocks and the potential for US sanctions against Iranian oil are in focus and existing financial sanctions against the country are already impacting Iran’s ability to trade. The yield on US 10-year treasuries was at 2.8556%, while the German 10-year bund yield was at 0.3453%.

Asian equity markets were mixed on Friday: Nikkei (unchanged), Kospi (+0.38%), the ASX200 (-0.51%), the Hang Seng (-0.92%) and the CSI 300 (-0.39%). This follows a weaker performance in western markets on Thursday; in the United States, the Dow Jones closed down by 0.53% at 25,986.92, while in Europe the Euro Stoxx 50 closed down by 0.73% at 3,430.99. The weakness seems to be driven by a combination of the potential for an escalation in the scale of US tariffs against China and increasing weakness in some emerging market currencies.

The dollar index is on a back footing this morning as it consolidates in low ground around 94.63. On the chart, the move above 95.66 on August 10 suggested the index had triggered a bullish Head and Shoulders Pattern, but failure to pusher again soon could start to make it look toppy.

With the base metals prices trading inversely to the dollar, the direction of the dollar remains all important.

With the dollar consolidating in low ground the other major currencies we follow are either extending gains or are consolidating around recent highs: sterling (1.3023), the euro (1.1682), the Australian dollar (0.7254) and the yen (110.99).

The yuan is also consolidating and was recently quoted at 6.8296, but most of the emerging market currencies we follow are either weakening, or consolidating in, or near, low ground. The exception is the Mexican peso that is consolidating in mid-ground.

The economic agenda is busy today, with a lot of data out already: Japanese data looked mixed and German retail sales came in worse than expected with a 1.4% fall – see table below for details. Data out later includes French, Italian and the European Union’s consumer price index (CPI), Italian and EU unemployment rates, with US data including the Chicago PMI and the University of Michigan consumer sentiment and inflation expectations.

For the most part, the base metals’ rally off the mid-August lows are now consolidating so it is too early to say whether they are just pausing, or whether selling is starting to dominate again at the higher price levels. Lead looks the most likely to extend gains, while nickel looks to be in the weakest position.

Overall, on the basis of recent oversold prices, large short positions, relatively healthy long-term fundamentals and a pick-up in physical interest, we do favor the upside from these levels, but the market may need to build more of a base before buyers are prepared to chase prices higher. The next batch of manufacturing PMI data that is out on September 3 is likely to set the direction.

The most of precious metals are following the path of the base metals, which suggests they are also following the dollar and overall market sentiment – the exception is palladium that is powering ahead with its rebound that has seen prices rally 18% from the mid-August low.