MORNING VIEW: Awaiting LME reaction to US-China trade talk developments

Trading in the base metals on the London Metal Exchange is expected to be nervous on Tuesday May 7, following the deterioration in US-China trade talks.

  • US President Donald Trump’s tweets on Sunday threatening higher trade tariffs unnerved markets on Monday.
  • China’s CSI 300 fell 5.9% on Monday, while the Dow Jones Industrial Average fell 471 points at one stage before closing down by 66 points.
  • Comex copper fell 2.9% at one stage on Monday before closing up by 0.3%.

Base metals

Three-month base metals prices on the LME were mixed on Tuesday morning. At the poles were nickel, down by 0.8%, and tin up by 2.2%. Copper was up by 0.3% at $6,262 per tonne, compared with $6,243 per tonne at Friday’s close, while aluminium and lead were little changed

The escalation in the US-China trade dispute at a time when markets were looking forward to a resolution is now likely to make the markets more nervous again and considering metals prices have for the most part been under pressure this could lead to further weakness.

With the increase in trade tariffs to 25% from 10% on $200 billion of Chinese goods, potentially happening as soon as Friday, this week’s scheduled trade talks in the United States will be all important.

In China, base metals prices on the Shanghai Futures Exchange were for the most part stronger on Tuesday, the exception was the June lead contract that was off by 0.4%, while the rest were up by an average of 0.5%. The June copper contract was up by 1.1% at 48,350 yuan ($7,156) per tonne, compared with 47,830 yuan per tonne at Monday’s close.

Spot copper prices in Changjiang were up by 0.8% at 48,230-48,330 yuan per tonne and the LME/Shanghai copper arbitrage ratio was recently at 7.74.

Precious metals
Spot precious metals prices were quite mixed; gold and silver prices were up either side of 0.2%, with gold recently quoted at $1,283.05 per oz, while platinum and palladium are polarized with platinum up by 1.3% at $880.20 per oz and palladium down by 1.7% at $1,347.30 per oz.

On the SHFE, the June gold and silver contracts were little changed compared with Monday’s close.

Wider markets
In wider markets, the spot Brent crude oil price is firmer after Monday’s spike lower, it was recently quoted up by 0.47% at $71.13 per barrel, having dipped to a low of $68.88 per barrel on Monday.

US treasuries yields were weaker at 2.4948%, this highlighting investors are prepared to accept lower yields for the safety treasuries provide, a sure sign of risk-off sentiment.

The yields on the US two-year and five-year treasuries have inverted again, also a sign of nervousness – they were recently quoted at 2.3067% and 2.2892% respectively.

The German 10-year bund yield is positive again, it was recently quoted at 0.0200%.

Asian equity markets are mixed: Nikkei (-1.54%), Hang Seng (+0.02%), CSI 300 (+0.37%), Kospi (-0.88%) and ASX 200 (0.29%).

This follows a weaker performance in western markets on Monday. In the US, the Dow Jones Industrial Average closed down by 0.25% at 26,438.48, while in Europe the Euro Stoxx 50 was down by 1.13% at 3,462.95.

The dollar index broke higher on April 23 and peaked at of 98.35, the highest since June 2017, when it was descending from the January 2017 peak of 103.82. It was recently quoted at a slightly softer 97.42. Despite the weaker treasury yields suggesting buying, the dollar has not spiked higher on the back of Trump’s latest tough talk.

The other major currencies have had a mixed reaction to latest developments, the yen has strengthened (110.69), as has the euro (1.1211), the Australian dollar and sterling initially weakened but have since rebounded to 0.7030 and 1.3124 respectively.

Key data

Tuesday’s key economic data showed Japan’s final manufacturing purchasing managers’ index (PMI) climbed to 50.2 from 49.5 and German factory orders rose by 0.6%, having dropped by 4% previously.

Data out later includes US jobs opening data and consumer credit. In addition, numerous central bankers are talking, including UK Monetary Policy Committee members Jon Cunliffe and Andy Haldane and US Federal Open Market Committee member Randal Quarles.

Today’s key themes and views
With the LME open after Monday’s bank holiday, trading is likely to reflect the fallout from the deteriorating US-China trade talks. While there were knee jerk reactions on Monday to the news, thin liquidity may well have caused bargain-hunting opportunities, but with all markets open today, a more reasoned response is expected to unfold. Given the gravity of the situation, there may well be further weakness unless some soothing noise comes from either China or the US administration.

For the precious metals, we are not surprised gold has been bid higher as the markets are more stressed, but the overall trend remains to the downside so we would be wary of chasing prices higher unless the trade talks end-up breaking up. Palladium still looks like it is in correction mode, while dips in platinum seem to be well supported.

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