MORNING VIEW: Base metals already under pressure – will PMI data add extra weight?

Broader markets are seeing some relief buying in the morning of Tuesday October 1 after the United States stepped in to ease fears of escalating trade tensions by denying plans to prevent Chinese companies from listing their shares on US markets, but metals remain under pressure.

The economic news remains depressing: South Korea’s exports registered 10 months of declines and a Bank of Japan survey show sentiment at large manufacturers is the lowest it has been in more than six years.

Monday’s trading on the London Metal Exchange led to some volatile moves: lead and zinc saw strong gains and closed up either side of 2.4% while the rest fell by an average of 1.1%. The flare-up in the zinc cash/three-month backwardation and a lead chart picture that was ready to pop seem to have driven the sister metals higher, while a weak Chicago purchasing managers’ index (PMI) reading and a late-in-the-day sell order that caught nickel off guard, led to weakness in the other base metals. 

  • China’s markets are closed for Gold Week holidays (October 1-7). 
  • Today’s economic agenda is busy, focused on PMI data across Europe and the US. 
  • Numerous central bankers are also speaking.

Base metals
Three-month base metals prices on the LME were mixed this morning. Copper led on the downside with a 1% drop to $5,652.50 per tonne, lead and zinc were down around 0.5% as they gave back some of Monday’s gains, while tin led on the upside with a 1% gain to $16,060 per tonne.

With China closed and with option declaration on Wednesday, trading could get quite volatile and the movement in nickel on Monday is an example of that with prices falling to $17,000 per tonne, from $17,635 in a 20 minute period.

Precious metals
The spot gold price has broken support around $1,483 per oz and that triggered the head-and-shoulder pattern on the chart we mentioned on Monday. This opened the way for a deeper correction to $1,461 oz, which is about a 6% fall from the early September high of $1,557 per oz. Silver has followed gold’s lead; the price at $16.97 per oz is down by 13.6% from the high.

The platinum price is correcting too at $881 per oz, down 11.6% from the high, while mighty palladium at $1,677 per oz, is just 1.5% down from yesterday’s record high. Palladium is bucking the trend due to its fundamental supply shortage and ever tightening emission control standards that require higher PGM weighting in auto catalysts.

Wider markets
Spot Brent crude oil prices are in decline again and were recently quoted at $59.45 per barrel, down from $60.96 at a similar time on Monday.

The yield on benchmark US 10-year treasuries has firmed – it was recently quoted at 1.7031% compared with 1.6837% at a similar time on Monday. The German 10-year bund yield has also firmed and was recently quoted at -0.5440%, compared with -0.5700% on Monday.

Asian equities were for the most part stronger on Tuesday: The Nikkei (+0.59%), the ASX 200 (+0.81%) and the Kospi (0.45%).

This follows a stronger performance in Western markets on Monday, where in the US, the Dow Jones Industrial Average closed up by 0.36% at 26,916.83; in Europe, the Euro Stoxx50 closed up by 0.45% at 3,585.57.

The dollar index has pushed up to fresh multi-year highs at 99.58 and was recently quoted at 99.50 – it was last this high in May 2017 and the peak in 2017 was 103.82.

While the dollar is strong, the other major currencies are weak: the euro (1.0888), the Australian dollar (0.6706), the yen (108.29) and sterling (1.2296).

Key data
Monday’s economic agenda is busy, in addition to the Chinese PMI data mentioned above, there is data on German retail sales, consumer price index data out of Spain, Germany and Italy; Germany, Italian and EU unemployment data, lending and GDP data out of the United Kingdom, and Chicago PMI out of the US.

Today’s key themes and views
Lead and zinc’s show of strength on Monday suggest metal specific drivers, while the rest seem to be reflecting the weaker economic backdrop and today’s PMI data should provide further insight into that. While nickel has a bullish medium term outlook following Indonesia’s ore export announcement, until that comes into effect at the start of 2020, it is likely to lead to a rush of exports, so short term even nickel could correct. For the base metals as a whole, we think the overall direction will be driven by how the next round of US/China trade talks go.

We have viewed gold as being vulnerable in the short term because it was looking toppy on the charts, but again we wait to see how well supported the dip is. There are still many global issues to be settled and until they are, demand for havens is likely to remain high.

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