MORNING VIEW: Base metals prices consolidate after Thursday’s broad-based reality check

There has been some follow-through selling in Asian-Pacific equity markets and base metals on the Shanghai Futures Exchange this morning, Friday June 12, but base metals on the London Metal Exchange and pre-market major western equity index futures are consolidating after Thursday's routs.

  • Pre-market Dow Jones equity index futures were indicated to open up by 1.4% this morning after the Dow Jones Industrial Average closed down by 6.9% at 25,128.17 on Thursday.
  • Asian-Pacific equity markets are down between 0.23% and 1.75%, so are showing limited follow-through weakness compared with the US equity sell-off.

Base metals
Three-month base metals prices on the LME were mixed this morning, with copper ($5,758.50 per tonne), nickel ($12,660 per tonne) and zinc ($2,000 per tonne) and up by 0.1%, 0.1% and 0.4% respectively, while the rest were down by between 0.1% and 0.3%. So overall the market is consolidating after Thursday’s average losses of 1.9%.

While the LME metals were consolidating, the most-traded base metals contracts on the SHFE were down by an average of 1%, led by a 1.7% decline in August nickel, with July copper off by 1.1% at 46,690 yuan ($6,594) per tonne.

Precious metals
Gold prices were little changed this morning with spot prices at $1,729 per oz, this after $1,728.90 per oz at a similar time on Thursday, but down from Thursday’s peak of $1,744.55 per oz.

Silver ($17.58 per oz) was down by 0.6% this morning, while the platinum group metals were up by an average of 0.7% – see table below for more details.

Wider markets
Despite the big rise in risk-off on Thursday, the yield on the US 10-year treasuries has not fallen that much further and was recently quoted at 0.7%, compared with 0.71% at a similar time on Thursday morning, but it remains low compared with 0.9% at a similar time on Monday.

Asian-Pacific equities were weaker this morning: the ASX 200 (-1.56%), the Kospi (-2.04%), the Nikkei (-0.95%), the Hang Seng (-1.39%) and China’s CSI 300 (-0.21%).

The rout in equities did attract some interest in the US dollar, which saw the dollar index rise; it was recently quoted at 96.69, this after 96.31 at a similar time on Thursday and after a low of 95.71 on Wednesday.

The yen strengthened yesterday, dropping to 106.57, but this morning it is consolidating and was recently quoted at 107.18. The other major currencies were consolidating after Thursday’s show of weakness: the euro (1.1312), the Australian dollar (0.6871) and sterling (1.2600).

Key data
Key data already out on Friday showed Japan’s revised industrial production for April slid to -9.8%, from -9.1%, and the United Kingdom’s manufacturing and industrial production fell by 24.3% and 20.3% respectively in April, while UK gross domestic production dropped by 20.4% and construction output plunged by 40.1%, again for April.

Out later is data on French consumer price index, Italian unemployment rate, UK consumer inflation expectations, industrial demand from the European Union and UK leading indicators.

In the United States, there is data on import prices and preliminary data from the University of Michigan on consumer sentiment and inflation expectations.

Today’s key themes and views
We said on Wednesday that the base metals may be running ahead of the fundamentals and they have now had a one-day correction. The price weakness has, however, attracted dip-buying this morning. Overall, we would say the risks lie to the downside for now because we see the demand side of the equation as having been hit a lot harder than the supply side and we expect the demand recovery will be drawn out.

But the risk of lockdowns ending too early in producing countries and that affecting supply more in the months ahead cannot be ruled out, so there may be further supply disruptions down the road, though it is probably too early to anticipate that. That said, we note with concern that Poland closed two coal mines on June 9, for three weeks, to help stop the spread of the Covid-19 virus, so metal supply remains vulnerable.

Gold prices ran higher on Thursday after risk-off sentiment gathered pace, but they have struggled to hold on to gains. This suggests investors are still looking for risk-on opportunities and yesterday’s sell-off provided that. We are not so sure it did though, it would not be surprising if there is more room for further risk-off and therefore we expect gold will remain well supported overall.