MORNING VIEW: Base metals prices rebound after Monday’s broad-based rout as market anticipates stimulus

Base metals prices were up across the board this morning, Tuesday March 10, on expectations that central banks and governments will step in to stop the rout.

This follows Monday’s slump across a broad set of assets that saw the base metals on the London Metal Exchange down by an average of 4.3% at their lows, oil futures slump by more than 35%, the Dow Jones Industrial Average Index (DJIA) off by 8.3% at its low and United States 10-year treasuries yields falling to a low of 0.318%.

US President Donald Trump promised “major” steps to support the economy and is expected to hold a press conference later on Tuesday.

  • Action like that seen on Monday suggests markets are pricing in recessions.
  • The slump in oil prices should be supportive for industry.
  • Gold prices are on a back footing because potential for coordinated stimulus increases risk-on appetites.

Base metals
The three-month base metals prices on the LME were up across the board by an average of 1.4% this morning, led by a 2.7% gain in nickel to $12,945 per tonne and a 2% gain in copper to $5,634 per tonne.

Since the novel coronavirus (2019-nCoV) struck markets in mid-January, the LME base metals have at their lows been down by an average of 14.7%, but at the time of writing, the LME metals were down by an average of 10.6%. So, all in all, the metals are not in freefall. By comparison the DJIA has fallen 19.8%.

The most-traded base metals contracts on the Shanghai Futures Exchange were also up across the board this morning, by an average of 1.8% – ranged between a 0.2% gain for May aluminium and a 4.2% gain in June nickel. May copper was recently up by 1.5% at 44,540 yuan ($6,413) per tonne.

Precious metals
Spot gold prices were down by 0.5% at $1,657.84 per oz this morning, this after highs in the early hours on Monday of $1,702.98 per oz. The promise of more liquidity and stimulus seems to be attracting some rotation out of gold into risk assets. The more industrial precious metals are well off their highs – the gold/silver ratio was recently quoted at 1:98.

Wider markets
The yield on benchmark US 10-year treasuries was recently quoted at 0.68%, with Treasury Inflation Protected Securities (TIPS) showing a real yield of -0.45%.

Asian equities were rebounding this morning: Nikkei (+1.27%), the Hang Seng (+2.09%), China’s CSI 300 (+2.29%), the Kospi (+0.42%), and the ASX 200 (+3.11%).

The rout in the US dollar saw a low on the index of 94.63 on Monday, it was recently quoted at 95.50. From its February 20 high to Monday’s low the index has fallen by 5.3%.

The other major currencies are consolidating recent gains: the yen (104.65), the euro (1.1356), sterling (1.3034) and the Australian dollar (0.6553).

Key data
Tuesday’s key economic agenda has seen China’s consumer price index (CPI) rise by 5.2% year on year in February, this was down from the 5.4% growth recorded in January, while the country’s producer price index fell by 0.4% in February, after a 0.1% gain in January.

Later there is employment data out in France and the European Union, industrial production data out in France and Italy and revised gross domestic product (GDP) data out in the EU.

Today’s key themes and views

The fact the steep sell-off in base metals on Monday turned into an intraday downward spike suggests the buyers dominated at the lower prices, but how much appetite they have to continue buying remains to be seen.

With China showing signs of slowly getting over the virus with industry utilization rates climbing, the demand and disruption shocks should start to ease. But, just as it eases in China, it looks set to deteriorate in other parts of the world. So still so much uncertainty that the markets are likely to remain volatile and nervous and we would not be surprised to see a step-down trend continue across the metals until there are signs of producer restraint.

Gold prices have once again pulled back from their highs, but the overall trend remains firmly to the upside, which we expect to continue.