MORNING VIEW: Broader markets mixed; western markets have delayed positive reaction to Fed rate cut

Broader markets are mixed this morning, Wednesday March 4, with markets in Asia generally weaker, while the London Metal Exchange base metals and western equities are recovering after having taken fright from the United States Federal Reserve’s rate cut on Tuesday.

The US central bank’s emergency 50-basis-point rate cut led the Dow Jones Industrial Average (DJIA) to close down by 2.94% on Tuesday, while the LME base metals were down by an average of 0.4%.

  • Most Asian equity indices are weaker this morning, led by a 1.7% fall in the Australian ASX 200.
  • Gold prices jumped by more than $50 per oz on Tuesday in reaction to the Federal Reserve rate cut.
  • The US 10-year treasury yield is below 1% for the first time.

Base metals
The three-month base metals prices on the LME were for the most part firmer this morning, the exception being aluminium that was down by 0.2%. The rest were up by an average of 0.5% – led by a 1% gain in copper to $5,716 per tonne as at 5.50am London time.

Trading volume remains relatively high, with 9,430 lots traded as at 05.50am London time, compared with 9,943 lots traded at a similar time on Tuesday.

While most LME metals prices are higher this morning, the opposite is true of the most-traded base metals contracts on the Shanghai Futures Exchange, where prices are down by an average of 0.9%. June tin bucks the trend with a 0.1% gain, while April lead and zinc lead the others lower with losses of 1.3% and 1.8% respectively, with April copper down by 0.9% at 45,390 yuan ($6,510) per tonne.

The spot copper price in Changjiang was down by 0.7% at 44,970-45,040 yuan per tonne, while the LME/Shanghai copper arbitrage ratio was at 7.94, unchanged from a similar time on Tuesday.

Precious metals
Gold prices are consolidating this morning and were recently off by 0.2% at $1,641.65 per oz, having had a $59.15-per-oz trading range on Tuesday. Silver followed gold’s lead, but lagged behind, as did platinum. Gold prices closed up by 3.4% on Tuesday, silver by rallied 2.6% and platinum closed up by 1%, while palladium closed down by 2.1% after concerns about how auto sales would fare if the virus spreads further seem to weigh on prices.

US total vehicle sales were 16.8 million units on an annualized basis in February, unchanged from January’s level.

Wider markets
The yield on benchmark US 10-year treasuries was recently quoted at 0.98%, this compares with 1.12% at a similar time on Tuesday.

Asian equities were mixed this morning: Nikkei (-1.22%), the Hang Seng (-0.11%), China’s CSI 300 (+0.07%), the Kospi (+0.58%), and the ASX 200 (+0.69%).

The rout in the US dollar continued on Tuesday, with the index falling to a low of 96.20 – it is consolidating this morning around 97.27.

The yen (107.41), the euro (1.1175) and to a lesser extent the Australian dollar (0.6600) are mirroring the dollar, they are consolidating after recent strength, while sterling (1.2814) is firmer, but overall remains in low ground.

Key data
Wednesday has a busy economic agenda with services purchasing managers index (PMI) data out in China, across Europe and in the US. Data already released showed China’s Caixin services PMI collapsed to 26.5 from 51.8.

In addition, there is data on German retail sales and US releases that include non-farm employment change from Automatic Data Processing (ADP), crude oil inventories and the Beige Book.

Also, United Kingdom Monetary Policy Committee member Benjamin Broadbent is speaking.

Today’s key themes and views
The fact that most markets sold off after the Federal Reserve’s emergency rate cut highlights that there is still a lot of fear in the market and that easier monetary policy on its own may not be enough to underpin economies while the novel coronavirus (2019-nCoV) passes through.

The fact western markets are opening up higher this morning, despite weakness in Asian markets, suggests bargain-hunting, but it may be too early for that. Overall we expect markets to remain under pressure as the full, albeit temporary, impact from the virus on demand is felt.

The distress-selling in gold as investors raise cash for margin calls seems to have run its course and increased safe-haven demand for gold seems to be driving prices higher again. With treasury real-yields negative and equities jittery, the opportunity cost of holding gold is low.