MORNING VIEW: Countertrend move runs out of steam as concerns rise

Governments’ massive efforts to support economies have provided some relief to markets and sentiment, but with the novel coronavirus (nCoV 2019) pandemic still spreading rapidly throughout Europe, the United States and elsewhere, there is still just too much uncertainty for markets to settle down.

In line with this, the countertrend move of recent days is showing signs of running out of steam this morning, Thursday March 26, with most Asian Pacific and pre-market western equity indices all showing losses.

  • Market braced for terrible US initial jobless claims data…
  • … expect markets to be volatile ahead of the release and then become directional again afterward.

Base metals
Three-month base metals prices on the London Metal Exchange were down across the board this morning by an average of 0.9%, this after an average gain of 1.8% on Wednesday. While the metals are following the direction of equities, they are doing so in a much more circumspect manner.

Tin led the decline with a 2% fall to $13,950 per tonne, but it was Wednesday’s star performer with a 6.3% gain. Aluminium was down the least with a 0.3% fall to $1,543 per tonne, while the rest were down between 0.9% for copper ($4,830 per tonne) and 1.2% for nickel ($11,195 per tonne).

Volume on the LME has returned a level more in line with historic levels of 5,566 lots as at 5.46am London time, compared with 8,221 lots traded as of at a similar time on Tuesday, and well below last week’s levels when it averaged 16,198 lots at a similar time.

The most-traded base metals contracts on the Shanghai Futures Exchange were stronger across the board by an average of 0.8%, but this is partially in reaction to gains on the LME on Wednesday, but also while China is in recovery mode with an average of 71.7% of small and midsize Chinese enterprises back in business, according to the Ministry of Industry and Information Technology, which has increased by 42.1% from a month ago.

The May aluminium and lead contracts led on the upside with gains of 1.2%, June tin was up by 1.1% and May copper was up 0.6% at 39,130 yuan ($5,514) per tonne. June nickel and May zinc were up by 0.2% and 0.4% respectively.

We wait to see whether the combination of a recovery in China, the world’s largest consumer of metals, and production cuts provide support for LME prices.

Precious metals
Spot gold prices were down by 0.7% at $1,599.76 per oz this morning, this after a high of around $1,638 per oz on Tuesday. Given a surge from $1,456 from March 20’s low, some consolidation is unsurprising – key will be how long prices pull back for.

Silver, platinum and palladium are all pointing lower too this morning, after solid price gains of late.

Wider markets
The yield on benchmark US 10-year treasuries has eased slightly and was recently quoted at 0.8%, compared with 0.84% at a similar time on Wednesday. Treasuries seem to be consolidating for now, but we wait to see how they react this afternoon to the initial jobless claims data from the US.

Asian-Pacific equities were for the most part weaker this morning: the Hang Seng (-0.97%), the Kospi (-1.09%), the CSI 300 (-0.64%) and the Nikkei (-4.51%), the exception being the ASX 200 that was up by 2.31%. The Nikkei is down the most, following three days of strong gains, but also while Tokyo faces a social lockdown.

The dollar index is weakening again and was recently quoted at 100.81, this compared with 101.44, at a similar time on Wednesday. With the virus spreading as fast as it is in the US, the country’s haven status may start to be questioned.

The other major currencies we follow are mixed; the euro (1.0911) is climbing, as is the yen (110.59), while the Australian dollar (0.5930) and sterling (1.1831) are consolidating.

Key data
Thursday’s economic agenda is busy with key data that includes German GfK consumer climate and UK retail sales, as well as US releases including initial jobless claims, final gross domestic product (GDP), GDP prices and preliminary wholesale inventories.

In addition, there is a European Central Bank economic bulletin, the UK Monetary Policy Committee will announce its interest rate decision, asset purchase facility, as well as provide a policy summary. There is also a Group of 20 (G20) meeting.

Today’s key themes and views
We expect more volatility while the market works out the trade-off between falling demand in non-Chinese economies, recovering demand in China and widespread production cuts. The government stimulus and support will hopefully mean economies can bounce back once we have either contained the coronavirus, or learnt to live with it.

So this could still turn out to be a “V”-shaped shock, especially as production is being cut so early into the downturn. But there may be further price weakness while the virus spreads further through Europe and the US.

We think the dash-for-cash liquidation in gold has probably run its course and gold will now benefit more from its haven attributes, especially while concerns that all the fiscal stimulus in this loose monetary climate, combined with the surge of debt, could erode the value of other asset classes. If you want gold to rise – be careful what you are wishing for.