MORNING VIEW: Countertrend move underway as markets react to fiscal stimulus, while some production cuts have helped support metal prices

United States politicians agreed a $2-trillion stimulus package to support the US economy during the ongoing novel coronavirus (nCoV 2019) pandemic, and markets, especially equity markets, have reacted well.

The Dow Jones Industrial Average (DJIA) closed up by 11.4% on Tuesday March 24, while Asian Pacific equity indices followed up that positive performance with gains of between 2.7% and 8% this morning.

Tuesday’s flash purchasing managers’ index (PMI) data showed manufacturing has been hit hard by the coronavirus pandemic, but the readings were generally better than expected. Services PMI data was worse than expected, however.

For example, the European Union’s flash services PMI came in at 28.4 in March, down from 52.6 in February and well below the expected reading of 40 – the same was true across the data we saw for individual European countries and the US.

Given the massive economic shock underway which, outside China, is expected to get worse before it gets better, means that the rebounds we are seeing are likely to be knee-jerk reactions to the unprecedented levels of monetary and fiscal policy, but until lockdowns are lifted and people can go back to work, demand for non-consumer essentials is likely to remain severely depressed.

Countertrend moves can last a long time and run a long way, but we see the governments’ efforts as shoring up employment and keep economies afloat, but unlikely to boost metal demand per se, at least in the early days.

  • Pre-market DJIA futures were up by 0.95% as at 6.32am London time.
  • China reported a drop in new coronavirus cases after imported transmissions fell and no domestic cases were reported.

Base metals
Three-month base metals prices on the London Metal Exchange were mixed this morning; nickel and copper were lower by 1.1% and 0.5%, with the latter recently quoted at $4,824 per tonne and now up by around 10.4% from the recent low at $4,371 per tonne. The rest of the metals were up by an average of 1.1%, but that is skewed by a 2.2% raise in tin to $13,775 per tonne.

Volume on the LME into the rebound was relatively low at 8,221 lots traded as of 6.13 am London time, this compared with 9,917 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 for the most part stronger, the exceptions were once again June nickel that was down by 0.9% and May zinc was down by 0.2%. The rest were up by an average of 1.2%, once again led by a 2.2% gain in June tin and a 1.8% gain in May copper, that was recently quoted at 38,850 yuan ($5,493) per tonne.

Precious metals
Spot gold prices were down by 1.3% at $1,612.94 per oz this morning, this after a high of around $1,638 per oz on Tuesday.

By comparison, the high in June Comex gold has been around $1,693 per oz – such a huge premium has come about because travel restrictions and gold refinery closures mean shorts on Comex may struggle to deliver 100oz bars against their positions as there could be a delay in taking loco London physical 400oz gold bars and getting them re-refined into 100oz bars and shipped, ready to be delivered against Comex short positions.

Spot silver, platinum and palladium prices are also rising strongly on the back of gold, but also while production stoppages, especially in South Africa, hit supply.

Wider markets
The yield on benchmark US 10-year treasuries has firmed slightly and was recently quoted at 0.84%, compared with 0.81% at a similar time on Tuesday. Treasuries seem to be taking a backseat for now, they are no doubt in demand but not at any price, while gold seems to be soaking up some of the haven demand.

Asian Pacific equities were stronger this morning: the ASX 200 (+5.53%), the Hang Seng (+3.25%), the Kospi (+5.89%), the CSI 300 (+2.78%) and the Nikkei (+8.04%).

The dollar index is little changed from a similar time on Tuesday, it was recently quoted at 101.44, this compares with 102.12 at a similar time on Monday and March 20’s peak at 103.

The other major currencies we follow are for the most part trending higher: Australian dollar (0.6038), sterling (1.1843) and the euro (1.0822), while the Japanese yen is weaker (111.22).

Key data
Wednesday’s economic data will focus on US durable goods orders. Other data includes a barrage of UK price data (see table below), UK realized sales, data on Germany’s business climate from Information and Forschung (Ifo), US house prices and US crude oil inventories.

Today’s key themes and views
Volatility dominates at the moment and we should expect more of it. 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 turn out to be a “V”-shaped shock, especially as the threat of the virus itself is already reining in some supply.

The base metals are getting some support, on average prices are up by 5% from their recent lows, so the metals are being more circumspect than equities. As mentioned earlier, the money being thrown at the economy is more about shoring up the economy and employment, rather than boosting demand, but it is demand that is taking the hit right now.

While western economies grind to a halt, all eyes will be on how China’s recovery gets underway. As a recovery is bound to take time, while the slowdown is happening now, we expect metals’ prices will remain under pressure and there could be further downward spikes if confidence is further crushed by the virus.

Gold is now picking up its haven demand, which is being fueled by 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.