MORNING VIEW: LME base metals prices consolidate after Monday’s pullbacks

Against a backdrop of poor economic growth, especially in Germany and China, and in the absence of fresh news, markets seem to be content to consolidate this morning, Tuesday July 23.

This is especially so ahead of the release of flash manufacturing purchasing managers’ index (PMI) data on Wednesday and the European Central Bank (ECB) rate decision on Thursday.

  • Metals consolidate after recent price gyrations.
  • Study group data shows deficits in copper, lead and zinc.
  • Equities in Asia are for the most part stronger.

Base metals
The three-month base metals prices on the London Metal Exchange are for the most part firmer, with the complex up by an average of 0.3% as at 6.37am London time. The exception is tin, which is off by 0.1%. Copper is little changed at $6,020.50 per tonne, up by $1 per tonne from Monday’s close, while nickel prices have rebounded 0.9% to $14,370 per tonne. The rebound in nickel prices comes after 6.4% drop over July 19 and Monday, following July 18’s high of $15,115 per tonne.

In China, base metals prices on the Shanghai Futures Exchange were lower across the board while they react to the weaker prices on the LME on Monday. The complex is down by an average of 0.7%, led by a 1.5% fall in October nickel, while September copper is off by 0.9% at 47,360 yuan ($6,882) per tonne, compared with Monday’s close of 47,800 yuan per tonne.

Spot copper prices in Changjiang were down by 0.7% at 47,170-47,290 yuan per tonne, compared with 47,470-47,630 on Monday. The LME/Shanghai copper arbitrage ratio was recently at 7.87, compared with 7.85 at a similar time on Monday.

Precious metals

Spot precious metals prices were down this morning by an average of 0.5%, led by a 0.8% fall in silver to $16.20 per oz, while gold was down by 0.6% at $1,419.90 per oz. A firmer dollar and a realization that the US Federal Reserve is likely to cut rates by 25 basis points next week, rather than by 50 basis points, seems to be prompting some profit-taking in gold after last week’s run up to $1,453 per oz – which was the highest since May 2013, when prices were on their way down from the 2011 record high of $1,921 per oz.

Platinum and palladium prices were also consolidating recent directional moves with platinum’s rally running into some selling, while the pullback in palladium has attracted buying.

The precious metals traded on the SHFE were also weaker this morning, with the most-traded December gold and silver contracts off by 0.9% and 0.8% respectively.

Wider markets
The spot Brent crude oil price was recently at $63.33 per barrel, little changed from where it was at a similar time on Monday, $63.37 per barrel. It remains surprising that with oil supply threatened in the Persian Gulf and in Libya that oil prices are not higher.

The yield on benchmark US 10-year treasuries was little changed this morning at 2.0518%, compared with 2.0514% at a similar time on Monday. But the German 10-year bund yield continues to weaken and was recently at -0.3420%, compared with -0.3240% on Monday morning.

In equities, Asian indices were firmer on Tuesday: Nikkei (0.91%), Hang Seng (0.22%), CSI300 (0.09%), Kospi (0.36%) and ASX200 (0.50%).

This follows positive closes in western markets on Monday, where in the United States the Dow Jones Industrial Average close up by 0.07% at 27,171.90 and in Europe, the Euro Stoxx50 closed up by 0.28% at 3,489.92.

The dollar index has firmed to 97.45, compared with 97.20 at a similar time on Monday morning.

While the dollar remains firm, the other major currencies we track are weaker: Japanese yen (108.11), euro (1.1192), sterling (1.2450), the Australian dollar (0.7022) and the Chinese yuan (6.8818).

Key data
In the United Kingdom, there is data on the Confederation of British Industry (CBI) industrial order expectations which is expected to fall for the fourth month in a row. In the US, there is data out on house prices, existing home sales and the Richmond Manufacturing Index. The market is likely to be on the lookout for any weaker than expected US data as that could change expectations about the size of the expected US Fed rate cut next week.

Today’s key themes and views
Given we are in the slow summer months it is interesting that the overall trend in most of the base metals has been up and this is happening when economic data remains weak and there is no end in sight for the US-China trade dispute. This suggests that the market may be taking more note of tighter supply fundamentals. The latest International Copper Study Group data shows the world refined copper market was in a deficit of 150,000 tonnes in the first four months of the year and International Lead and Zinc Study Group data showed January-May deficits in zinc and lead of 123,000 tonnes and 42,000 tonnes respectively.

With tension in trade, falling government bond yields and raised geopolitical risks over Iran, oil and Brexit, it is not surprising that gold prices are trending higher and with a trade deal still not on the horizon, gold may not face a strong headwind for some time. We see this latest pullback as brief correction following last week’s push to new multi-year highs.

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