MORNING VIEW: LME base metals prices consolidate after Monday’s sell-off

Markets were consolidating during morning trading on Tuesday May 14 after the previous day’s weakness that saw prices adjust to an escalation in the US-China trade war, with China retaliating by increasing tariffs on $60 billion worth of US imports. This saw risk-off and money move into haven assets, including gold.

  • Investment money flows into gold, the yen and treasuries…
  • …while flowing out of commodities and equities

Base metals

The London Metal Exchange base metals complex was for the most part slightly firmer on Tuesday morning, with three-month prices up by an average of 0.2% – this after falling by an average of 1.4% on Monday, when zinc and copper led the way down with falls of 2.4% and 2% respectively.

While copper, zinc and lead have lost ground during the latest escalation in the US-China trade conflict, aluminium, nickel and tin, although weak, have managed to tread water. What is also interesting is that despite stock increases in zinc, the backwardation remains strong with the LME’s cash/three-month spread at $143-143 per tonne, which suggests the shorts may not be too comfortable staying short for any longer than they need to.

In China, base metals prices on the Shanghai Futures Exchange were weaker across the board on Tuesday, with prices off by an average of 0.6% – led by a 1% drop in the June lead contract. The June copper contract was recently down by 0.3% at 47,580 yuan ($6,926) per tonne.

Spot copper prices in Changjiang were down by 0.2% at 47,360-47,510 yuan per tonne and the LME/Shanghai copper arbitrage ratio was recently at 7.87, compared with 7.83 at a similar time on Monday and 7.78 at a similar time on May 9. This highlights that LME copper is relatively weaker than China’s spot copper.

Precious metals
Spot gold and silver prices were little changed on Tuesday morning with gold at $1,298.46 per oz, but this is after a strong performance on Monday when prices closed up by 1.1%, compared with $1,285.75 per oz at Friday’s close. Platinum and palladium prices were also firmer this morning, seeing gains of 1.2% and 0.5% respectively.

On the SHFE, the June gold contract was up by 1.4% from Monday’s close, while the December silver contract was up by 0.9%.

Wider markets
In wider markets, the spot Brent crude oil price was up by 0.8% at $70.48 per barrel, compared with $69.92 per barrel at Monday’s close.

The yield on benchmark US 10-year treasuries was weaker at 2.4095%, compared with 2.4270% at a similar time on Monday. The yields on the US two-year and five-year treasuries were recently quoted at 2.1915% and 2.1914% respectively, showing that the backwardation between the two has all but levelled out.

The German 10-year bund yield has moved further into negative territory, it was recently quoted at -0.0705%, compared with -0.0500% at a similar time on Monday.

Asian equity markets were unsurprisingly down this morning: Nikkei (-0.59%), Hang Seng (-1.7%), CSI 300 (-0.32%), the Kospi (-0.11%) and the ASX 200 (-0.92%). The fact that Asian equities were not down by more, considering the sell-off in the United States on Monday, suggests some stability is returning.

In the US on Monday, the Dow Jones Industrial Average closed down by 2.38% at 25,324.99, while in Europe the Euro Stoxx 50 was down by 1.2% at 3,320.78.

Despite all the turmoil in markets, the dollar index is not moving too much, it was recently quoted at 97.37, unchanged compared from a similar time on Monday.

The other major currencies are mixed; the Japanese yen showed strength on Monday, reaching 108.99 on the back of haven asset demand, but was recently quoted at 109.66, the euro at 1.1235 is little changed, sterling is weaker at 1.2939, as is the Australian dollar at 0.6950.

The yuan continues to sell off, it was recently quoted at 6.8768, compared with 6.8665 at a similar time on Monday. The other emerging market currencies are either consolidating or showing weakness.

Key data

Data out already on Tuesday showed a slight gain in Japan’s economic watchers sentiment, which climbed to 45.3 from 44.8. The German consumer price index (CPI) was unchanged at 1%, while the German wholesale price index climbed by 0.6%, after a previous 0.3% rise.

Later there is data on the UK employment situation, German and EU Zentrum fur Europaische Wirtschaftsforschung (ZEW), EU industrial production, as well as US data including the National Federation of Independent Business (NFIB) small business index and import prices. In addition, US Federal Open Market Committee members John Williams and Esther George are speaking.

Today’s key themes and views

We have been expecting the fallout from the lack of a US-China trade deal to lead to increased volatility and that is being seen. Despite the increase in tariffs, it does seem as though a trade deal may still within reach as US President Donald Trump is still on schedule to meet with Chinese President Xi Jinping at a Group of Twenty summit on June 28-29.

So while traders vent their disappointment now, the price weakness could be setting the market up for a strong reversal, especially as the funds are believed to be significantly short and the fundamentals for all the metals remaining tight, with Fastmarkets expecting deficits in to remain in place in all the base metals this year.

As such, while there may be further price weakness ahead, traders are also likely to be looking for buying opportunities.

Gold found some support last week on the back of the turmoil in trade talks and that was built upon on Monday with prices breaching $1,300 per oz, which broke the downward trend line. Given the increased uncertainty surrounding the trade deal and the nervousness that is producing, gold may well remain in demand for a while.

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