MORNING VIEW: LME base metals prices correct while traders reconsider US rate cut expectations

Rising tension over Iran and a reduction in expectations on the size of the next US Federal Reserve rate cut were weighing on sentiment this morning, Monday July 22.

Last week the market started to price-in a 50-basis-point cut in the US benchmark interest rate at the Federal Open Market Committee’s (FOMC) July 30-31 meeting, but now a 25-basis–point cut now seems more likely.

  • Tensions in the Middle East increased after Iran seized two tankers in the Straits of Hormuz on Friday and there was an attack on a Libyan oil field.
  • The probability of a 50-basis-point US rate cut has fallen to 22.5%, from over 60% late last week.

Base metals
With most of the base metals spiking higher on Friday on the back of dovish Federal Reserve comments, prices have started to consolidate this morning, with prices down by an average of 0.2%, although the average has been skewed by a 0.5% rise in tin prices to $17,860 per tonne. Lead led the decline with a 0.7% fall to $2,033.50 per tonne, while copper is little changed at $6,076 per tonne, down $1 per tonne from Friday’s close.

Despite tin prices bucking the trend this morning, tin prices are the weakest of the complex, with prices just 1.7% above this year’s multi-year low at $17,585, which was the lowest since July 2016.

In China, September copper and tin prices are firmer on the Shanghai Futures Exchange, while the rest of the metals are weaker, led by a 2% drop in October nickel prices to 115,580 yuan ($16,792) per tonne. Nickel has, however, been the strongest of the base metals of late, with the October contract rising to a high of 119,230 yuan per tonne, from a low of 96,710 yuan per tonne in early July.

September copper was up by 0.3% at 47,640 yuan per tonne this morning, while spot copper prices in Changjiang were unchanged at 47,470-47,630 yuan per tonne. The LME/Shanghai copper arbitrage ratio was recently at 7.85.

Precious metals
Despite the increased tension in the Middle East, it appears that the market’s view on US interest rates is setting the near-term tone in gold prices, with spot gold recently trading at $1,426.26 per oz, down from Thursday’s high at $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.

Likewise, silver prices are consolidating last week’s strong gains that saw prices reach a high of $16.58 per oz, which was the highest they had been for a year. Indeed, last week’s rally in silver outpaced that of gold, with the gold/silver ratio falling to 1:87 from around 1:93 in early July.

Platinum continues to trend higher, with the metal’s price recently quoted at $848.20 per oz, while palladium continues to correct lower and was recently quoted at $1,516.20 per oz.

The precious metals traded on the SHFE were mixed this morning, with the most-traded December gold contract off by 0.3%, while December silver was up by 0.8%.

Wider markets
The spot Brent crude oil price was recently at $63.37 per barrel this morning, compared with $62.90 at a similar time on Friday. 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 has recovered some ground this morning, it was recently at 2.0514%, compared with 2.0446% at a similar time on Friday. But the German 10-year bund yield dipped lower to -0.3240%, compared with -0.3138% on Friday morning.

In equities, Asian indices were mostly trading lower on Monday: Nikkei (-0.23%), Hang Seng (-1.12%), CSI300 (-0.69%), Kospi (-0.05%) and ASX200 (-0.14%).

This follows negative closes in the United States on Friday that saw the S&P500 close 0.62% lower and Dow Jones Industrial Average close down by 0.25%.

The dollar index remains firm at 97.20 on Monday morning, its range last week being 96.65- 97.44. We expect the US central bank will stick with an initial cut of 25 basis points in July, leaving the option for a further cut later in the year.

While the dollar remains firm, the other major currencies we track are weaker: Japanese yen (107.91), euro (1.1216), sterling (1.2480), the Australian dollar (0.7035) and the Chinese yuan (6.8781.

Key data
There is little economic data out today – a German Bundesbank monthly report, but Bank of Japan’s governor Haruhiko Kuroda is speaking at the International Monetary Fund in Washington DC, at 4pm London time.

Today’s key themes and views
For the most part, the trends in the base metals are to the upside - the exceptions are tin and zinc that are trending lower. While weaker monetary policy is a positive, the slowdown in global growth caused by the US-China trade war is a major negative. Given the slower growth should be the dominant factor for metals, the fact most of the metals are trending higher, does suggest supply fundamentals are starting to become more important drivers.

The tension in trade, falling government bond yields and raised geopolitical risks over Iran, oil and Brexit, it is not surprising that gold prices are rising and with a trade deal still not on the horizon, gold may not face a headwind for some time.

base metals

precious metals

macroeconomic data

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