MORNING VIEW: LME base metals prices positive despite escalation in US-China trade war

While US-China trade talks continue, the market seems to be clinging on for an eleventh-hour deal this morning, Friday May 10, because key markets are holding up surprisingly well. But, if a deal does not miraculously emerge soon then further disappointment is likely to set in.

  • US raises tariffs on $200 billion worth of Chinese imports to 25%
  • China’s CSI 300 is up by 3.2%, other Asian equity markets predominantly up
  • US treasury yields weaker and gold firmer – both signs of haven asset demand

Base metals
Despite the escalation in trade tensions with the United States raising tariffs on imports from China, the three-month base metals prices on the London Metal Exchange were for the most part positive, with the complex up by an average of 0.3%.

But the two main metals showing strength were the two smaller markets of nickel (+1.1%) and tin (+0.6%). Copper and lead were up by 0.1%, aluminium was up by 0.2% and zinc was off by 0.1%. The three-month copper contract was recently quoted at $6,145 per tonne, compared with Thursday’s close of $6,141 per tonne.

The overall trends on the price charts remain downward. This is more in line with the bigger economic picture that continues to face numerous headwinds, including US trade disputes with China and Europe, sanctions against Iran and Britain’s exit from the European Union.

In China, base metals prices on the Shanghai Futures Exchange were mixed on Friday, with the complex up by an average of 0.2%. The June lead and September tin contracts are down by 0.6%, the June aluminium and nickel contracts are up by 1% and 0.7% respectively, while the June zinc and copper contracts are up by 0.3%, with the latter recently quoted at 47,790 yuan ($7,009) per tonne.

Spot copper prices in Changjiang were up by 0.7% at 47,730-47,960 yuan per tonne and the LME/Shanghai copper arbitrage ratio was recently at 7.78, compared with 7.76 at a similar time on Thursday.

Precious metals
Spot precious metals prices were firmer on Friday morning with gold and silver prices up by 0.1%, with gold recently quoted at $1,285.74, compared with $1,282.99 per oz at a similar time on Thursday. Platinum and palladium prices are both up by 1.2%. Given the deterioration in the trade talks this week, it is somewhat surprising that gold prices are not stronger.

On the SHFE, the June gold contract was up by 0.5% from Thursday’s close, while the December silver contract was flat.

Wider markets
In wider markets, the spot Brent crude oil price is firmer by 0.63% at $70.72 per barrel, compared with $70.28 per barrel at Thursday’s close.

US treasuries 10-year yields were weaker at 2.4520%, compared with 2.4640% at a similar time on Thursday. The yields on the US two-year and five-year treasuries remain inverted, they were recently quoted at 2.2631% and 2.2483% respectively.

The German 10-year bund yield remains negative, it was recently quoted at -0.0500%, unchanged from what is was at a similar time on Thursday.

Asian equity markets were for the most part stronger: Nikkei (-0.27%), Hang Seng (+1.16%), CSI 300 (+3.24%), the Kospi (+0.29%) and the ASX 200 (0.25%).

This follows a weaker performance in western markets on Thursday. In the US, the Dow Jones Industrial Average closed down by 0.54% at 25,828.36, while in Europe the Euro Stoxx 50 was down by 1.95% at 3,350.71.

The dollar index is consolidating, it was recently quoted at a slightly firmer 97.40, compared with 97.54 at a similar time on Thursday.

The other major currencies are mixed; the euro is firmer at 1.1288, compared with 1.1199 at a similar time on Thursday, while the rest are consolidating: the yen 109.82, sterling (1.3023) and the Australian dollar (0.6999).

The yuan is rebounding from recent weakness, it was recently quoted at 6.7991, compared with a low of 6.8255 on Thursday. The other emerging market currencies are either consolidating, or slightly weaker, the exception is the South African rand that is strengthening.

Key data
Friday’s key economic data is focused on industrial production figures out across Europe, Italian retail sales, UK gross domestic product and US consumer price index data. In addition, US Federal Open market Committee members Lael Brainard and John Williams are speaking. Any sustained pick-up in US tariffs on Chinese imports is likely to be inflationary in the US, but this will take time to show up.

Today’s key themes and views
All eyes are on US-China trade talks and while the market seems to be taking increased US tariffs in its stride, at least for now, that may change if China announces any retaliation. The market is likely to remain nervous as the outlook is on a knife-edge – talks could break up, or a last minute deal, or gesture of goodwill could be forthcoming. Overall, we expect increased volatility ahead.

Gold found some support on the increased market stress on Thursday, but so far it has been limited and looks fragile. The overall trend remains to the downside, but given the trade tensions we would also expect trading to remain choppy.

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