MORNING VIEW: LME base metals prices under selling pressure; larger US Fed rate cut in limbo

Base metals prices were generally lower in the early trading hours of Tuesday July 9, amid concerns over the prolonged US-China trade dispute, geopolitical tensions in the Middle East, the continued sell-off in major equity indices and persistently weak economic data.

  • Market expectations of a more substantial 50 basis points rate cut by the US Federal Reserve Bank in its upcoming Federal Open Market Committee (FOMC) meeting at the end of this month have been significantly toned down. Instead, the market has priced in a 25 basis points cut. 
  • US approval of arms sales to Taiwan has watered down what looked like a promising restart to US-China trade talks. 
  • Gold prices remain elevated, highlighting increased haven demand
  • Base metals subdued while economic weakness dominates

Base metals

London Metal Exchange base metals three-month prices were all under selling pressure bar tin at the time of writing, and the complex was down 0.2% on average as of 6:30am London time. But the gain in LME tin was minimal, up 0.1%, while aluminium was unchanged at $1,805 per tonne. The rest of the complex struggled to attract bids, with zinc down 0.1%, copper and lead off by 0.2% and nickel down 0.9%.

Similarly, the base metals prices on the Shanghai Futures Exchange were down by 0.2% on average. Dip-buying interest remained in the most-traded August nickel and September tin contracts as both metals prices were up 0.8% and 0.5% respectively. However, the rest of the complex ran into persistent selling pressure. The most-traded August zinc contract was off by 1% as market participants reacted to higher Chinese refined zinc output. August lead was off by 0.8%, followed by copper (down 0.5%) and aluminium (off 0.3%).

Spot copper prices in Changjiang edged lower to 46,150-46,260 yuan per tonne, while the LME/Shanghai copper arbitrage ratio has declined to 7.76.

Precious metals
The spot gold price came off from a Monday July 8 high of $1,407.65 per oz and was last trading at $1,395.25 per oz this morning. The limited pullback is a reflection that demand for haven-assets remains strong amid the ongoing geo-political tensions in the Middle East. Also, the increase of gold holdings by various central banks has been a supportive element and indicates that the trend to diversify from risky assets remains. The spot silver price was holding on to the $15.00 per oz handle and managed a mild 0.3% gain.

Meanwhile, the platinum price was almost unchanged at $812.70 per oz at the time of writing. Sister-metal palladium continues to keep most of the gains made in June but appeared a tad weak, down 0.2% this morning at $1,553.90 per oz.

The precious metals complex on the SHFE remain weak, down by 0.1% on average. The December gold contract was off by 0.1%, while silver was unchanged and trading at 3,657 yuan per kg ($530.68).

Wider markets
The spot Brent crude oil price moved lower to $64.03 per barrel, off from yesterday’s high of $65.12 per barrel.

Meanwhile, benchmark US 10-year treasuries continue to hover above the 2% mark but remain under pressure, down 0.51% at 2.0342%. The German 10-year bund yield still trades in record negative territory and was last seen at -0.3700%.

Asian equity indexes remained under selling pressure, with the Nikkei being the exception, up 0.14%. The Hang Seng led the declines, off 0.57%, while China’s CSI300 was down by 0.31%, the Topix was down 0.22% and the ASX was down -0.10%.

Given the low probability of a 50 basis points rate cut, equity investors continued to reduce their bullish exposure in major US indices on Monday July 8, with the Dow Jones Industrial Average down 0.43%, the S&P500 off by 0.48% and the Nasdaq off by 0.78%.

The dollar index was firmer this morning and was trading at 97.45 at time of writing. Meanwhile, the Japanese yen continued to weaken to (108.78), a contrast to last week’s strength when it was trading at 107.52 on July 3.

The other major currencies we follow have come under selling pressure, with the euro down 0.05% at 1.1211, while the sterling was last at 1.2490. Meanwhile, selling continues in the Australian dollar as it slides to 0.6953, down 0.28%.

The yuan hovered comfortably at 6.8831, up 0.02% this morning. However, the risk of a weaker yuan remains as trade negotiations between the United States and China is still in a gridlock, with little results to show for.

Key data
Data out in the early Asian trading session saw Japanese average cash earnings come in better than expected at negative 0.2% but M2 money stock was a tad lower at 2.3%, down from the previous 2.7%.

For the rest of the day, market attention will turn to Federal Reserve Chair Jerome Powell and this is followed by other Fed speakers – James Bullard and Randal Quarles. Any reiteration of a dovish remark may have little impact since most of the rate cut expectations have been priced in. However, a surprise hawkish view on the US economy could stir market sentiment and shift global investors interest and potentially a stronger dollar.

Today’s key themes and views
Most of the London Metal Exchange base metals prices were a tad weaker this morning as appetite for risk assets remained subdued. The market seems to content to reduce exposure and steer cautiously as it waits for further clarity from US Fed chairman Powell testimony.