MORNING VIEW: LME metals firmer across the board; recent price weakness runs into support

Generally London Metal Exchange prices have been weak in recent days and the strong dollar has been a factor in that, but dip-buying appears to be providing support in morning trading on Friday April 26.

  • Asian equities generally weaker this morning
  • Dollar index extends gains
  • Market waiting for US GDP data

Base metals
Base metals prices on the LME were for the most part firmer across the board this morning, with copper, nickel, zinc and lead prices up by either side of 0.6%, while aluminium prices were up by 0.1% and tin has been untraded. Copper was recently quoted at $6,380 per tonne, up 0.5% from Thursday’s close.

The market continues to wait for concrete developments on the US/China trade deal. A new deal is expected to boost business confidence and that in turn could lead to more restocking because industry is believed to be running with low stocks.

But since reaching a deal has become a long drawn out ordeal, stale long liquidation seems to have taken over from the more positive sentiment seen in the first quarter.

In China, base metals prices on the Shanghai Futures Exchange were mixed with June copper, aluminium and September tin down around 0.5%, while June nickel, lead and zinc were up by between 0.2% and 0.6%. June copper was recently quoted at 48,890 yuan ($7,261) per tonne, compared with 49,200 yuan per tonne at Thursday’s close.

Spot copper prices in Changjiang were down by 0.8% at 48,720-48,755 yuan per tonne and the LME/Shanghai copper arbitrage ratio was recently at 7.66.

In other metals in China, the September iron ore contract on the Dalian Commodity Exchange was down by 0.2% at 619 yuan ($71.25) per tonne from 620.50 yuan per tonne at the close on Thursday. On the SHFE, the October steel rebar contract was down by 0.4% at 3,729 yuan per tonne compared with 3,744 yuan per tonne at Thursday’s close.

Precious metals
Spot precious metals prices were firmer across the board with gains averaging 0.3%, led by a 0.6% gain in platinum prices. The overall trend in gold and silver are to the downside, but prices appear to have run into some support for now. Likewise, the platinum group metals have pulled back from the respective highs but are holding up better. Gold was recently quoted at $1,280.03 per oz, down by 0.2% from Thursday’s close at $1,277.85 per oz.

On the SHFE, the June gold and silver contracts were up by 0.4% and 0.5% respectively, from Thursday’s closing levels.

Wider markets
In wider markets, the spot Brent crude oil price has generally strengthened because the United States has further tightened its sanctions against Iranian exports. Prices were recently quoted at $74.12 per barrel, compared with around $71 per barrel in mid-April.

The yield on US 10-year treasuries was recently quoted at 2.5246%, the yields on the US 2-year and 5-year treasuries have returned to a small contango - they were recently quoted at 2.3089% and 2.3116% respectively. The German 10-year bund yield has turned negative again and was recently quoted at -0.0150%.

Asian equity markets were for the most part weaker on Friday: the Nikkei (-0.22%), the CSI 300 (-1.29%), the Hang Seng (0.01%), the Kospi (-051%) and the ASX 200 (+0.05%).

This follows a weaker performance in western markets on Thursday: in the US, the Dow Jones Industrial Average closed down by 0.51% at 26,462.08, and in Europe, the Euro Stoxx 50 was down by 0.31% at 3,491.92.

The dollar index broke higher on Tuesday April 23, and has climbed to reach a high of 98.34, the highest since June 2017, when it was on the way down from the January 2017 peak of 103.82. The stronger dollar is weighing on the other major currencies to varying degrees: the euro (1.1136), sterling (1.2903), the yen (111.63) and the Australian dollar (0.7020).

The yuan has weakened out of its two-month sideways range, this as the dollar shows particular strength. It was recently quoted at 6.7360. The other emerging market currencies we follow are also generally showing weakness, the stronger dollar making debt servicing more burdensome.

Key data
Economic data already out on Friday shows a mixed picture for Japan: the Tokyo consumer price index climbed to 1.35, compared with a prior reading of 1.1%; unemployment climbed to 2.5% from 2.3%; industrial production fell by 0.9%, against an expected rise of 0.1%; retail sales climbed 15 after a 0.6% rise previously; and housing starts climbed 10%. Out of the data still to be released the market is likely to focus on US advanced gross domestic product and revised university of Michigan consumer sentiment and inflationary expectations.

Today’s key themes and views
The base metals have been showing weakness in recent weeks, although for lead, the weakness has been fairly continuous since mid-March. More recently, prices seem to have run into dip-buying which has been enough to provide some support. The metal showing the greatest weakness has been tin and that is probably on the combination of the market anticipating a pick-up in exports from Indonesia as well as on reports that the electronics/semiconductor sectors are seeing slower growth. We still feel that as the trade dispute has caused the global economy to slow down so much, a deal will breathe new life into the global economy. And that will lead to restocking and a pick-up in capital spending, but it is still a waiting game.

We had thought gold prices were looking quite vulnerable and the stronger dollar has weighed on gold prices, although in recent days the precious metals have run into some dip-buying. For now, we see the path of least resistance as to the downside. Given we expect a US/China trade deal to emerge over the next few months, the need for havens may well diminish further. That is unless tighter US sanctions on Iran increase geopolitical tensions.

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