MORNING VIEW: LME metals prices rebound as China works to stabilize market

A rebound is underway across a broad set of markets, with China’s CSI 300 index up by 2.5% this morning, after China’s central bank pumped money into the financial system and appears to be working to stabilize markets and calm fears.

  • Most Asian equity indices are rebounding.
  • Gold prices are retreating as they pull back from Friday’s highs.
  • US 10-year government bond yields are firmer too.

Base metals
Three-month base metals prices on the London Metal Exchange were up across the board during early trading on Tuesday February 4, led by 2.2% gains in nickel ($13,000 per tonne) and zinc ($2,212 per tonne), while aluminium lagged with a 0.2% gain – it was, however, the metal that fell the least in recent weeks.

The three-month copper price was up by 1.8% at $5,662.50 per tonne. At their recent lows, the base metals were down by an average of 11.9% from the highs reached on January 17. This morning, the complex was down by an average of 9.1% compared with the January 17 highs, so have regained some 2.8% of lost ground.

Trading volume has been high with 19,607 lots traded as at 5.46am London time, this compares with 16,178 lots traded at a similar time on Monday and a more “normal” volume of around 5,000 lots.

In China, the most-traded base metals contracts on the Shanghai Futures Exchange were mixed this morning. The March contracts for aluminium and zinc were down by 0.5% and 0.2% respectively, while March lead and March copper were up by 0.2% – the latter recently quoted at 45,080 yuan ($6,427) per tonne. April nickel was up the most with a 1.8% gain and June tin was up by 0.7%.

The spot copper price in Changjiang was up by 0.1% at 44,880-45,000 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 7.96 – this compared with around 7.88 before the Lunar New Year holiday. This suggests LME copper prices are still weaker relative to SHFE prices than they were before the Wuhan coronavirus started to impact the metals and in turn this may open up some arbitrage opportunities.

Precious metals
Spot gold prices are drifting this morning and were recently quoted at $1,572.20 per oz, down by 0.4% from Monday’s close – the recent high has been $1,590.20 per oz. Silver ($17.72 per oz) continues to follow gold’s lead, while palladium ($2,333 per oz) is on the rise again, having spent the second half of last week consolidating after its initial pullback. Platinum, recently at $974 per oz, is also attempting to rebound.

Wider markets
The yield on benchmark US 10-year treasuries was recently quoted at 1.55%, compared with 1.53% at a similar time on Monday, and the German 10-year bund yield was recently quoted at -0.45%, compared with -0.44% at a similar time yesterday.

Asian equities were firmer across the board this morning: the Nikkei (+0.49%), the Kospi (+1.84%), China’s CSI 300 (+2.57%), the ASX 200 (+0.37%) and the Hang Seng (+1.25%).

This follows a stronger performance in Western markets on Monday, where in the United States, the Dow Jones Industrial Average closed up by 0.51% at 28,399.81; in Europe, the Euro Stoxx50 closed up by 0.56% at 3,661.27.

The dollar index (97.86) rebounded on Monday after some strong US economic data and after January 31’s spike lower, and it is firmer again this morning.

The rebound in the dollar has weighed on the euro (1.1057) and the yen (108.90), while sterling (1.2989) is weaker as United Kingdom Prime Minister Boris Johnson still seems prepared to have a ‘no deal’ with the European Union if trade negotiations do not work out. The Australian dollar (0.6720) is firmer, no doubt helped by the rebound in commodity prices and sentiment.

The Chinese yuan (6.9920) is firmer than Monday when it reached a weak point of 7.0246, it had been trading around 6.8450 on January 17.

Key data
Economic data out today includes Spanish unemployment change, UK construction purchasing managers’ index (PMI), EU producer price index and Italian consumer price index.

US data includes factory orders and the economic optimism reading from Investor’s Business Daily (IBD), TechnoMetrica Institute of Policy and Politics (TIPP).

Today’s key themes and views
Given the significant price falls in recent weeks happened at a time of reduced liquidity and as it is still early days to know what medium-term impact the novel coronavirus (2019-nCoV) will have on the Chinese and indeed global economies, we should be braced for choppy trading now while the markets adjust to developments and government action.

Although gold prices have climbed over recent weeks, the fact that new highs have not been reached suggests the market already considers gold as an expensive haven. That said, there is little doubt that gold remains in the strong upward trend that it has been in since the fourth quarter 2018.