MORNING VIEW: Markets generally upbeat, helped by EU recovery fund deal

Markets were for the most part stronger this morning, Tuesday July 21, encouraged by the €750 billion ($858 billion) recovery fund that European Union leaders agreed on in the early hours of this morning.

Markets were also being boosted by hopes that progress is being made on Covid-19 vaccines and ongoing concerns about supply disruptions, while participants seem content to look past the current economic damage caused by weak demand in the shadow of the pandemic.

  • Silver traded at multi-year highs this morning...
  • ...despite strength in markets, it appears there is growing demand for haven assets too.

Base metals
Three-month base metals prices on the London Metal Exchange were for the most part stronger this morning. The exception was tin that was down by 0.1% at $17,365 per tonne, while the rest were up between 0.3% for zinc ($2,205.50 per tonne) and 0.8% for lead ($1,843 per tonne), with copper up by 0.4% at $6,499.50 per tonne.

Traded volume has been light with just 3,250 lots traded as of 6.26am London time, compared with 6,509 lots at a similar time on Monday.

The most-traded base metals contracts on the Shanghai Futures Exchange were also mostly stronger, with the complex up by an average of 0.8%. August aluminium was the only one in negative territory, it was down by 0.1%. October nickel was up by 0.2%, while the rest of the metals were up by between 0.9% and 1.4%, with September copper up by 0.9% at 51,810 yuan ($7,411) per tonne.

Precious metals
Spot gold prices were little changed this morning, compared with the close on July 17; prices were recently quoted at $1,818.23 per oz, this after setting fresh multi-year highs at $1,820.45 per oz on Monday.

Silver ($20.28 per oz) was up by 2%, platinum ($852.30 per oz) was up by 0.6% and palladium ($2,057.50 per oz) was up by 0.5%, compared with Monday’s closes. The move in silver takes prices to levels not seen since 2016, when prices peaked at $21.13 per oz.

Wider markets
The yield on US 10-year treasuries was at 0.61% this morning, compared with 0.62% at a similar time on Monday morning; the weak yield suggests haven interest is quite high, which seems at odd given the strength across markets. With gold and silver also at fresh multi-year highs, are alarm bells ringing?

Asian-Pacific equities were stronger this morning: the Hang Seng (+1.92%), the CSI 300 (+0.15%), the Nikkei (+0.84%), the ASX 200 (+2.58%) and the Kospi (+1.41%).

The US dollar index has breached support this morning with a drop to 95.63 - the former low was 95.71 on June 10. A weaker dollar should be good for commodity demand from importing countries.

As the dollar weakens, the euro (1.1445) and yen (1-7.30) are holding their ground, while the Australian dollar (0.7039) and sterling (1.2689) have climbed.

Key data
Tuesday’s economic agenda is light. Data out already showed Japanese consumer prices were unchanged, having previously fallen by 0.2%, United Kingdom public sector borrowing was slightly more than expected at £34.8 billion ($43.9 billion) in June, but it was down from £44.7 billion in May (before the pandemic a high borrowing number was around £15 billion).

Later there is data on Chinese leading indicators.

Today’s key themes and views
After a pause last week, the base metals resumed their upside moves yesterday and are seeing follow-through buying this morning. We were waiting to see if the halt in the rise turned into more of a sell-off, but this does not seem to be the case.

While we can see why metals are being supported (Covid-19 production disruptions, potential for Chinese stockpiling, promises of infrastructure spending and institutional investor access to cheap financing), it is not all one way - demand has taken a hit in recent month so there is a risk that the rebounds have run ahead of the fundamentals and that may dawn on the market before too long. The catalyst for a pullback could be a pullback in equities.

Gold and silver prices are at multi-year highs, which suggests haven demand is strong. The weaker dollar will also act like a tailwind. We expect the bull market to continue given the state of uncertainty.




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