MORNING VIEW: Markets mixed as consolidation sets in following recent gains, participants prepare for year-end

Broader markets are generally weaker this morning, Wednesday December 18, with equities in Asia mainly lower, metals mixed and havens little changed.

In Europe, fear that a hard Brexit has not vanished is weighing on sentiment, especially in sterling, while a lack of detail on the United States-China trade deal has made it difficult for markets to see further follow-through buying.

  • Equities in Asia are consolidating recent gains, but multi-year highs in many regional equity indices suggests sentiment is bullish overall.
  • Analysts seem to be getting more bullish for commodities in 2020 with Bank of America saying there could be a “risk asset melt-up” in the first quarter.

Base metals
Three-month base metals prices on the London Metal Exchange were mixed this morning, with copper, nickel, lead and tin down between 0.1% for lead ($1,892 per tonne) and 0.4% for both copper ($6,163 per tonne) and nickel ($13,965 per tonne). Aluminium ($1,773.50 per tonne) and zinc ($2,298 per tonne) were up by 0.5% and 0.3% respectively.

Trading volume has been below average with 3,253 lots traded as at 5.40am London time.

In China, the most-traded base metals contracts on the Shanghai Futures Exchange were also mixed – February aluminium led on the upside with a 1.1% gain, with May tin up by 0.7% and February lead up by just 0.1%. February nickel led on the downside with a 1.6% decline, followed by a 0.6% fall in February zinc and a 0.3% fall in February copper, which was recently quoted at 49,110 yuan ($7,017) per tonne.

The spot copper price in Changjiang was up by 20 yuan per tonne at 49,000-49,040 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 7.97, up from 7.94 at a similar time on Tuesday morning.

Precious metals
The precious metals are holding up well near the upper levels of their recent ranges. The fact gold prices ($1,476.95 per oz) have not retreated on the trade deal news is interesting, it may be investors are still holding on to the exposure to gold in case the details of the deal disappoint.

Wider markets
The spot Brent crude oil price are also consolidating and were recently quoted at $65.68 per barrel, down 0.15% from Tuesday’s close and below yesterday’s highs at $66.22 per barrel.

The yield on benchmark US 10-year treasuries has firmed, which suggests some reduction in haven interest. It was recently quoted at 1.8737% compared with around 1.8630% at a similar time on Tuesday. The German 10-year bund yield was little changed and was recently quoted at -0.2934%, compared with -0.2939% at a similar time on Tuesday.

Asian equities were mixed this morning: the Nikkei (-0.49%), the Hang Seng (-0.02%), the Kospi (-0.04%) were weaker, while China’s CSI 300 (+0.16%) and the ASX 200 (+0.06%) nudged upward.

This follows a mixed performance in Western markets on Tuesday, where in the US, the Dow Jones Industrial Average closed up by 0.11% at 28,267.16; in Europe, the Euro Stoxx50 closed down by 0.73% at 3,745.28.

The dollar index broke lower on December 12 but it has since bounced – it was recently quoted at 97.30, compared with December 12’s low of 96.60. The rebound is now testing its breakdown level. The reversal in sterling’s (1.3105) election gains and a pullback in the euro (1.1137) have fueled the rebound in the dollar.

The yen (109.43) is consolidating recent weakness, as is the Australian dollar (0.6850).

The Chinese yuan (7.0052) is still giving back some of its gains from December 13, when it reached a multi-month high of 6.9588. The upward trends in the Russian rouble (62.52), South African rand (14.4057), Brazilian real (4.0714) and Mexican peso (18.930), perhaps are anticipating better demand for commodities going forward.

Key data
Today is another busy day for economic releases across Europe, with data already out showing Germany’s producer price index coming in flat, compared with a 0.2% fall previously. German business climate data from Information and Forschung (Ifo), the European Union’s consumer price index and a host of price data out of the United Kingdom are also expected. US releases include crude oil inventories.

In addition, US Federal Open Market Committee member Charles Evans is speaking.

Today’s key themes and views
After a stronger performance in recent days, the base metals are for the most part consolidating and generally look well placed to continue to work higher – some more than others, with lead and nickel looking less buoyant than the others. As the year-end approaches, book squaring and thinner trading conditions may lead to choppy trading, but with a partial trade deal reached and some stronger Chinese economic data, bases should generally be in place, which should provide the foundations for a stronger outlook for 2020.

The fact gold prices are holding up also suggests there is still some nervousness about the details of the trade deal, plus with many equity indices at record, or multi-year highs, investors may be looking to park their profits in havens over the holiday period.

Owing to year-end holidays, today’s Morning View will be the last of 2019. The next report will be published on Monday January 6, 2020.