MORNING VIEW: Markets mixed; participants remain nervous about US response to China over Hong Kong

Broader markets were generally weaker this morning, Friday May 29, while they wait for what United States President Donald Trump’s response will be to China’s plans to impose national security laws in Hong Kong.

The base metals were mixed, however. On the Shanghai Futures Exchange only the lead contract was showing price falls, while most of the base metals traded on the London Metal Exchange were showing losses with only aluminium and zinc managing slight gains.

  • Trump to hold a press conference about China later on Friday.
  • South Korea sees a pick-up in new Covid-19 cases again, and cases in India are thought to be rising rapidly after restrictions have been eased.
  • Industrial production fell by 9.1% and 6% month on month in Japan in South Korea respectively in April.

Base metals
Three-month base metals prices on the LME were mainly weaker this morning with aluminium ($1,540 per tonne) and zinc ($1,632 per tonne) the only two metals showing slight gains, both were up by 0.1%.The rest were down by an average of 0.3%, with copper down by 0.3% at $5,354 per tonne.

Volume remains light on the LME with 3,804 lots traded as at 6.19am London time.

The most-traded base metals contracts on the SHFE were mainly firmer, the exception was lead where the July contract was down by 0.7%, while the rest of the metals were up by an average of 0.6%, with July copper up by 0.7% at 43,940 yuan ($6,141) per tonne.

Precious metals
Spot gold prices were slightly firmer this morning with prices up by 0.1% at $1,721.29 per oz. Prices have been quite volatile this week, trading in a $1,693.90-1,735.45 range. The other precious metals are stronger with silver ($17.44 per oz) and platinum ($826.50 per oz) both up by 0.3%, while palladium ($1,931.80 per oz) is up by 1%.

Wider markets
The yield on benchmark US 10-year treasuries has eased slightly and was recently quoted at 0.66%, this after being at 0.7% at a similar time on Tuesday – the range in recent weeks has been 0.61-0.74%.

Asian-Pacific equities were mixed this morning: the Nikkei (-0.18%), the ASX 200 (-1.63%), the Hang Seng (-0.93%), China’s CSI 300 (+0.23%) and the Kospi (+0.05%).

Currencies
The US dollar index is weaker and was recently quoted at 98.29 – it started to break out of the bottom of its 98.54-100.87 range on Thursday that it had held since early April.

Given this dollar move, it is not surprising that the other major currencies we follow are firmer: the euro (1.1098), the Australian dollar (0.6657), sterling (1.2347) and the yen (107.16).

The Chinese yuan (7.1505) is consolidating after Wednesday’s weakness that saw it reach 7.1770 that approached the weaker levels it was at in August last year, when it hit a low of 7.1842. The overall weakness suggests the market is readying for an escalation in the trade war. A weaker yuan will help offset any further tariffs.

Key data
Friday sees a barrage of key economic data to end the month with, too much to comment on, so please see the table below for details. But while the data will be important, as much of it old and backward looking, the market is mainly likely to wait to react to Trump’s press conference about China.

Today’s key themes and views
While there is optimism that the reopening of economies will bring with it improved demand, which will increase order flow, the benefits of that will need to be weighed up against the danger that re-openings prompt second waves of the virus.

We are particularly concerned that where economies are having to reopen for economic reasons before they have some control over the Covid-19 virus, that this will prolong the impact of the virus globally because a deeper spread of the virus is more likely to affect production while it spreads into less populated mining areas, as well as supply as it continues to hit distribution routes and infrastructure.

But, in the short term, Trump’s message on how he is going to deal with China is likely to set the tone for Friday and for the start of June.

We said earlier in the week that given the pick-up in geopolitical tensions it is surprising that gold is not firmer. Gold prices have started to rebound and with the dollar weaker and Trump expected to rattle the geopolitical cage, we would not be surprised to see gold supported further.