MORNING VIEW: Markets pause to adjust to Monday’s sell-off, but little has changed for the better

Consolidation across a broad section of markets is underway this morning, Tuesday February 25, while Monday’s sell-offs pause as markets adjust to lower prices, but little has changed for the better.

Given the novel coronavirus (2019-nCoV) is starting to spread across more countries and indeed major manufacturing countries at that, including Japan, South Korea and Italy, and the full impact of the shipping delays from China have yet to be felt across the global economy, the likely economic impact has probably not yet been taken into account in the markets.

  • Japan warns it is on the brink of a wider outbreak because its 160 cases are spread across 16 prefectures.
  • United States 10-year treasuries US ten-year treasuries yields drop to 1.4%.
  • Gold price retreat suggests profit-taking and/or selling to raise funds for margin calls after Monday’s hefty equity sell-offs.

Base metals
Despite concerns the epidemic may be turning into a pandemic, the three-month base metals prices on the London Metal Exchange were all up this morning by an average of 0.8%, this after an average 1.2% fall on Monday – see table below for more details. Out of the metals, zinc and nickel are the two that have extended losses in recent days, while the rest are generally trending lower, so today’s uptick seems a counter-trend move. The exception is tin ($16,765 per tonne), which continues to work higher from its late-January lows at $15,690 per tonne.

Trading volume remains strong into the rebound, with 8,448 lots traded as at 5.45am London time, this compares with last week’s average of 6,649 lots for this time of day.

While LME prices are higher, the most-traded base metals contracts on the Shanghai Futures Exchange were mixed today as they reacted to Monday’s weakness on the LME. April zinc is down by 1.7%, the others lie between a range of up or down by 0.2%, with copper off by 0.2% at 45,790 yuan ($6,511) per tonne.

The spot copper price in Changjiang was down by 15 yuan per tonne at 45,430-45,570 yuan per tonne, while the LME/Shanghai copper arbitrage ratio was at 8.01, compared with 8.05 on Monday.

Precious metals
The spot gold price is correcting lower and was recently trading at $1,640.60 per oz, this after setting a high on Monday at $1,689 per oz. Profit-taking and selling to raise funds for margin calls in other markets may well be behind the price retreat – we do not see the retreat as reflecting any reduction in concerns.

Wider markets
The yield on benchmark US 10-year treasuries is weaker this morning and was recently quoted at 1.4%, compared with 1.47% at a similar time on Monday.

Asian equities were mixed this morning, the exceptions were the Hang Seng that was up by 0.17% and the Kospi that was up by 1.18%, while the Nikkei that was closed on Monday, is down by 3.34% today as it plays catch-up, while the rest were lower: China’s CSI 300 (-0.19%) and the ASX 200 (-1.6%). Pre-market western equity indices are stronger.

The dollar index (99.30) is consolidating -it peaked on February 20 at 99.91. Last Friday’s weaker-than-expected flash manufacturing purchasing managers index (PMI) from the US, which fell to 50.8 from 51.9, dented the dollar, and having stopped rising, profit-taking seems to be setting in – the index has climbed from a low of 96.20 at the start of the year.

The other major currencies we follow are either consolidating or getting some lift now that the dollar has stopped rising: euro (1.0817), sterling (1.2939), the Australian dollar (0.6618) and the yen (110.82).

Key data
Tuesday’s economic agenda contains data on German final gross domestic product and United Kingdom realized sales data from the Confederation of British Industry (CBI).

US data includes two house price indices, consumer confidence and the Richmond Manufacturing Index.

In addition, US Federal Open Market Committee members Robert Kaplan and Richard Clarida are speaking.

Today’s key themes and views
Our view is unchanged, we see the biggest threats to the metals being the demand hit China is experiencing and the disruption to international supply chains from China that are likely to hit manufacturing on a global basis and therefore that could slow demand for the metals.

As such we expect more downward pressure on the metals. Any disruption to global manufacturing will, however, create pent-up demand and more stimulus and funding could lead to even stronger demand down the road – hence we see this as likely being a ‘V’-shaped correction.

Gold prices seem to be absorbing profit-taking, given all the uncertainty and nervousness across markets we expect weaker gold prices will attract more rotation out of risk and into havens.