MORNING VIEW: Metal price weakness attracts dip-buying

With US-China trade talks appearing to have soured, it is somewhat surprising that the metals markets are not weaker. But, confirmation that Chinese vice premier Liu He’s trip to Washington on Thursday May 9 is to go ahead, suggests there may still be a chance of a trade deal and that seems to be encouraging some dip-buying in the metals.

  • Risk-off prompting haven demand with equities down, while treasuries, gold and the yen are firmer
  • Base metals also managing to shrug off weakness in equities
  • Markets expected to remain nervous overall, expect more volatility

Base metals

Three-month base metals prices on the London Metal Exchange were for the most part firmer on Wednesday morning with the complex up by an average of 0.5%. Zinc was the exception, with a drop of 0.1%, while copper leads on the upside with a 0.8% gain to $6,213 per tonne, compared with Tuesday’s close at $6,161.50 per tonne.

While prices may be working higher this morning, the overall trends on the price charts are pointing downward. This is more in line with the bigger economic picture that continues to face numerous headwinds from the US trade disputes with China and Europe, sanctions against Iran and Britain’s exit from the European Union.

The threat of the US-China trade dispute turning ugly has increased, but we have seen before that US President Donald Trump can turn the rhetoric on and off, so while events have turned negative this week, the pendulum could swing positive on the back of another presidential social media post.

In China, base metals prices on the Shanghai Futures Exchange were mixed on Wednesday, with the June contracts for copper and zinc, and September tin, all weaker by between 0.4% and 0.9%, while the June contracts for aluminium, nickel and lead were up by between 0.1% and 0.4%. The June copper contract was down by 0.7% at 47,970 yuan ($7,082) per tonne, compared with 48,310 yuan per tonne at Tuesday’s close.

Spot copper prices in Changjiang were down by 0.8% at 47,820-47,920 yuan per tonne and the LME/Shanghai copper arbitrage ratio was recently at 7.72, compared with 7.74 at a similar time on Tuesday. The weaker Chinese trade balance data for April that showed a $13.8-billion trade surplus, compared with a $32.6-billion surplus in March, may have weighed on Chinese domestic prices.

Precious metals

Spot precious metals prices were stronger on Wednesday morning with the complex up by an average of 0.4% – the stress in financial markets caused by the trade situation is prompting a risk-off climate with money coming out of equities and heading for havens. Gold was recently quoted at $1,287.12 per oz, up from Friday’s close at $1,279.05 per oz, which was before Trump announced his latest tariff threats.

On the SHFE, the June gold and December silver contracts were firmer by 0.5% and 0.3% respectively, compared with Tuesday’s close.

Wider markets

In wider markets, the spot Brent crude oil price is consolidating, it was recently quoted at $70.20 per barrel, compared with $71.13 per barrel at a similar time on Tuesday, but above Monday’s low at $68.88 per barrel.

US treasuries yields were weaker at 2.4603%, compared with 2.4948% at a similar time on Tuesday, which again highlights investors are prepared to accept lower yields for the safety treasuries provide, a sure sign of risk-off sentiment.

The yields on the US two-year and five-year treasuries remain inverted, also a sign of nervousness – they were recently quoted at 2.2874% and 2.2675% respectively.

The German 10-year bund yield has weakened and turned negative again, it was recently quoted at -0.0378%, compared with 0.0200% at a similar time yesterday.

Asian equity markets were weak: Nikkei (-1.46%), Hang Seng (-0.95%), CSI 300 (-0.88%), Kospi (-0.41%) and ASX 200 (-0.42%).

This follows a weaker performance in western markets on Tuesday. In the United States, the Dow Jones Industrial Average closed down by 1.79% at 25,965.09, while in Europe the Euro Stoxx 50 was down by 1.78% at 3,401.16.

The dollar index broke higher on April 23 and peaked at of 98.35, the highest since June 2017, when it was descending from the January 2017 peak of 103.82. It was recently quoted at a slightly softer 97.43. Despite the weaker treasury yields suggesting buying, the dollar has not spiked higher on the back of Trump’s latest tough talk.

The other major currencies, with the exception of sterling, are firmer: yen (110.05), euro (1.1211) and the Australian dollar (0.7023), while is weaker at 1.3065.

The yuan continues to weaken, it was recently quoted at 6.7694, having traded either side of 6.7000 between February and April. The other emerging market currencies we follow are also generally on a back footing, which suggests concern over the latest direction the trade talks have taken.

Key data

Wednesday’s key economic data included the Chinese trade balance, as mentioned above, and German industrial production for March that surprised on the upside with a 0.5% gain – it was expected to fall by 0.5%. February’s reading was revised to 0.4% from 0.7%. Key data still to be released includes US crude oil inventories. In addition, UK Monetary Policy Committee member David Ramsden and US Federal Open Market Committee member Lael Brainard are speaking.

Today’s key themes and views

The markets are rightly nervous as seen by the skittish equity markets, but the more trade-based commodity markets seem to seeing the price weakness as a buying opportunity. This suggests enough traders see Trump’s rants as gamesmanship. Let us hope they are right, as a collapse in the trade talks would likely send a very negative shockwave through markets.

Gold is getting some lift on the back of the increased market stress, as are other haven assets such as treasuries and the yen. But, the overall trend remains to the downside so we would be wary of chasing prices too much higher unless the trade talks end-up breaking up. The downward trend line on the gold chart is around $1,295 per oz.

base metals prices
precious metals prices

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