MORNING VIEW: Metals at interesting juncture as coronavirus drives production cuts

Markets are looking quite mixed this morning, Friday March 27, with most Asian-Pacific equity indices up, the pre-market Dow Jones Industrial Average (DJIA) down by 1.1%, while base metals prices on the London Metal Exchange and Shanghai Futures Exchange are up and gold is down from recent highs.

It is not surprising the markets are mixed as it is confusing that the DJIA rallied by 6.4% on Thursday after data showed 3.28 million initial jobless claims in the United States for the week ended March 21 and the fact that the country now has the most cases of confirmed cases of Covid-19.

On the other hand, the fact that the base metals are firmer is also not so surprising because the threat of the coronavirus has prompted some producers to either cut or reduce production. The fact that China, which imports large amounts of its metals and raw materials and accounts for about half of global consumption, is starting to recover, could lead to shortages.

  • Difficult to justify such bullish performance on DJIA…
  • …but not so difficult to see that the metals could be supported at these levels.

Base metals

Three-month base metals prices on the LME were up across the board this morning by an average of 1%, led by zinc ($1,895.50 per tonne) and lead ($1,717 per tonne) that were up by 1.7% and 1.5% respectively. Copper was up by 0.9% at $4,857.50 per tonne, while aluminium, nickel and tin were up by 1%, 0.9% and 0.3% respectively.

The most-traded base metals contracts on the SHFE were stronger across the board by an average of 1.2%, with May zinc, May lead and June tin, the clear winners with gains of around 2%. May aluminium and June nickel were up by 0.6%, while May copper lagged with a 0.3% gain to 39,180 yuan ($5,526) per tonne.

Precious metals
Spot gold prices were little changed this morning and were recently quoted at $1,624.60 per oz, down from Thursday’s high of $1,643.75 per oz. Gold did react as you would expect to Thursday’s poor US jobs data and the fact it has pulled back to consolidate is not so surprising.

Silver, platinum and palladium are all consolidating this morning, just below recent rebound highs.

Wider markets
The yield on benchmark US 10-year treasuries has eased slightly and was recently quoted at 0.78%, compared with 0.8% at a similar time on Thursday. Treasuries have settled down and seem to be consolidating.

Asian-Pacific equities were for the most part stronger this morning: the Hang Seng (+0.38%), the Kospi (+1.87%), the CSI 300 (+0.32%) and the Nikkei (+3.88%), the exception being the ASX 200 that was down by 5.3%.

The dollar index fell sharply on Thursday, in line with the weak data, the index was recently quoted at 99.44, this compared with recent high of 103 on March 20.

The other major currencies we follow are either firmer, or are consolidating near rebound highs: the euro (1.1016), the yen (108.93), the Australian dollar (0.6065) and sterling (1.2212).

Key data
Friday’s economic agenda is focused on the US with data on personal income and spending, personal consumption expenditures price index and revised University of Michigan consumer sentiment and inflation expectations.

Today’s key themes and views

The metals are at an interesting juncture with the coronavirus calling the tune on production cutbacks rather than economics; the start of the supply response has been quick, much quicker than in more “normal” downturns, and could become more widespread. The fact China is starting to recover and relies on metal imports could well support prices.

SHFE base metals prices have started to outperform those on the LME; Indeed, the LME/Shanghai copper ratio is at 8.1, compared with 7.95 in early January before the Covid-19 crisis struck. That means SHFE copper is now trading some $88 per tonne higher relative to LME copper than it was prior to the pandemic.

As the crisis unfolds further in the world ex-China, we expect there will be more demand for haven assets, especially while concerns that all the fiscal stimulus in this loose monetary climate, combined with the surge of debt, could erode the value of other asset classes.