MORNING VIEW: Metals, broader markets open in negative territory as fears of second waves of Covid-19 rise

• Base metals prices on the London Metal Exchange were weaker, as were most on the Shanghai Futures Exchange.
• Asian-Pacific equity markets and pre-market major western equity index futures were sharply lower this morning, with South Korea’s Kospi index down by 4.76%.

Base metals
Three-month base metals prices on the LME were down by an average of 0.7% this morning, led by a 1.4% decline in nickel ($12,565 per tonne), with copper ($5,727 per tonne) off by 0.9%.

While the LME metals were all lower, the most-traded base metals contracts on the SHFE were mixed with July aluminium up by 0.7% and July copper unchanged at 46,690 yuan ($6,594) per tonne, while the rest were down by an average of 0.5%.

Precious metals
Spot gold prices were weaker and were recently quoted at $1,722.03 per oz, down by 0.5% from Friday’s close. The other precious metals were down by an average of 1.6%. Given the risk-off situation in the markets, the weakness in gold suggests investors are anticipating a ‘dash-for-cash’, which often leads to the selling of more liquid assets such as gold.

Wider markets
In line with the rise in risk-off, the yield on the US 10-year treasuries has fallen and was recently quoted at 0.65%, compared with 0.70% at a similar time on Friday, and well below the 0.9% at a similar time on June 8.

Asian-Pacific equities were weaker this morning: the ASX 200 (-2.19%), the Kospi (-4.76%), the Nikkei (-3.47%), the Hang Seng (-2.21%) and China’s CSI 300 (-0.94%).

Currencies
With equities falling and risk-off returning, interest in the US dollar has picked up; it was recently quoted at 97.31, this after 96.69 at a similar time on Friday and after a low of 95.71 on June 10.

With the dollar strengthening, the other major currencies were weakening: the euro (1.1241), the Australian dollar (0.6786), the yen (107.20) and sterling (1.2458).

Key data
Key data already out on Monday showed China fixed asset investment falling by 6.3% in the year to the end of May, after a 10.3% decline in the year to the end of April. China’s industrial production rose by 4.4% year on year in May, after a 3.9% rise in April and retail sales were down 2.2% year on year in May, after a 7.5% decline in April. China’s unemployment rate was 5.9% in May after 6% in April, and Japan’s tertiary industrial activity fell by 6% month on month in April, after a 3.8% decline in March.

Data out later includes the European Union’s trade balance, US Empire State manufacturing index and US long-term securities transactions (TIC).

In addition, US Federal Open Market Committee member Robert Kaplan is speaking.

Today’s key themes and views
We said that last week that the base metals may have run ahead of the fundamentals, they are now correcting lower. Whereas Thursday’s weakness initially attracted dip-buying that saw the LME metals consolidate on Friday, renewed weakness this morning now suggests the correction has resumed.

Overall, we would say the risks lie to the downside for now because we see the demand side of the equation as having been hit a lot harder than the supply side and we expect the demand recovery will be drawn out, especially if second waves of the virus get out of control.

We fear that the ending of lockdowns too early in producing countries may well affect supply more in the months ahead so further supply disruptions are likely, though it is probably too early to anticipate that, but it could provide support to the metals at a later date.

While gold may sell-off in the short term as other asset classes sell-off, we expect the secondary reaction to be bullish after money coming out of equites rotates into havens.