MORNING VIEW: Metals consolidate while traders weigh up likely impact of Wuhan coronavirus

The broad-based rally across markets that started on Monday finally halted this morning and consolidation is setting in. And, given there is still so much uncertainty around the impact of the Wuhan coronavirus (2019-nCoV), a pause for reflection seems logical.

This is especially so for the metals markets, with China such a big player on both the demand and supply side of the equation and where demand is bound to be hit, at least for a few months, and where supply is already being affected, as seen by copper smelter Guangxi Nanguo declaring force majeure on shipments of concentrates.

  • Asian equity indices down either side of 0.5% this morning
  • Gold prices edging higher again, recently quoted at $1,566 per oz compared with $1,557 at a similar time on Thursday

Base metals
Three-month base metals prices on the London Metal Exchange were mixed, with aluminium up by 0.2% nickel up 0.6% and tin prices unchanged, while lead and zinc are both down by 0.2% and copper was off by 0.3% at $5,726 per tonne, compared with $5,810 at a similar time on Thursday (see table below for prices).

Trading volumes have been slightly above average with 5,969 lots traded as of 5.40am London time. Volumes started at a very high levels on Monday and have gravitated over the course of the week toward a more normal level, which is around 5,000 lots, at around this time of day.

In China, the most-traded base metals contracts on the Shanghai Futures Exchange were also mixed, with April aluminium up by 0.3% and June tin up by 1.6%, while March lead was down 0.4% and zinc down 0.3%, April nickel down by 0.1%, and copper was off 0.6% at 45,790 yuan ($6,557) per tonne..

The spot copper price in Changjiang was down by 0.4% at 45,500-45,680 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 7.99, compared with 7.95 on Thursday. The ratio was around 7.88 before the Lunar New Year holiday.

Precious metals
Precious metals were mixed this morning. The spot gold price was little changed $1,565.58 per oz, silver prices were down by 0.2% at $17.78 per oz, platinum was up 0.1% at $963 per oz and palladium was off by 1.3% at $2,318.90 per oz.

Wider markets
The yield on benchmark United States 10-year treasuries has weakened and was recently quoted at 1.63%, compared with 1.67% at a similar time on Thursday. The German 10-year bund yield was slightly weaker too and was recently quoted at -0.37%, compared with -0.36% at a similar time yesterday. This seems in line with the pause in the broader markets.

Asian equities were weaker across the board this morning - with the Nikkei (-0.18%), the Kospi (-0.72%), China’s CSI 300 (-0.89%), the ASX 200 (-0.38%) and the Hang Seng (-0.86%) - and, given the strong gains on Thursday, which averaged 2.2%, some consolidation ahead of the weekend is not surprising.

The dollar index (98.47) continues to work its way higher and that has kept other major currencies on a back footing: the yen (109.95), the euro (1.0979), sterling (1.2943) and the Australian dollar (0.6721). The Chinese yuan at 6.9772 is consolidating, the range since mid-January has been 7.0246 to 6.8450.

Key data
Today’s economic agenda is busy and will be focused on the US employment report. Data already out showed Japan’s leading indicator climb to 91.6% from 90.8%. Chinese trade data is due to be released, but whether that actually happens remains to be seen.

Other key data out later includes German and French industrial production and trade balances, Italian retail sales and then, after the US employment report, there will be data on US final wholesale inventories and consumer credit.

Today’s key themes and views
We have been saying that it is still early days in terms of discerning the medium-term impact of the coronavirus on China and, indeed, on the global economy and that the risks remain significant and trading is likely to remain choppy in terms of outright prices and premiums.

This week, we have seen base metals prices adjust after the mid-January to early-February sell-off that saw prices drop by an average of around 12%, so even having unwound being oversold, we still expect choppy trading in the days and weeks ahead when the market learns more about the disruptions to demand and supply.

Gold prices have started to work higher again, which suggests there is still demand for gold as a haven asset in these uncertain times. Although the consensus seems to be that the coronavirus will reach an inflection point over the next week or two, until that is seen, we think there is still a high economic risk, which could spill over to the equity markets.

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