MORNING VIEW: Metals prices consolidate, volatility likely to dominate

After a drop of 12.93% in the Dow Jones Industrial Average (DJIA) on Monday March 16, the futures in the pre-market are up by 4.96% this morning - close to the 5% limit.

Three-month base metals prices on the London Metal Exchange were mixed, while those on the Shanghai Futures Exchange were down across the board, as they respond to Monday’s 1.8% average drop in prices on the LME.

  • Asian equity indices are mixed this morning, polarized between Australia’s ASX 200 being up by 5.8% and South Korea’s Kospi being down by 2.47%.
  • Monday’s rout in the precious metals highlights the fact that the dash-for-cash has continued.
  • With some of the health data getting better, will fear in the markets start to wane?

Base metals
Three-month base metals prices on the LME were down by an average of 0.2% this morning, with nickel ($12,180 per tonne) and copper ($5,308) up by 1.4% and 0.4% respectively, while the rest were down between 0.2% for zinc and 1.4% for lead – see table below for more details.

At their recent lows, the base metals were down by an average of 17.2% from their January 17 highs.

The most-traded base metals contracts on the SHFE were down across the board by an average of 1.4% while they reacted to the falls on the LME on Monday. June tin and May lead were down the most with losses of 2.6% and 2.2% respectively, while May copper was off by 1.8% at 42,460 yuan ($6,063).

Precious metals
Precious metals were down by an average of 1.7% this morning, this after they suffered a meltdown on Monday, with platinum and silver at one stage down on the day by 27.4% and 19.9% respectively. Spot gold prices were down by 1.5% at $1,484.70 per oz this morning. The gold/silver ratio has raced higher to 1:116.

Wider markets

The yield on benchmark United States 10-year treasuries was recently quoted at 0.81%, this compares with 0.74% at a similar time on Monday, so some stability appears to have emerged in this sector.

Asian equities were mixed this morning: the ASX 200 (+5.83%), the Nikkei (+0.06%) and the Hang Seng (+0.43%), the Kospi (-2.47%) and CSI 300 (-0.8%).

The dollar index is consolidating after last week’s strong rebound and was recently quoted at 98.41, this after the low of 94.63 on March 9.

The other major currencies we follow are weaker: the Australian dollar (0.6085), sterling (1.2212), the yen (106.77) and the euro (1.1139).

Key data
The economic agenda is busy today; key releases include Germany-based thinktank ZEW’s economic sentiment for Germany and the European Union as well as US retail sales, industrial production and capacity utilization numbers – see table below for more details.

There is also an EU economic summit and Ecofin meetings in Europe.

Today’s key themes and views
Given the rout in the precious metals you have to remain open to the possibility of a greater deleveraging sell-off in the base metals, although we do think the inventory situation in the supply line is leaner now that it was in 2008, so there may not be so much metal lying around that could be dumped on exchanges. Overall, as Europe and the US are hit more by the novel coronavirus (2019-nCOV), demand for metals is likely to temporarily fall and that is expected to keep prices under pressure, unless production cuts are announced.

Overall sentiment is likely to pick-up if data starts to show that more countries already badly affected by the virus are getting over it. According to China’s National Health Commission, the total number of coronavirus cases in China had been 80,860 by the end of March 15, of which 67,000 had recovered.

In the financial crisis of 2008 gold prices fell by 34%, before climbing 182% over the following three years. This time round gold prices have fallen by 14.8% since the peak on March 9.