MORNING VIEW: Metals prices drop; US/China talks, US monetary policy disappoint but better PMI data may provide support

Equities sold off after the US Federal Open Market Committee (FOMC) suggested that its rate cut was simply a mid-cycle adjustment rather than the start of monetary easing.

Metals followed them lower but better Chinese manufacturing purchasing managers’ index (PMI) data may provide support.

  • The US Dow Jones Industrial Average closed down by 1.23%
  • China’s Caixin PMI climbed to 49.9 in July from 49.4 in June
  • A busy day ahead for economic data - more PMI data is due in Europe and the US

Base metals
With the exception of tin, the three-month base metals prices on the London Metal Exchange were down by an average of 0.8% on the morning on Thursday August 1. Nickel led the decline, falling by 1.45% to $14,350 per tonne, followed by a 1% fall in lead to $1,995 per tonne. Copper was down by 0.55% at $5,910 per tonne. Tin bucked the trend, rising by 0.3% to $17,375 per tonne, but only after it set a fresh three-year low on Wednesday at $17,215 per tonne.

In China, base metals prices on the Shanghai Futures Exchange were mixed. Although October nickel and September tin were up by 0.4% and 0.3% respectively, the rest of the September contracts were weaker - zinc and lead were down by 1.2% and 1.1% respectively and aluminium and copper were down by 0.3% and 0.45 respectively, with the latter at 46,640 yuan ($6,759) per tonne.

Spot copper prices in Changjiang were down by 0.4% at 46,550-46,650 yuan per tonne and the LME/Shanghai copper arbitrage ratio was stronger at 7.89 compared with 7.87 on Wednesday.

Precious metals
The FOMC stance was not as dovish as the market expected, which has sideswiped gold - the spot price was down 0.6% at $1,406.43 per oz after a 1.1% fall yesterday. Silver and platinum are down by 1.4% and 1.35% respectively this morning and palladium is down by 0.8%.

On the SHFE, the December gold contract was down by 1.3% while the December silver contract was down by 2%.

Wider markets
The spot Brent crude oil price has consolidated - it was recently quoted at $64.34 per barrel, down from $65.19 at a similar time on Wednesday.

The yield on benchmark US 10-year treasuries was firmer this morning at 2.0522% compared with 2.0480% at a similar time on Wednesday. The FOMC stance suggests the Federal Reserve is not as worried about the outlook as the market is. The German 10-year bund yield has continued to weaken - it was recently at -0.4290% compared with -0.4040% on Wednesday morning.

In equities, Asian indices were mixed. The Nikkei climbed by 0.09% on Thursday morning, probably due to the weaker yen, while the rest of the indices we follow are down: Hang Seng (-0.92%), Kospi (-0.36%), the CSI 300 (-0.83%) and the ASX200 (-0.35%).

This follows a weaker performance on Wednesday. In the United States the Dow Jones Industrial Average closed down by 1.23% at 26,864.27.

Currencies
The dollar index shot higher on the FOMC decision and statement. It was recently quoted at 98.83 so it has cleared resistance from the double top from April (98.35) and May (98.38). Clearance now targets 103.80, the highs from January 2017.

The other major currencies we track are weaker: the euro (1.1046), yen (109.13), the Australian dollar (0.6848), sterling (1.2120) and the Chinese yuan (6.8993).

Key data

The economic agenda is heavy again today. Data already out includes the Chinese Caixin PMI (see above); Japan’s manufacturing PMI dropped to 49.4 from 49.6; but Spain’s manufacturing PMI climbed to 48.2 from 47.9. Manufacturing PMI data is due later from other parts of Europe and the US. In addition, there is the Bank of England’s interest-rate decision and monetary policy summary while governor Mark Carney is speaking too. In the US, data on employment, construction spending and total vehicle sales will be released.

Today’s key themes and views
The base metals look weak again. The lack of progress in US/China trade talks is weighing on sentiment but perhaps the market will take comfort from the fact the FOMC did not feel the need to be more dovish. As well, the improvement in China’s manufacturing PMI readings - the official one yesterday and the Caixin this morning - is also encouraging. For now we see this latest weakness as a knee-jerk reaction to the weakness in equities and the disappointment stemming from the trade talks but we expect the weakness to be short-lived.

Gold has reacted to the less-dovish FOMC message and to the stronger dollar but, given much uncertainty on financial, economic and geopolitical fronts, there are plenty of reasons for investors to like the insurance that gold offers so we expect the dip to attract buying interest.

base metals

precious metals

macroeconomic data

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