MORNING VIEW: Metals prices generally buoyant after China adds further financial stimulus

China’s race to contain the coronavirus (2019-nCov), combined with its financial stimulus, are providing the markets with more than enough hope, with risk-on being seen across most of the metals and many equity indices, especially in western markets, this morning, Monday February 17.

But this apparent confidence is likely to be fragile as there is still much uncertainty surrounding the virus and its impact on global manufacturing, with so many supply chains originating in China.

  • Japan’s economy contracted at a 6.3% annual rate in the fourth quarter, after last year’s consumption tax increase.
  • Hong Kong and South Korea join China in stimulating their economies
  • 100 of the 105 new fatalities in China on Sunday were in Hubei province, suggesting good containment - there were 2,048 new cases taking the total cases to 70,536 according to the National Health Commission.

Base metals
Three-month base metals prices on the London Metal Exchange were up across the board with gains averaging 0.6%, led by a 1.1% gain in copper to $5,821.50 per tonne as of 05:40am London time, this compared with $5,775.50 per tonne at a similar time on Friday morning. See table below for more details.

Trading volumes was in line with recent performance with 7,059 lots traded as of 5:40am London time, compared with an average of 7,906 lots at a similar time across last week.

The most-traded base metals contracts on the Shanghai Futures Exchange were mixed, April nickel and aluminium are down by 0.4% and 0.7% respectively, while the rest were up by an average of 0.3%, led by a 0.6% gain in April copper to 46,340 yuan ($6,637) per tonne.

The spot copper price in Changjiang was up by 0.4% at 45,710-45,830 yuan per tonne, with the LME/Shanghai copper arbitrage ratio was at 7.96, compared with 7.97 on Friday.

Precious metals
Spot gold prices were little changed this morning, down by 0.1% at $1,582.20 per oz, from Friday’s close, but this was up from where prices were at a similar time on Friday morning ($1,575.50). The more industrial precious metals were up an average of 0.9%.

Wider markets
The yield on benchmark United States 10-year treasuries was slightly weaker and was recently quoted at 1.58%, compared with 1.60% at a similar time on Friday. The German 10-year bund yield was slightly weaker too and was recently quoted at -0.4%, compared with -0.39% at a similar time on Friday.

Asian equities were mixed this morning: Nikkei (-0.69%), the Kospi (-0.06%), the Hang Seng (+0.71%), China’s CSI 300 (+1.92%) and the ASX 200 (-0.07%). Pre-market western equity indices are, however, firmer this morning.

The dollar index (99.13) is holding on to Friday’s gains, buoyed by generally strong data and is acting as a haven in this time of stress.

The euro continues to hold in low ground (1.0839) reflecting the weaker economy; the yen (109.85), the Australian dollar (0.6726) and sterling (1.3035) are consolidating.

Key data

Economic data out already this morning shows China’s foreign direct investments (FDI) continued to weaken (since August 2019) with two data series released today: the FDI rose 5.8% in December, compared with a 6% rise in November and 4% in January; while Japan’s revised industrial production grew 1.2% in December, after an initial reading of 1.3%.

In Europe there is a Eurogroup meeting and Germany’s Bundesbank is releasing its monthly report. With parts of the US financial market closed for Presidents’ Day, there is no US economic data today.

Today’s key themes and views
In China, it appears that markets are being buoyed by financial stimulus, although with parts of the country still in lockdown, regional shortages of metal could be seen. Overall though, domestic demand must be suffering and that is a net negative for the amount of metal being consumed. Globally, with China a net importer of metals, the virus is unlikely to prompt a shortage refined metal, indeed judging by recent exchange stock activity stocks are on the rise, especially in China. That said, with China an exporter of metal products and parts, supply disruptions could have an impact on manufacturing across the globe and that could also be a negative for demand. As such, we are wary of having too much confidence in the price gains being seen across the metals.

The rise in the gold price on Friday, and the fact most of those gains have been held on to, suggests there has been a pick-up in haven interest. We expect gold to remain underpinned until the coronavirus is contained.

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