MORNING VIEW: Monetary, fiscal stimulus underpin market confidence; base metals prices firmer

Broad-based government action to lower interest rates and make money available to the markets have helped underpin the financial system and confidence, and that has led to some risk-on in some sectors this morning, Thursday March 5.

Following on from the United States Federal Reserve’s emergency 50-basis-point rate cut on Tuesday, Wednesday saw the US House of Representatives approve an emergency $8.3 billion budget to combat the novel coronavirus (2019-nCoV), which led the Dow Jones Industrial Average (DJIA) to close up by 4.53%. But going hand-in-hand with the various stimulus measures are warnings of slower growth and possible recessions.

  • Most Asian equity indices are higher this morning, led by a 2.3% rise in China’s CSI 200 Index.
  • Italy has closed all schools and the US state of California declared a state of emergency.
  • International Monetary Fund (IMF) makes $50 billion available for emergency financing.

Base metals
The three-month base metals prices on the London Metal Exchange were for the most part firmer this morning, the exception being tin that was down by 0.1%. The rest were up by an average of 0.8% – led by a 1.5% gain in nickel to $12,870 per tonne as at 6.08am London time. See table below for more details.

Trading volume remains relatively high, with 9,063 lots traded as at 6.08am London time, compared with an average of 10,642 lots traded at a similar time over Monday to Wednesday.

The most-traded base metals contracts on the Shanghai Futures Exchange, were also mainly higher, the exception being April lead that was down by 0.4%, while the rest were up by an average of 0.6%. The May copper contract was up by 0.2% at 45,490 yuan ($6,536) per tonne.

Precious metals
Gold prices are consolidating again this morning and were recently up by 0.2% at $1,639.63 per oz, compared with $1,641.65 at a similar time on Wednesday. Silver is following gold’s lead, but has lagged behind as seen by the gold/silver ratio at 1:95, which is a multi-year high.

Wider markets
The yield on benchmark US 10-year treasuries has climbed back above the 1% level and was recently quoted at 1.01%.

Asian equities were firmer across the board this morning: Nikkei (+1.09%), the Hang Seng (+2.16%), China’s CSI 300 (+2.29%), the Kospi (+1.26%), and the ASX 200 (+1.11%).

The rout in the US dollar has halted for now with the index recently at 97.33, the range since February 20 has been 96.92-99.91.

The Australian dollar (0.6628) is rebounding, the yen (107.27) and the euro (1.1135) are consolidating and sterling (1.2880) is climbing.

Key data
Thursday’s economic agenda is focused on the US with Challenger job cuts, revised non-farm productivity and revised unit labor costs, initial jobless claims and factory orders.

In addition, United Kingdom Monetary Policy Committee member Andrew Haldane, Bank of England governor Mark Carney and US Federal Open Market Committee member Robert Kaplan are speaking.

Today’s key themes and views
The markets’ love of liquidity seem to be wooing investors and underpinning markets, but given the coronavirus is slowly spreading through continents and government’s attempts to contain it are likely to cause temporary, but severe, disruption to economic activity and business/ household spending, the hit to metal demand is likely to be considerable. As for metals prices, much will depend on whether production is as affected as demand – we think demand will take the biggest hit.

Interestingly, oil prices have been down 26.7% since the coronavirus started to impact markets in the second half of January and prices were still down 22.2% from the January high this morning, suggesting a gloomy outlook and this is even with a production cut from the Organization of the Petroleum Exporting Countries likely to be announced.

Gold prices are holding up in high ground, but with more risk-on around in equities in recent days, it is unsurprising that gold prices are treading water, but they seem well-placed to push higher should broader markets become more nervous.