MORNING VIEW: Pause in selling leads to some uplift, but risks still lie to the downside

Asian Pacific equity indices are firmer this morning, Friday March 20, as are many of the base metals and all of the precious metals, but given the worst no doubt lies ahead in terms of weaker demand for non-household consumables in Europe and the United States, the current upturn may be a countertrend move or a two-thirds-of-the-way-down pause.

We say two thirds of the way down because most of the base metals have already had two downlegs since the novel coronavirus (2019-nCoV) struck. But this countertrend move could go far, indeed it already has, given three-month London Metal Exchange copper prices are up by 9.4% from Thursday’s lows. What we are saying is that although prices are rallying, we doubt the lows are in place yet.

  • The Dow Jones Industrial Average (DJIA) climbed by 0.95% on Thursday and in the pre-market it was up by 1.3%.
  • The fact Italy has now had more deaths from the virus than China, suggests Europe may end up being harder hit than China has been, with all the fallout that will come with that.

Base metals
Three-month base metals prices on the LME were mixed this morning with copper, aluminium and tin lower by 0.6%, 1% and 2.2% respectively, with copper at $4,780 per tonne, but up from Thursday’s low of $4,371 per tonne. The rest were up by an average of 1.4%, led by a 2.4% rise in nickel to $11,565 per tonne. Collectively the base metals are now up from recent lows by an average of 3.1%, led by copper’s 9.4% rebound, with aluminium up by the least with a 1.8% gain, but it had fallen the least too.

Volume on the LME has been high with 17,713 lots traded as at 6.26am London time, this compared with 11,892 lots at a similar time on Monday.

The most-traded base metals contracts on the Shanghai Futures Exchange were mostly up on Friday, the exception was June tin that was down by 0.6%. The rest were up by an average of 2.2%, led by a 3.8% rise in May zinc. May copper was up by 1.1% at 38,390 yuan ($5,410) per tonne.

Precious metals
Spot gold prices were on the rebound this morning with prices up by 2% at $1,501 per oz, while the more industrial precious metals were up by an average of 4.7%. Underlying tails on gold’s candlestick chart suggests there is buying interest, but buyers are not dominating yet, but that may change if gold closes on the highs later today.

The gold/silver ratio has turned lower, it was recently quoted at 1:117, this after 1:123 at a similar time on Thursday morning.

Wider markets
The yield on benchmark US 10-year treasuries was recently quoted at 1.05%, compared with 1.23% at a similar time on Thursday, but it is still above where it was on Monday morning, 0.74%.

Asian Pacific equities were stronger this morning: the ASX 200 (+0.7%), the Nikkei (closed), the Hang Seng (+4.33%), the Kospi (+7.44%) and CSI 300 (+1.79%).

The dollar index is pulling back and was recently quoted at 101.23, this compares with a higher earlier this morning of 103 – so some end-of-week profit-taking may be getting underway, which could also be what is driving some of the other countertrend moves too.

The other major currencies we follow are also rebounding from recent weakness which escalated on Thursday: Australian dollar (0.5977), sterling (1.1820), the Japanese yen (109.37) and the euro (1.0813).

Key data
Friday’s economic data includes German producer price index, the European Union’s current account, the United Kingdom’s consumer inflation expectations and public sector borrowing and US existing home sales.

Today’s key themes and views
Rebounds are happening across the board so far today, which may well be driven by end-of-week profit-taking by shorts. Given the virus is only just starting to have an impact on our way of life and business in Europe and the US, the disruption that lies ahead is bound to affect demand as well as supply, but perhaps demand more quickly.

But now that China is starting to recover and considering the country is a huge importer of metals, there is a risk that production cuts due to virus control, rather than due to low prices, may well see stocks drawn down by China and supply shortages emerge. So again we see this as a ‘V’-shaped sell-off, especially if China stimulates its economy with infrastructure spending and it avoids the virus spreading again – the latter may be a tall order.

Gold and the other precious metals are getting some lift this morning, we do see these as countertrend moves too, so would not get too comfortable with them, although they may run for a while.