MORNING VIEW: Production shutdowns support metals prices, while government support boosts financial markets; gold’s haven attributes kick in

Asian Pacific equity indices and most metals prices are stronger this morning, Tuesday March 24, boosted by a combination of broad-based fiscal and monetary policy, and for the metals, announcements of production cuts.

The base metals were for the most part stronger on the London Metal Exchange and Shanghai Futures Exchange, while gold is up too, having rallied by 4.6% on Monday. But, without wanting to be a doomsayer, with the worse of the novel coronavirus (2019-nCoV) spread in Europe and North America ahead of us, it is difficult to see confidence lasting.

  • Pre-market Dow Jones Industrial Average (DJIA) futures were up by 4.2% as at 7.07am London time.
  • China’s Beige Book International suggests a 10-11% gross domestic product (GDP) contraction in the first quarter – given what the country has gone through this seems conservative.
  • Markets hopefully already braced for weak flash purchasing managers index (PMI) data that is out later on Tuesday.

Base metals
Three-month base metals prices on the LME were for the most part firmer this morning, the exception was aluminium that was flat at $1,560 per tonne, while the rest were up by an average of 1.7%. Copper led the rebound with a 2.7% gain to $4,723 per tonne – see table below for more prices.

Volume on the LME into the rebound was relatively low at 9,917 lots traded as of 6.19am London time, it was 20,135 lots at a similar time on Monday, while it averaged 16,198 lots at a similar time across last week.

The most-traded base metals contracts on the SHFE were for the most part stronger, the exception was June nickel that was down by 0.8%, while the rest of the metals were up by an average of 2.5%, led by a 3.6% gain in June tin and a 3.6% gain in May copper that was recently quoted at 37,940 yuan ($5,344) per tonne.

Precious metals
Gold prices are rebounding strongly and seem to be reflecting the unprecedented levels of fiscal and monetary easing, which combined with high levels of fear about what damage is being done to the global economy and production cuts, all make for a perfect storm for gold.

Spot gold was recently quoted at $1,575.90 per oz, up by 0.6% from Monday’s close and 8.6% higher than last week’s low at $1,451.70 per oz. The more industrial precious metals are also firmer, led by a 3.1% rise in palladium that is up by 3.1% at $1,826.20 per oz.

Wider markets
The yield on benchmark United States 10-year treasuries remains weak and was recently quoted at 0.81%, compared with 0.83% at a similar time on Monday.

Asian Pacific equities were stronger this morning: the ASX 200 (+4.17%), the Hang Seng (+4.38%), the Kospi (+5.34%), the CSI 300 (+2.69%) and the Nikkei (+7.13%). The Nikkei has been boosted by hopes that the Bank of Japan and public pension funds are buying equities to support the market.

The dollar index is pulling back and was recently quoted at 101.44, this compares with 102.12 at a similar time on Monday and March 20’s peak at 103.

The other major currencies we follow are rebounding from recent lows: Australian dollar (0.5952), sterling (1.1657), the Japanese yen (110.54) and the euro (1.0841).

Key data
Tuesday’s economic data will focus on the flash manufacturing and services PMI that is out in Japan, Europe and the US. Japan’s manufacturing PMI dropped to 44.8, from 47.8, but it in came in better than the expected 42.1.

Also on the economic agenda there is data on industrial order expectations in the United Kingdom and US releases that include the Richmond manufacturing index and new home sales.

In addition, the Bank of England will release the meeting minutes and a statement from its Financial Policy Committee and there is a Group of Seven (G7) meeting scheduled.

Today’s key themes and views
Normally in a sell-off producers take time to announce production cuts, but this time the virus is forcing the issue on many producers. This should help prevent the build-up of too much inventory that could then delay any price recovery. But, with demand likely to be weak until economic recoveries get underway, would-be buyers may not be in too much of a hurry to buy, especially as cash flow is likely to be tight. As such, prices may well get some lift and then settle into a sideways pattern waiting for demand to recover. If governments announce infrastructure projects, or “cash-for-clunkers” programs, then a recovery may be brought forward.

But while production cuts will help rebalance the market, it is still too early to say how much damage will be done to demand as it is still early days for the virus’ impact on Europe and the North America, let alone the rest of the world.

While western economies grind to a halt, all eyes will be on how China’s recovery gets underway. As a recovery is bound to take time, while the slowdown is happening now, we expect metals’ prices will remain under pressure and there could be further downward spikes if confidence is further crushed by the virus.

Gold finally seems to be seeing a secondary reaction – the first reaction was the dash-for-cash that saw gold positions liquidated, the secondary reaction now underway is where recently-raised cash is now parked in havens.