MORNING VIEW: Risk-off dominated in Asian trading, but some rebound being seen as Europe opens

While risk-off dominates and even though governments are prepared to throw money at the financial system and into economies and households, the likelihood is that more factories will close, household spending will fall, as will demand for raw materials, but there may be some dead cat bounces along the way.

Partial and full lockdowns will hopefully mean the novel coronavirus (2019-nCoV) is brought under control within months and economic activity will recover.

For the base metals, the accelerated sell-off is no doubt due to the likely demand slump, we should expect to see more production cuts announced on precautions to prevent the spread of the virus and as margins are squeezed as prices fall. These will hopefully go some way to counter the drop in demand.

  • The Dow Jones Industrial Average (DJIA) fell by 6.3% on Wednesday and in the pre-market it was down by 1.9%.
  • The three-month copper price on the London Metal Exchange was down by 4.1% at $4,540 per tonne, it was earlier down 7.7% at $4,371 per tonne.
  • Asia-Pacific equity indices are down, once again led by a 3.27% decline in Australia’s ASX 200.

Base metals
Three-month base metals prices on the LME were mainly lower this morning, the exception being nickel that was up by 0.1% at $11,400 per tonne, but it fell by 4.4% on Wednesday. Copper has now dropped the most in the base metals complex, with a loss of 31.1% since its January 17 high, while the others have been down by an average of 22.8%. Aluminium has fallen the least, it has dropped by 13.6%. Collectively the complex has now retreated by an average of 24.2% from their January 17 highs.

The most-traded base metals contracts on the Shanghai Futures Exchange were down across the board by an average of 6.5% on Thursday, this compares with Wednesday’s 2.7% fall on the LME – meaning we are seeing fresh weakness this morning.

June tin and May copper led on the downside, both with falls of 9%, with May copper at 37,570 yuan ($5,343) per tonne, compared with 40,860 yuan per tonne at a similar time on Wednesday.

Precious metals
Spot gold prices remain under pressure and were recently quoted at $1,480.83 per oz, underlying tails on the candlestick charts suggest there is buying interest, but buyers are not dominating yet. The recent low was $1,451.70 per oz.

From recent peaks, the precious metals have now fallen by 14.8% for gold, 38.4% for silver, 47% for platinum and 48.2% for palladium. The gold/silver ratio continues to race higher, it was recently quoted at 1:123.

Wider markets
The yield on benchmark United States 10-year treasuries was recently quoted at 1.23%, this compares with 1.02% at a similar time on Wednesday and 0.74% on Monday. With yields rising, it means bond prices are falling, in line with most other asset classes.

Asian Pacific equities were weaker this morning: the ASX 200 (-3.27%), the Nikkei (-1.04%), the Hang Seng (-2.8%), the Kospi (-8.39%) and CSI 300 (-1.51%).

The dollar index is consolidating after extending gains on Wednesday, it was recently quoted at 100.97. The dollar seems to be reflecting the US’ haven status.

The other major currencies we follow continue to trend lower Australian dollar (0.5764), sterling (1.1564), while the Japanese yen (108.64) and the euro (1.0930).

Key data
Thursday’s economic data is focused on the US with the Philly Fed manufacturing index, initial jobless claims, the current account, leading indicators and natural gas storage.

Today’s key themes and views
With the price drops accelerating in recent days, a deleveraging sell-off in the base metals is underway – hopefully with the pandemic being stretched out in that China is starting to recover just as Europe and the US are starting to feel the pain, demand will be recovering is some areas, while falling in others, which should lessen the blow. In addition, production cutbacks are likely to tighten supply before stocks start to build up too much.

As European markets open today, sentiment does seem to be getting better – the markets might be focusing on all the stimulus that the United Kingdom, European Central Bank and the US have provided, but it may not last long.

With equities and bond prices falling and the dollar appearing to be the only haven that is rising, the focus may fall on gold, especially if money that has come out of equities and bonds is now looking for somewhere to be parked until equities look safer again.

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