MORNING VIEW: Shake-out in base metals continues but some production also now being cut

Despite massive rescue packages announced by governments around the world, equity indices are still falling - as are most of the base metals - this morning, Wednesday March 18.

But we are starting to production halts emerge in the metals, so both the demand and supply sides of the supply/demand equation are now likely to be reined in. Although with economic activity in Europe slowing, demand is likely to fall at a faster pace, at least until China ramps up production.

  • The Dow Jones Industrial Average (DJIA) rebounded by 5.2% on Tuesday, but in pre-market trade this morning it is down by 5% – so limit down.
  • The three-month copper price on the London Metal Exchange was down by 3.4% as of 6.06am London time.
  • Asia-Pacific equity indices are down, once again led by a 6.43% decline in Australia’s ASX 200.

Base metals
Three-month base metals prices on the LME were mainly lower this morning, the exception being tin that was up by 1.1% at $14,100 per tonne, but it led on the downside on Tuesday with a 7.8% collapse. The rest of the complex was down by an average of 1.5%. Collectively, at their individual lows, the base metals are now down by an average of 20.3% 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 2.8% on Wednesday while they reacted to the falls on the LME on Tuesday, when the LME complex closed down by an average of 3.9%.

June tin led on the downside with a 4.9% fall, followed by 3.9% declines in May lead and copper – the latter recently quoted at 40,860 yuan ($5,831) per tonne. The falls on the LME seem to be outpacing those on the SHFE, but that stands to reasons if China is starting to recover.

Precious metals
Spot gold prices are running into buying below $1,500 per oz – Monday’s and Tuesday’s lows were $1,451.70 and $1,466 respectively, but the lowest close so far has been $1,507.20 per oz. The other precious metals appear to be finding support too, although trading is erratic. The gold/silver ratio continues to race higher, it was recently quoted at 1:121, compared with to 1:116 at a similar time on Tuesday.

Wider markets
The yield on benchmark United States 10-year treasuries was recently quoted at 1.02%, this compares with 0.81% at a similar time on Tuesday and 0.74% on Monday, so some stability appears to have emerged in this sector. If investors are not prepared to chase yields below 1%, then perhaps they will look for other havens, which may benefit gold.

Asian Pacific equities were weaker this morning: the ASX 200 (-6.43%), the Nikkei (-1.68%), the Hang Seng (-3.59%), the Kospi (-4.86%) and CSI 300 (-1.70%).

The dollar index is consolidating after extending gains on Tuesday, it was recently quoted at 99.46. The dollar seems to be reflecting the US’ haven status.

Of the other major currencies we follow the Australian dollar (0.5991) is falling, as is sterling (1.2076), while the Japanese yen (107.01) and the euro (1.1006) are consolidating.

Key data
Wednesday’s economic data includes the European Union’s consumer price index and Italian and EU trade balance data. US data due later includes housing starts, building permits and crude oil inventories.

Today’s key themes and views
We said on Tuesday that “given the rout in the precious metals you have to remain open to the possibility of a greater deleveraging sell-off in the base metals” and that seems to be getting underway, with all the metals accelerating lower to varying degrees over the past 24 hours.

Overall, while Europe and the US are hit more by the novel coronavirus (2019-nCOV), demand for metals is likely to temporarily fall and that is expected to keep prices under pressure, but if more production cuts are announced then that should start to cushion the downside, especially if there is more evidence that China’s economy and health are rebounding.

With the dollar climbing and US treasury yields also suggesting investors are not prepared to chase them lower, then perhaps gold will start to pick up more investor interest, especially if money that has come out of equities is now looking for somewhere to be parked until equities look safer again.