MORNING VIEW: SHFE base metals down by average of 4.8% as prices catch up after holiday

While markets in China catch up after more than a week of holiday, most base metals prices on the London Metal Exchange are rebounding because China’s sell-off has not been as severe as feared.

  • China’s CSI 300 was down by 7.7%, while pre-market Dow Jones Futures are indicated up by 0.6%.
  • SHFE copper price falls 7%, which was limit down, but were recently quoted off by 6.5%, suggesting some buying has started to emerge.
  • Gold prices also pull back from Friday’s highs.

Base metals
Three-month base metals prices on the LME were for the most part stronger this morning, Monday February 3. The exceptions were lead that was down by 0.6% and tin that was unchanged – the rest were up by an average of 0.8%, with copper up 1.6% at $5,647 per tonne.

Trading volume has been high with 16,178 lots traded as of 5.35 am London time, strong volume and rising prices bodes well.

In China, the most-traded base metals contracts on the Shanghai Futures Exchange were unsurprisingly all down while they caught up with the price performance on the LME last week. The most-traded March copper contract was down the most, with a 6.5% fall to 45,030 yuan ($6,489) per tonne, while the rest were down between 3.4% for March aluminium and 5.3% for the June tin contract.

The spot copper price in Changjiang was down by 6.4% at 44,750-45,050 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 7.98 – this compared with around 7.88 before the Lunar New Year holiday. This suggests LME copper prices are now weaker relative to SHFE prices than they were before the Wuhan coronavirus started to impact the metals.

Precious metals
Spot gold prices are drifting this morning and were recently quoted at $1,580.69 per oz, down by 0.5% from Friday’s close – the recent high has been $1,590.20 per oz. Silver continues to follow gold’s lead, palladium ($2,281.50 per oz) is consolidating below recent highs, while platinum ($959.80 per oz) is drifting lower.

Wider markets
The yield on benchmark US 10-year treasuries was recently quoted at 1.53% and the German 10-year bund yield was recently quoted at -0.44%.

Asian equities were for the most part weaker this morning: the Nikkei (-0.84%), the Kospi (-0.01%), China’s CSI 300 (-7.58%) and the ASX 200 (-1.34%), but the Hang Seng (+0.5%), was bucking the trend.

This follows a weak performance in Western markets on Friday, where in the United States, the Dow Jones Industrial Average closed down by 2.09% at 28,256.03; in Europe, the Euro Stoxx50 closed down by 1.35% at 3,640.91.

The dollar index is consolidating after Friday’s retreat. It was recently quoted at 97.49, having peaked at 98.19 on January 29. The yen that has been strengthening in recent weeks was recently quoted at 108.49, the recent range being 110.28-108.31, while the Australian dollar (0.6697) is consolidating recent weakness, its range since January 17 being 0.6678-0.6911.

The euro (1.1082) is consolidating Friday’s gains, its low last week was 1.0991, and sterling (1.3157) has been doing the same – its low last week being 1.2975.

The Chinese yuan (7.0209) has weakened since the markets reopened, it was trading around 6.8450 on January 17.

Key data
Today is a busy day for economic data with manufacturing purchasing managers index (PMI) data out across major economies. Japan’s manufacturing PMI dropped to 48.8 in January from 49.3 a month earlier, and China’s Caixin PMI eased to 51.1 from 51.5 over the same comparison. Later there is PMI data out across Europe and the US.

In addition, there is data on US construction spending and US total vehicle sales. German Bundesbank President Jens Weidmann is also speaking.

Today’s key themes and views
It is still early days to know what medium-term impact the novel coronavirus (2019-nCoV) will have on the Chinese and indeed global economies, but it is a relief to see that copper prices in Shanghai, along with many of the other metals, have already managed to bounce off their limit-down levels. We now need to wait to see what follow-through action there is over the next few days.

But, with SHFE base metals prices down by an average of 4.8% from their pre-Lunar New Year holiday closing levels, while LME prices at their recent lows have been down by an average of 11.1% since their January 17 highs, does suggest that LME prices may have overshot on the downside last week when trading was less liquid due to the holiday.

Gold prices have been climbing steadily in recent weeks, but there has not been any mad rush into the market, indeed over the past two weeks, prices have not set fresh highs for the year. As such, haven buying has been evident, but it is being done in a controlled manner. For now, given the uncertainty over how the virus will spread and what its economic impact will be, we expect gold will remain well supported.