MORNING VIEW: Underlying support in base metals continues to look robust

LME base metals have looked tired, having lost their upward momentum in the past few days, but underlying support looks plentiful, with all the base metals on the SHFE being in positive territory this morning, Wednesday June 9.

  • US 10-year treasury yields have fallen, not on haven buying, but because the market seems more sanguine that central banks will not rock the boat anytime soon…
  • …but will that apply to China, where the producer price index (PPI) rose by 9% May after a 6.8% rise in April?

Base metals
London Metal Exchange three-month base metals prices were mixed this morning, with copper, aluminium and tin showing average losses of 0.3%, while nickel, lead and zinc had gains averaging 0.5%. This morning’s performance followed a generally upbeat session on Tuesday, when gains averaged 0.8%. Copper, however, continues to struggle to get back above the $10,000 per tonne level and was quoted at $9,970 per tonne as of 6.05am London time (see table below for details).

The most-active Shanghai Futures Exchange base metals contracts, meanwhile, were up across the board, with gains averaging 1.3% led by a 2.5% rise in July lead and a 2.3% rise in July tin. July copper was up by 0.6% at 71,840 yuan ($11,231) per tonne.

Precious metals
Spot precious metals were also up across the board this morning with gains averaging 0.3%, with gold up by 0.1% at $1,894.21 per oz.

Wider markets
The yield on US 10-year treasuries has slipped back to 1.52%, having been at 1.56% at a similar time on Tuesday. Traders seem more relaxed that the US Federal Reserve will give the economy enough slack to show that any inflationary pressures are transitory. The weaker-than-expected (but still strong) US employment report last Friday, provided evidence of a continuing recovery, but did not put the Fed in a tight spot.

Asia Pacific equities were mainly weaker on Wednesday: the Nikkei (-0.38%), the Kospi (-0.7%), the Hang Seng (-0.13%) and the ASX 200 (-0.08%), while the CSI 300 (+0.07%) was firmer.

The US Dollar Index is consolidating in the middle of its recent range and was recently at 90.09. The recent range has been 89.53-90.63.

The other major currencies are consolidating within recent ranges this morning and were little changed from where they were at a similar time on Tuesday: sterling (1.4158), the Australian dollar (0.7730), the yen (109.48) and the euro (1.2179).

Key data
In addition to China’s PPI data, as mentioned above, other key economic data already out included China’s consumer prices index (CPI), which rose 1.3% in May, after a 0.9% rise in April.

Later today there is key data on Germany’s trade balance and Japan’s preliminary machine tool orders, along with US data on final wholesale inventories and crude oil inventories.

Today’s key themes and views
Tin prices set fresh multi-highs on Tuesday at $31,470 per tonne, with real tightness in supplies being the main driver. The other base metals were holding up in high ground and seem well supported. Big-picture support comes from supply disruptions, shipping issues, economic recoveries and infrastructure spending, but physical buyers seem reluctant to chase the prices higher. Given the recoveries, buyers will only be able to destock for so long, after which they will be have to return to the market. The question is whether anything rocks the boat between now and when they do. China’s PPI remains a concern, we wait to see how the market responds to US CPI data due out on Thursday.

The background for gold is looking bullish due to the inflationary pressures and the potential for a broad-based correction. The weak dollar and the pullback in US treasury yields should be supportive.

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