Base metals vulnerable to renewed worries over China

Dec 29, 2016 - 5:21 AM GMT
by
  • Global risk sentiment deteriorates as investor fears over China mount – most risk asset classes are vulnerable to further selling pressure.
  • Base metals stabilise thanks to a weaker dollar so far this morning, while precious metals rebound strongly on increased safe-haven bids.
  • The economic agenda is busy today – we expect risk aversion to continue in the days ahead, leading us to favour precious metals relative to base metals.

 

This morning, Thursday December 29, base metals on the LME are stabilising somewhat, posting an average gain of 0.3%, after witnessing broad-based downward pressure yesterday as a result of profit-taking, reflected in the loosening of nearby spreads, on the back of a resurgence of risk aversion.

Copper and nickel are today’s strongest performers, rising 0.6% each. Tin, down 0.3%, is the only base metal on the LME to post a loss.

In Shanghai, base metals on the SHFE are broadly stable, posting an average gain of 0.2%. While zinc is the strongest performer, climbing 2.3%, aluminium, down 1.3%, has fallen the most. At the same time, spot copper in Changjiang has edged 0.9% lower to 44,970-45,170 yuan, while the contango with the futures is at $96 per tonne, and the LME/Shanghai copper arb ratio is unchanged from yesterday at 1:8.2.

This morning, precious metals continue their rebound, with the complex showing an average gain of 0.9%, after a strong session yesterday, in which silver and palladium managed to outperform gold and palladium in spite of a lower level of risk appetite.

The US government bond market strengthened yesterday, driving yields lower, partly in response to an increase in risk aversion, partly owing to disappointing domestic pending home sales in November. The 10-year US bond yield closed at 2.51%, down from its recent peak of 2.60% on December 15.

Broad equities lost ground yesterday amid thin trading volumes. In Europe, the Euro Stoxx 50 was little changed to close at 3,279 amid a muted data flow. In the USA, weaker-than-expected data prompted investors to take some profits – the Dow Jones retreated 0.56% to close 19,834 while the S&P 500 moved 0.80% lower to finish the trading day at 2,251.

In Asia this morning, equities are witnessing selling pressure. Apart from the CSI 300 (+0.24%), the Nikkei 225 (-1.49%), the Hang Seng (-0.10%) and the Kospi (-0.04%) are trending lower early in the trading session.

The US dollar is consolidating strongly, with the DXY currently trading at 102.87, after strengthening yesterday against most other currencies, especially the euro as a result of increased political tensions and the yuan driven by capital outflows from China. But the dollar weakened slightly against the yen, in part reflecting the unwinding of carry trades amid a lower risk appetite. The long dollar trade has become somewhat crowded so we would not be surprised to see a weaker dollar in the days ahead, especially if risk aversion continues, which may give a boost to base and precious metals.

The economic agenda is busy today. In Europe, investors will pay attention to the release of M3 money supply and private loans for November to better assess whether economic conditions are improving in the area. In the USA, investors will particularly focus on the release of the latest weekly unemployment claims, to see whether the labour market continues to tighten, and changes in US crude oil inventories, which could have an impact on oil prices. Volatility across the metals markets may therefore surge, especially when taking into account the poor liquidity conditions during the year-end quasi-holiday.

Base metals may remain vulnerable to additional profit-taking in the days to come as investors seem to express renewed fears over the capability of the Chinese government to prevent accelerating capital outflows from destabilising the economy. Due to poor liquidity conditions, tin may be the most vulnerable base metal in case of a more pronounced wave of risk aversion.

Precious metals may continue to strengthen in the coming days on the back of some turbulence across risky assets. Indeed, we expect investors to turn increasingly risk-off amid renewed investor fears over China’s FX reserves, which should prompt renewed speculative buying across the complex. In this environment, we may continue to overweight gold and platinum over silver and palladium.

Overnight Performance
GMT 04:31 +/- +/- % Lots
Cu 5546 30.5 0.6% 619
Al 1705 1 0.1% 475
Ni 10180 65 0.6% 635
Zn 2585 4 0.2% 637
Pb 2028.5 8.5 0.4% 115
Sn 20875 -65 -0.3% 17
  Average   0.3%        2,498
Gold 1149.63 7.13 0.6%  
Silver 16.176 0.171 1.1%  
Platinum 907.4 9.4 1.0%  
Palladium 673 7 1.1%  
  Average PM   0.9%  

 

SHFE Prices 04:31 GMT RMB Change % Change
Cu 45640 110 0.2%
AL  12635 -170 -1.3%
Zn 21110 480 2.3%
Pb 17655 -130 -0.7%
Ni 86210 -150 -0.2%
Sn 147740 1560 1.1%
Average change (base metals) 0   0.2%
Rebar 2976 -39 -1.3%
Au 268.55 2 0.8%
Ag 4092 49 1.2%

 

Economic Agenda
GMT Country Data Actual Expected Previous
9:00am EU M3 Money Supply y/y   4.4% 4.4%
9:00am EU Private Loans y/y   1.9% 1.8%
1:30pm US Unemployment Claims   277K 275K
1:30pm US Goods Trade Balance   -61.5B -61.9B
1:30pm US Prelim Wholesale Inventories m/m   0.1% -0.4%
4:00pm US Crude Oil Inventories     2.3M