Not giving up our long base metals/short precious metals view

Nov 29, 2016 - 5:56 AM GMT
  • Global risk-on sentiment pauses. Base metals pull back and precious metals gain some upward momentum.
  • The economic agenda is fairly busy today. Although volatility across financial markets may surge, we expect risk appetite to resume in the very near term.
  • As a result, base metals (and palladium) are likely to continue to perform better than precious metals this week.

This morning, Tuesday November 29, base metals on the LME are slightly weaker amid decent volumes as profit-taking continues. Copper, dropping 2%, has been hit the most. Precious metals are under marginal selling pressure, with the complex edging 0.2% lower on average.

Precious metals are under marginal selling pressure, with the complex edging 0.2% lower on average. 

In Shanghai, the base metals contracts are moving a little lower, with the complex down 0.6% on average. Copper, tumbling 3.3%, is again the worst performer, while lead, rallying nearly 5%, continues to outperform as domestic tightness intensifies.

Meanwhile, spot copper in Changjiang is down 1.4% at 47,820-48,020 yuan per tonne, while the backwardation with the futures contracts is at $117 per tonne, and the LME/Shanghai copper arb ratio remains open at 1:8.16.

Base metals on the LME retreated on Monday November 28, partly in response to a pause in global risk-on sentiment, after experiencing significant price gains last week. Zinc, selling off 2.1%, was the worst performer while tin, edging 0.5% higher, was the only base metal to end in positive territory.

Precious metals were a touch stronger – while palladium gained further upward momentum and set fresh 2016 highs, other precious metals attempted to rebound after falling for a third straight time last week.

In bonds, the US government bond market strengthened slightly yesterday after weakening sharply last week on stronger economic and inflation expectations. Key economic data on US inflation and employment are due to be released this week. Any positive surprise may prompt a renewed wave of US government bond selling, pushing yields higher.

Broad equities were a touch weaker on Monday. US equities retreated somewhat after hitting fresh all-time highs last week, with the Dow Jones closing 0.3 % down at 19,098. European equities continued to lack underlying strength, having traded in a narrow range since August. The Euro Stoxx 50 moved 1.04% lower but remained above the psychological 3,000 mark.

Given growing political uncertainty in Europe, we expect further capital flows from Europe to the US, thereby underpinning the outperformance of US equities relative to European equities. Looking at equities this morning, Asian equities are trading weaker, with the exception of CSI 300, up 1%, as investors adopt a cautious stance after the pause in risk sentiment seen in Western countries the day before.

In FX, the dollar is stabilising in the early hours of the trading day, with the DXY firmly above 101, after being under selling pressure yesterday. The DXY climbed last week to its highest since March 2003. Unlike precious metals, base metals have been unaffected by the surging dollar. We expect the dollar to gain further upward momentum this week, which should exacerbate the divergence between precious and base metals.

In terms of the economic agenda, today will be fairly busy. We will kick off in Europe with inflation statistics in Germany and Spain for November as well as French consumer spending for October. In the US, we will pay close attention to the release of the preliminary Q3 GDP reading and the CB consumer confidence index for November. In addition, US Federal Reserve governor Powell is due to speak about the economic outlook and as such, may influence the market’s conviction about a rates increase at the US Federal Reserve’s December 13-14 meeting. Against this, we feel that volatility across base and precious metals could pick up.

Base metals may continue to enjoy further upward pressure as investors are likely to further boost their allocation in favour of risk assets at the expense of “risk-free” assets. Given that US stocks are at record highs, investors may tactically favour base metals. We are friendly toward all base metals over the next month, but we see downside risks to our forecasts growing for copper because of overstretched speculative positioning, raising the likelihood of a reversal, and tin due to unconvincing fundamentals.

Precious metals are likely to experience renewed selling pressure once global risk-on sentiment resumes. We expect investors to continue to unwind their elevated long exposure to haven assets, most notably gold and silver, and lift their exposure to risk assets in a bid to take advantage of stronger growth dynamics expected next year.


Overnight Performance
GMT 05:11 +/- +/- % Lots
Cu 5759 -116 -2.0% 5302
Al 1733 -2 -0.1% 1606
Ni 11390 -130 -1.1% 2134
Zn 2846 25.5 0.9% 4272
Pb 2461.5 18.5 0.8% 586
Sn 21100 150 0.7% 28
  Average   -0.1%  13,928
Gold 1191.2 -3.4 -0.3%  
Silver 16.611 -0.059 -0.4%  
Platinum 925.8 1.8 0.2%  
Palladium 753.5 -2.5 -0.3%  
  Average PM   -0.2%  


SHFE Prices 05:11 GMT RMB Change % Change
Cu 47010 -1590 -3.3%
AL  13625 -395 -2.8%
Zn 23850 155 0.7%
Pb 22060 1035 4.9%
Ni 93580 -2350 -2.4%
Sn 145700 -1180 -0.8%
Average change (base metals)     -0.6%
Rebar 3188 -93 -2.8%
Au 272.65 -0.55 -0.2%
Ag 4184 1 0.0%


Economic Agenda
GMT Country Data Actual Expected Previous
7:00am EU
German Import Prices m/m
  0.6% 0.1%
German Prelim CPI m/m
  0.1% 0.2%
7:45am EU
French Consumer Spending m/m
  0.2% -0.2%
8:00am EU
Spanish Flash CPI y/y
  0.5% 0.7%
1:30pm US
Prelim GDP q/q
  3.0% 2.9%
1:30pm US
Prelim GDP Price Index q/q
  1.5% 1.5%
2:00pm US
S&P/CS Composite-20 HPI y/y
  5.3% 5.1%
2:15pm US
FOMC Member Dudley Speaks
3:00pm US
CB Consumer Confidence
  101.3 98.6
5:40pm US
FOMC Member Powell Speech