METALS MORNING VIEW 19/06: Metals prices under pressure after more tariffs prompt risk-off trade

Jun 19, 2018 - 9:35 AM GMT
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Further threats of US tariffs against China has spooked the markets and three-month base metals prices on the London Metal Exchange were down across the board on the morning of Tuesday June 19, with the complex down by an average of 0.5%.

This adds to the weakness seen in the second half of last week.

Copper led the decline with a 1.2% fall to $6,891 per tonne, followed by a 0.7% drop in aluminium ($2,212 per tonne) and a 0.6% decline in tin ($20,475 per tonne). The others are down between 0.1% and 0.4%.

Volume has been high with 15,234 lots traded as at 6.46am London time. High volume and price weakness does not bode well.

In precious metals this morning, spot gold prices were up by 0.3% at $1,282.46 per oz, while the more industrial precious metals are unchanged in the case of platinum, or weaker in the case of silver (-0.2%) and palladium (-0.3%). On balance the precious metals have been weak in recent days, especially silver that has dropped to $16.45 per oz this morning from $17.32 per oz on June 14.

In China, base metals prices on the Shanghai Futures Exchange were down across the board, with prices down by an average of 1.5%. Zinc was off the most with the most-traded August contract down by 2.4%, while August copper was down by 2.4% at 52,390 yuan ($8,187) per tonne.

In other metals in China, the most-traded September iron ore contract price on the Dalian Commodity Exchange was down by a hefty 5.2% to 447.50 yuan per tonne. Meanwhile on the SHFE, the most-traded October steel rebar contract price fell by 2.6%, while the December gold and silver contract prices were down by 0.9% and 3.1% respectively.

Spot copper prices in Changjiang were down by 1.5% at 52,100-52,480 yuan per tonne and the LME/Shanghai copper arbitrage ratio was higher at 7.59.

In wider markets, spot Brent crude oil prices were off by 1.07% at $74.63 per barrel this morning. The yield on US 10-year treasuries has weakened to 2.8730%, as has the German 10-year bund yield to 0.3670%. Government debt, therefore, up as demand for haven assets rises on the back of US President Donald Trump’s latest rhetoric on tariffs.

The rhetoric has also hit most equity markets in Asia today: Nikkei (-1.55%), Hang Seng (-2.36%), CSI 300 (-2.57%) and the Kospi (-1.67%), while the ASX200 (+0.1%) is marginally higher. This follows weakness in western markets on Monday, where in the United States the Dow Jones closed down by 0.41% at 24,987.47, and in Europe where the Euro Stoxx 50 closed down by 1.09% at 3,466.65.

The dollar index surged on June 14 and set a high of 95.14 on June 15, but it has since consolidated and was recently trading at 94.70. The euro (1.1614) and sterling (1.3250) are also consolidating having been weaker last Thursday, the Australian dollar has fallen to 0.7378 and is the weakest it has been since June last year, while the yen is picking up haven interest and has climbed to 109.59.

Not surprisingly, the yuan is weak at 6.4544 – the weakest it has been since mid-January. The rand is weak at 13.8772, while the rest of the emerging market currencies we follow are weak, but most are not moving too much today given the latest tariff salvo from Trump.

Economic data out today includes the European Union’s current account as well as building permits and housing starts from the US. In addition, European Central Bank (ECB) President Mario Draghi is speaking at the ECB Forum on Central Banking in Sintra, Portugal.

The economic and political environments are not bullish for the industrial metals and as such prices are capped on the upside, with any supply-led rallies attracting selling, as has been seen in copper and lead recently. Prices are now testing the downside once again and given increased trade tensions that are affecting most markets, there could be more room on the downside.

Ironically, we think Trump is being as aggressive as he is on trade because he feels this is the first time in years that the US economy and the global economy are strong enough to take this trade adjustment – as he said in recent weeks China was “very spoilt on trade”. Key now will be whether the markets think the global economy is strong enough and/or whether trade agreements follow.

With treasury yields down and the yen stronger, it appears demand for haven assets is up, so we wait to see if that flows into gold – there is little sign of this so far, but with gold prices trading at levels last seen in December, it may start to look like a relatively “cheap” haven asset.