MORNING VIEW: Dovish Fed comments provide some relief but trade, growth concerns dominate

Jun 5, 2019 - 10:34 AM GMT
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Nervousness in markets has temporarily eased following dovish comments from US Federal Reserve chairman Jerome Powel that suggested the Fed may be prepared to cut interest rates to sustain growth.

This has lifted equity prices on Wednesday June 6 and that has flowed through to some of the metals.

  • World Bank lowers global growth forecast for 2019 to 2.6%, from its 2.9% call in January
  • Dovish Federal Reserve comments provide boost to a broad range of markets
  • China’s Caixin services purchasing managers’ index (PMI) dropped to 52.7 from 54.50

Base metals
Three-month base metals prices on the London Metal Exchange were mixed on Wednesday morning, with copper and lead prices off slightly, while the rest were up between 0.1% for lead and 0.4% for tin. Copper was off $2.50 per tonne at $5,892 per tonne, following a close on Tuesday at $5,894.50.

In China, base metals prices on the Shanghai Futures Exchange were almost mixed on Wednesday; July nickel and September tin contracts were down by 0.6% and 0.3% respectively, while the July contracts for the other metals were up by an average of 0.4%. July copper contract was recently quoted at 46,510 yuan ($6,732) per tonne, compared with Tuesday’s close at 46,290 yuan.

Spot copper prices in Changjiang were up by 0.6% at 46,510-46,590 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 7.89, compared with 7.91 at a similar time on Tuesday.

Precious metals
Gold prices are going from strength to strength and were recently quoted at $1,328.99 per oz, up by 0.3% from Tuesday’s close at $1,325.30. Silver and platinum are following gold’s lead, while palladium prices are consolidating.

On the SHFE, the December gold contract is up by 0.5% compared with Tuesday’s close, while December silver is up by 0.2%.

Wider markets
Concerns about the slowdown in global economic activity have weighed on oil prices with the spot Brent crude oil price recently quoted at $61.50 per barrel, little changed from $61.08 at a similar time on Tuesday but down sharply from the $70 level where it was trading on May 27.

Despite the dovish Fed comments, the yield on benchmark US 10-year Treasuries is slightly firmer and was recently quoted at 2.0975%, compared with 2.0904% at a similar time on Tuesday. The yields on the US two-year and five-year treasuries are yo-yoing around each other and have returned to a contango again – they were recently quoted at 1.8483% and 1.8550% respectively.

The German 10-year bund yield fell further into negative territory and was recently quoted at -0.2250%, compared with -0.2100% at a similar time on Tuesday.

Asian equity markets were stronger this morning, boosted by gains in the US on Tuesday: Nikkei (+1.80%), Hang Seng (+0.38%), CSI 300 (+0.10%) and Kospi (+0.10%) and the ASX 200 (0.41%).

This follows a strong performance in western markets on Tuesday. In the United States, the Dow Jones Industrial Average closed up by 2.06% at 25,332.18, while in Europe, the Euro Stoxx 50 closed up by 1.01% at 3,333.49.

Currencies
The dollar index is heading lower; it extended lower earlier this morning to 96.96, but was recently quoted at 97.07. This follows May 30’s high at 98.29, which failed to overcome the May 23 peak at 98.38. It has now breached the low at 97.03 from May 13.

With the dollar turning lower, the other major currencies are firmer; the euro (1.1258), sterling (1.2701) and the Australian dollar (0.6998), with the Japanese yen (108.10) consolidating in high ground.

The yuan has flattened out in low ground and was recently quoted at 6.9078, compared with around 6.7100 in mid-April before the escalation in the US-China trade dispute.

Key data
Economic data on Wednesday is focused on services PMI with releases in China, across Europe and in the US. In addition, there is data on EU retail sales, US ADP non-farm employment change, crude oil inventories and the Beige book.

In addition, US Federal Open Market Committee member Richard Clarida and Michelle Bowman are speaking.

Today’s key themes and views
The base metals have received a slight boost from the rebound in equities, which were driven by the more dovish Fed comments, but whether that is enough to spark follow-through buying is questionable. The dominating themes are trade uncertainty and deteriorating economic growth and unless a trade deal comes in to brighten up the outlook, it is hard to see why consumers would be in a hurry to restock. At some time, the fundamentals are likely to re-exert themselves but until they do the path of least resistance is likely to remain sideways-to-lower.

With economic and political concerns running high and with treasury yields falling below or towards 2%, the opportunity cost of holding gold has fallen, making gold more of an attractive haven investment. A lower US interest rate would be bullish for gold, but the fact the pick-up in risk appetite in equities has not prompted profit-taking in gold in the past 12-18 hours is constructive for gold.