MORNING VIEW: LME base metals prices recover while selling pressure subsides

Jun 10, 2019 - 11:05 AM GMT
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Global risk sentiment improved on Monday June 10 after the United States reached a last-minute trade deal with Mexico over the weekend, averting the imposition of a 5% tariff on all Mexican goods entering the US.

The positive trade development has paved the way for the London Metal Exchange three-month base metals prices to recover higher this morning as investors’ appetite for risk assets returns. Having said that, we remain mindful that the gains will be able to rise only so much since the US-China trade talks have so far shown little progress.

Conversely, demand for haven assets has declined, with investors in particular shifting away from gold. The strong run-up to a new 2019 high at $1,348.25 per oz on Friday has attracted profit-taking following a potentially bearish double top formation. So far this morning, the spot gold price has slipped 1.02% and was recently trading at $1,326 per oz.

  • Group of 20 (G20) finance leaders concluded that trade and geopolitical tensions have intensified, but failed to express a pressing need to resolve them.
  • Market attention now turns to a potential revival in US-China trade talks, though very little progress has been made on this front.
  • Larger-than-expected trade surplus for China in May has clouded the outlook for continued trade negotiations with the US.

Base metals
The London Metal Exchange three-month base metals prices were trending higher this morning, up by an average of 0.5% as at 6.33am London time. Nickel led the charge with a gain of 1.2%, followed by zinc (+0.7%), lead (+0.7%), copper (+0.6%) and aluminium (+0.1%). Tin was the lone metal in negative territory with its three-month price down by 0.3%.

In China, base metals prices on the Shanghai Futures Exchange enjoyed similar gains on Monday, with prices up by an average of 0.6%. Zinc was the outperformer with the metal’s most-traded July zinc contract up by 1.7% at 20,725 yuan ($2,999) per tonne. Nickel followed with a 1% increase in its July contract, while the July lead and copper contracts were up by 0.8% and 0.5% respectively and the September tin price was up by 0.1%. Aluminium was the laggard of the SHFE complex, with the metal’s most-traded July contract dipping by 0.2%.

Spot copper prices in Changjiang were up 0.5% at 46,130-46,440 yuan per tonne and the LME/Shanghai copper arbitrage ratio edged up to 7.97.

Precious metals
Following strong starts early this month, the spot gold and silver prices have both now run into profit-taking while demand for haven assets subsides. The spot gold price was recently down by 0.9% at $1,328.43 per oz, while spot silver has slipped below the psychological price level of $15 per oz – down by 1.3% at $14.79 per oz so far this morning.

Platinum was the lone precious metal in positive territory, up by 0.4% and last trading at $806.60 per oz but renewed selling interest in haven assets could act as a drag on the metal’s price action. Sister-metal palladium followed in the footsteps of gold and silver, dropping by 0.2%.

On the SHFE, the June gold contract was unchanged at 301.65 yuan per gram but the December silver contract was off by 0.2%.

Wider markets

In wider markets, fresh buying pushed the spot Brent crude oil price to a high of $63.90 per barrel this morning, up from last week’s low of $59.42 per barrel. With the positive development in US-Mexico trade relations, the recovery in demand for oil should continue in the coming days.

The improved vibe also applies to global bond yield. Benchmark US 10-year treasuries has edged higher to 2.1262%, up 1.96%. Meanwhile, the German 10-year bund yield still trades in negative territory and was recently quoted at -0.2427%.

The improvement in sentiment also affected global bond yields; the yield on benchmark US 10-year treasuries has edged higher to 2.1262%, compared with 2.1233% at a similar time on Friday. The German 10-year bund yield continues to trade in negative territory and was recently quoted at -0.2427%, compared with -0.2350% on Friday.

In equities, Asian markets were stronger across the board: Hang Seng (+2.16%), Topix (+1.34%), CSI300 (+1.29%), Nikkei (+1.20%) and the ASX 200 (+0.95%).

This follows strong closes for major US indices on Friday, with the Nasdaq up by 1.66%, the S&P500 up by 1.05% and the Dow Jones Industrial Average up by 1%, or 263 points, to 25,983 points

Currencies

The dollar index recovered from last week’s low of 96.45 to trade at 96.86 this morning and this has added downward pressure to the Japanese yen as it weakens to (108.67).

The other major currencies we follow were under selling pressure, with the euro (1.1300), sterling (1.2707) and the Australian dollar (0.6966) down by 0.3%, 0.23% and 0.46% respectively.

The yuan continues to weaken at 6.9334, compared with around 6.7100 in mid-April before the escalation in the US-China trade dispute.

Key data
In data already out on Monday, China recorded a larger-than-expected trade surplus of $41.7 billion in May. Chinese dollar-denominated exports rose unexpectedly last month with a year-on-year increase of 1.1% against an expected 3.8% decline. China’s imports fell a sharp 8.5% in May against a forecast 3.3% decline.

While the export data surprised to the upside, the decline in China’s imports signaled weakening domestic demand in the country.

Japan’s overall bank lending rose by 2.6% in May from the same month a year earlier. This follows the 2.4% annual increase in April. The country’s final gross domestic product (GDP) price index disappointed, however, at 0.1% while final quarterly GDP was in line with expectations at 0.6%.

Key data of note out later on Monday includes GDP, manufacturing production, construction output and industrial production from the United Kingdom. US Jolts job openings are also due.

Today’s key themes and views
Although market participants cheered a successful deal being struck between the US and Mexico, underlying risk sentiment remains fragile. As such, we remain cautious toward the short-term respite that the base metals are enjoying because US-China trade tensions seem a long way from being resolved.

That said, the selling witnessed last week in the LME base metals has subsided as global investors shift away from haven assets. As a result, gold and silver prices have reacted lower amid the improved risk sentiment and the recovery in the dollar index suggests there may be more downside in the near term. But investors’ appetites for risk could turn quickly on either fresh trade rhetoric from Chinese news outlets or a president releasing statements on social media.

base metals
precious metals

macroeconomic data

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