The downward pressure across the industrial metals is being driven by a fragile risk appetite in Asia, evident in domestic equity losses - the Shanghai composite index (~-2%) is down for the first time in three days. This is principally caused by United States-China trade tensions after the Chinese government reiterated in a joint People’s Bank of China/International Monetary Fund conference that the country will retaliate “unquestionably” in response to the new trade measures implemented by the US government.
On the Shanghai Futures Exchange, the base metals complex also experienced broad-based weakness, showing an average loss of 1.0%, with zinc (-3.2%) the worst performer and nickel (unchanged) the most resilient. We would have expected relatively stronger SHFE prices considering today’s appreciation in the yuan - the USD/CNH is rebounding after three consecutive days of decline. Copper prices in Changjiang are down by 0.9% at 50,720-51,000 yuan ($8,078-8,123) per tonne and the LME/Shanghai copper arb ratio stands at 7.37.
Turning to the precious metals, the complex is subdued this morning, with gold (-0.2%), silver (-0.2%), palladium (-0.1%) slightly down, platinum is flat. This comes after a decent rally on Wednesday when the complex surged by an average 0.8% on the back of haven flows stemming from rising geopolitical risks.
US President Donald Trump criticized Russian President Vladimir Putin for backing Syrian President Bashar al-Assad in spite of the alleged chemical attack in Douma, indicating a deterioration in the relationship between the US and Russia.
Rising geopolitical risks pushed the dollar lower (on stronger haven flows in favor of the euro and the yen) and exerted upward pressure on US real rates (on stronger inflation expectations stemming from the oil rally). This prompted the speculative community to extend their bullish bets across the precious metals space.
On the macro front, investors will pay a close attention to the March European Central Bank (ECB) meeting minutes after Wednesday’s release of the March US Federal Open Market Committee (FOMC) meeting minutes. While the Fed’s minutes surprised slightly to the hawkish side since several FOMC members acknowledged that a stronger pace of monetary policy normalization could be warranted, the ECB’s minutes may also lean to the hawkish side after the annual ECB report released earlier this month showed that the central bank was more confident in its positive outlook for the economy. This could push the euro higher and thus the dollar lower, supporting metals pricing.
Base metals could experience some weakness for the remainder of the week after the substantial gains made in the first half of the week. Continuing trade tensions between the US and China could prompt some financial participants to lock in some profit. Aluminium (+9% on the week) appears therefore the most vulnerable to a bout of de-risk.
Precious metals should push still higher on the back of stronger haven flows stemming from escalating geopolitical tensions between the US and Russia. A potential US strike on Assad’s regime after the alleged suspected chemical attack could turn out to be a strongly bullish catalyst.
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