METALS MORNING VIEW 07/01: Metals buoyant on the back of good US employment report, Chinese stimulus and a more Dovish Fed, but will it last?

Three-month base metals prices on the London Metal Exchange were up across the board by an average of 0.2% this morning, Monday January 7, with copper recently quoted at $5,937 per tonne – this after average gains of 1.5% last Friday.

Volume across the complex has been average with 5,995 lots traded as at 7.15am London time.

In the precious metals this morning, gold prices are off their highs of $1,298.55 per oz seen last Friday and were last at $1,290.22 per oz – given the rebounds in broader markets, some consolidation/profit-taking in gold is understandable. Silver is following gold’s lead, while the platinum group metals are being boosted by the recovery in industrial metals – palladium set a fresh record high last Friday at $1,312.50 per oz, while platinum prices broke higher and were recently quoted at $825.90 per oz.

In China this morning, base metals prices on the Shanghai Futures Exchange were for the most part stronger, with gains averaging 1%, led by a 2.2% rise in the May nickel contract, while the February copper contract was up by 1.4% at 47,430 yuan ($6,905) per tonne. Lead was the only base metal on the SHFE dragging its feet.

Spot copper prices in Changjiang were up by 1.3% at 47,390-47,590 yuan per tonne and the LME/Shanghai copper arbitrage ratio has eased to 7.99 from 8.06 last Friday, the corrections in the ratio suggest LME prices are leading the rebound.

In other metals in China, the May iron ore contract on the Dalian Commodity Exchange was up by 1.8% at 511 yuan per tonne. On the SHFE, the May steel rebar contract was up by 1.8%.

In wider markets, the spot Brent crude oil price was stronger, up by 1.04% at $58.05 per barrel. The yield on US 10-year treasuries has started to rebound, it was recently quoted at 2.6629%. The yields on the US 2-year and 5-year treasuries have converged with the yields at 2.4927% and 2.4923% respectively. The German 10-year bund yield was also firmer at 0.2050%. The firmer yields support a more risk-on stance in the financial markets.

Asian equity markets were firmer across the board on Monday: Nikkei (2.44%), Hang Seng (0.67%), Kospi (1.34%), the CSI 300 (0.61%) and the Australian ASX 200 (1.14%). Chinese stimulus and a more dovish US Federal Reserve have boosted confidence.

The dollar index is under pressure and was recently quoted at 95.94, which is in line with the more dovish Fed comments, while the euro (1.1437), sterling (1.2749) and the Australian dollar (0.7136) are all firmer, while the yen (108.19) is weak as money flows out of haven assets into more risky ones.

The yuan was firmer at 6.8503, which suggests some confidence may be returning and the other emerging market currencies we follow are also firmer, which also suggests risk-on is emerging.

Economic data already out on Monday shows weakness in German factory orders which fell by 1%, after a 0.2% rise previously, but German retail sales were more upbeat, rising by 1.4% after a 0.1% rise previously. Later there is data on Sentix investor confidence and retail sales from the European Union and the Institute for Supply Management non-manufacturing purchasing managers’ index (PMI) from the United States of note.

So with a rebound underway, all eyes will now be on whether there is follow-through buying interest after the show of weakness at the start of the year. A good US employment report last Friday, China’s stimulus measures and a more dovish Fed are positive developments, but with trade talks being held this week between the US and China, the markets are likely to remain nervous.

Over the second half of last year rallies kept on being capped and short-selling dominated, we expect it will take some very positive steps forward on trade to change the market’s mind set. But, if there are improvements in the trade outlook then they would likely turn attention to the metals’ fundamentals and if that happens, then the market may view the metals as being oversold.

Gold prices have done well in light of the gloom in other markets in recent months. Going forward a more dovish Fed and weaker dollar could still underpin a firmer gold price, but if confidence in broader market picks up then gold may struggle if the more oversold-looking markets start to rebound.

London Metal Exchange, base metals prices, precious metals prices

Shanghai Futures Exchange, base metals prices, precious metals prices

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William Adams

william.adams@fastmarkets.com

Published

William Adams

January 07, 2019

08:55 GMT

London