METALS MORNING VIEW 27/03: Weak Chinese industrial profits sends metal prices lower

Chinese industrial profits were down by 14% in January-February compared with a year ago, marking the biggest fall since 2011. The data paints a worrying picture while the negative economic impact from China’s deleveraging activities in 2018, as well the bitter US-China trade war, continue to take a heavy toll on major industrial sectors.

The overnight release of this data put base metals prices under selling pressure in the early Asian session on Wednesday March 27 and negatively affected currencies along with it. This weakness has also filtered through to the start of European trading.

On the London Metal Exchange, three-month base metals prices were generally weak with an average loss of 0.2%.

Metals like nickel and zinc, which had seen decent gains at the close on Tuesday, were reversing their earlier strength with drops of 0.5% and 0.7% respectively. Tin (-0.3%) and aluminium (-0.1%) posted more marginal losses while copper was unchanged at $6,350 per tonne at the time of writing.

Three-month lead was an exception to the general weakness seen on the LME this morning, with the metal managing to eke out a small gain of 0.4%.

In terms of volume, 4,628 lots had traded on LME Select as at 6.49am London time, well below last week’s average of 5,684 lots at a similar time of the day.

Spot precious metals prices were holding up rather well this morning with the complex posting an average gain of 0.3%. Gold and silver were flat at $1,316.73 per oz and $15.42 per oz respectively, while platinum was up by 0.7% and palladium was rebounding well from a low of $1,534 per oz on Tuesday with a gain of 0.4%.

Following the heavy selling witnessed over the past two trading days, base metals prices on the Shanghai Futures Exchange were firmer on Wednesday, securing an average gain of 0.4%. Leading the advance was the May nickel contract which had rebounded to 100,860 yuan ($15,021) per tonne, an increase of 1.3% from the previous day’s close.

The May zinc contract followed close behind with an increase of 1.1% thanks to follow-through buying, while copper and lead were up by 0.3% and 0.1% respectively. The May tin contract was little changed and the May aluminium contract bucked the generally stronger showing by the SHFE base metals to edge down by 0.1%.

The spot copper price in Changjiang was up by 0.2% at 49,320-49,420 yuan per tonne after some dip-buying emerged, while the LME/Shanghai copper arbitrage ratio stood at 7.43 on Wednesday after 7.40 at a similar time on Tuesday.

Precious metals prices on the SHFE also suffered after selling emerged; the SHFE June gold and silver contracts were down by 0.2% and 0.8% respectively. Other metals in China fared better with the May iron ore contract on the Dalian Commodity Exchange unchanged at 613 yuan per tonne and the SHFE May rebar contract up by 0.3% 3,712 yuan per tonne.

Selling pressure emerged and pushed SHFE June gold and silver contract lower, down 0.2% and 0.8% respectively. Other metals fared better, with May Iron ore contract traded at Dalian Commodity Exchange (DCE) unchanged at 613 yuan per tonne while SHFE May rebar contract was up 0.3% and was last trading at 3,712 yuan per tonne.

In wider markets, Brent crude oil prices continued to recover since the March 22 low of $66.18 per barrel – the price was recently at $68.18 per barrel, up by 0.41% from the previous day’s close. The German 10-year bond yield remains in negative territory at -0.0400, while the US 10-year treasuries bond yield has started to dip, recently down at 2.3969, which is likely to re-ignite recessionary fears.

Strong closes in the US and European equity markets on Tuesday provided Asian equity indexes with a positive narrative this morning. While Nikkei (-0.23%) and Topix (-0.52%) were slightly weaker, the rest were stronger: Hang Seng index (+0.57%), China CSI 300 (+1.16%) and ASX200 (+0.09%).

In the United States, key equity indexes secured gains on Tuesday, with the Dow Jones Industrial Average (+0.55%), S&P 500 Index (+0.72%) and Nasdaq (+0.71%). Early indication of European equity indexes performance for Wednesday showed optimistic numbers, with strength seen in the German Dax (+0.4%), French CAC (+0.3%) and FTSE (+0.3%) at the time of writing.

The dollar index has started to break higher from its inverse head and shoulder formation on the 4-hourly chart and was most recently at 96.92. With the dollar stronger, the other currencies we follow were weaker: the Euro was down by 0.14% at 1.1260 while the Japanese yen dipped to 110.61 and Australian dollar was down by 0.55% at 0.7095. Given the ongoing uncertainty surrounding Britain’s exit from the European Union, it is unsurprising to see the pound sterling has followed the rest lower to 1.3194.

In data on Tuesday, European Central Bank president Mario Draghi was scheduled to speak in Frankfurt. Other key data due later includes the release of German 10-year bond auction results, while US data includes current account, trade balance and crude oil inventories.

The base metals complex was notably weaker in the early Asian trading session over the past three trading days, only for fresh buying to emerge late in the European trading session. This suggests that there is still dip-buying interest despite all the negative macro-headlines and metal prices are pulling back in a rather orderly fashion.

As we approach the end of the first quarter, all the base metals prices have performed considerably higher than the January 2019 low and this provides a supportive narrative for further gains to emerge in the second quarter of the year.

Meanwhile, recent strengthening in the dollar index is likely to act as a headwind on precious metals prices. Selling pressure has been visible ever since gold and silver prices came off this week’s highs of $1,324.55 per oz and $15.58 per oz respectively. Compared with its peers, platinum is holding on to gains well while the profit-taking in palladium remains.

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Andy Farida

andy.farida@fastmarkets.com

Published

Andy Farida

March 27, 2019

09:45 GMT

London