METALS MORNING VIEW 10/04: LME base metals prices on defensive after global risk sentiment sours

Global risk sentiment soured overnight following news that the International Monetary Fund (IMF) has downgraded its global growth outlook for 2019 to 3.3% from 3.5% previously.

The IMF forecasts the slowdown seen in the second half of 2018 to continue into the first half of this year before picking up in the second half of 2019. The projected growth rate for next year was unchanged at 3.6%.

As a result, three-month base metals prices on the London Metal Exchange were mixed amid low volumes during morning trading on Wednesday April 10 while participants digested the news.

Zinc and tin led on the upside with gains of 0.5% and 0.2% to $2,867 per tonne and $20,930 per tonne respectively, while the rest were little changed to weaker. The complex averaged a gain of 0.1%.

A total of 3,536 lots had changed hands on LME Select at 6.40am London time on Wednesday, which compares with the 5,790 lots traded at a similar time on Tuesday.

In the spot precious metals, gains in platinum and palladium were offset by declines in gold and silver. The precious metals complex was unchanged at the time of writing but the tone remains somewhat bearish after gold, silver and platinum have retreated from highs reached earlier in the week. Meanwhile, the selling momentum in palladium has slowed, allowing the metal’s spot price to stabilize at $1,388 per oz.

In China, base metals prices on the Shanghai Futures Exchange remained under selling pressure with the complex down by 0.1% on average. There were two standout metals, however, with the most-traded May contract and the most-traded June nickel contract up by 0.5% and 0.3% respectively. The rest weakened with the May contracts for zinc and sister metal lead leading the decline with drops of 0.7%.

Elsewhere, the spot copper price in Changjiang rose by 0.2% to 49,440-49,540 yuan ($7,364-7,379) per tonne after 49,320-49,420 yuan per tonne at a similar time on Tuesday. The LME/Shanghai copper arbitrage ratio stood at 7.65 this morning, which is slightly down from 7.67 yesterday.

In other metals in China, the selling in base metals on the SHFE has spread through to the precious metals complex; the June gold contract managed to eke out a gain of 0.3%, but this was easily offset by the 0.5% drop in the June silver contract. The May iron ore contract on the Dalian Commodity Exchange fell 1.9% to 700 yuan per tonne and the SHFE’s May rebar contract dipped by 0.3% to 3,748 yuan per tonne.

In wider markets, the Brent crude oil price struggled to hold on to its gains above $71.00 per barrel and was last trading at $70.76 per barrel. The German 10-year bond yield trades in and out of -0.0100 to 0.0100 and the US 10-year treasuries bond yield has dipped lower to 2.4868, a contrast to yesterday’s 2.5204. A further decline in global bond yields imply a risk-off tone, which could have a negative impact on base metals prices.

Global equity indexes were in line with this risk-off mode, with Asian major indexes Topix down by 0.69%, Nikkei by down 0.53% and the Hang Seng down by 0.17%. Surprisingly, China’s CSI 300 managed to produce a small gain of 0.26%.
This follows weakness in western markets on Tuesday; in the United States, the Dow Jones Industrial Average ended 0.72% lower, the S&P500 was down by 0.61% and the Nasdaq was off by 0.56% following news that the Trump administration was considering implementing additional tariffs on the European Union, raising fears of another trade war.

In currencies, the dollar index was softer – recently trading at 96.98. As a result, the other major currencies we follow are a tad firmer; the euro was up by 0.01% at 1.1268, the Japanese yen was slightly higher at 111.17 and the Australian dollar rose by 0.3% to 0.7147.

In data overnight, Japan’s bank lending grew by 2.4% year on year in March, while the country’s producer price index (PPI) for the same period rose by 1.3%, beating the forecast 1% gain. But the country’s core machinery orders increased by 1.8% month on month in February, lower than the expected 3% gain but up from the 5.4% decline recorded previously.

It is a busy day for data on Wednesday with French and Italian industrial production, UK manufacturing production and construction output and the all-important European Central Bank main refinancing rate which is expected to stay at 0%.

Later on Wednesday, market participants will turn their attention to the minutes from the US Fedaerl Open Market Committee’s March meeting for further clues on the central bank’s outlook for future interest rate increases, which will likely dictate the direction of the dollar index.

In general, the LME base metals prices have failed to hold on to the gains acquired following a string of positive trade rhetoric between the US and China due to there being a lack of any concrete developments. Fresh macro developments, such as the report from the IMF and potential new trade dispute between the US and Europe has set a bearish tone for the demand outlook on base metals.

There is still no sign of strong physical order book in the second trading quarter of 2019 as cancelled warrants across the base metals have declined. Fresh inflow of zinc has given sellers control of the complex while tin still waits for more Indonesian supply.

Gold and silver are holding on to gains made at $1,303.40 per oz and $15.20 per oz but the upside momentum lacks conviction for now. Platinum has retreated below $900 per oz, while palladium is trying to establish a base above recent low at $1,324 per oz.

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Andy Farida

andy.farida@fastmarkets.com

Published

Andy Farida

April 10, 2019

10:00 GMT

London