MORNING VIEW: Relief buying in LME base metals amid softer dollar

Although the softer dollar index has provided a conducive backdrop for risk sentiment, there is still an air of caution amid the simmering geo-political tensions in the Middle East.


  • Over the weekend, Iran warned that it is ‘fully prepared to enrich uranium at any level and with any amount’, sparking fears that the long-tense relations between Iran and the United States is edging closer to a full military intervention.
  • Although spot gold and silver prices have come off their recent highs, the backdrop of a softer dollar and increased tensions in the Middle East are driving up demand for haven assets again. 
Base metals
Still, the London Metal Exchange base metals three-month prices were up 0.3% on average as of 06:55am London time. Buying pressure were seen from LME tin, up 1% and this was followed by lead 0.5% and the resilient nickel, up 0.4%. However, the rest of the base metals complex were struggling, with LME aluminium down 0.2%, copper off by 0.1% while zinc was unchanged at the time of writing.

In China, the base metals prices on the Shanghai Futures Exchange were higher by 0.5% on average. The complex was mainly driven higher by strong dip-buying appetite, with the most traded August nickel contract up 1.7% and September tin contract saw gains of 2.2%. Meanwhile, the most-traded August zinc contract was down 0.5%, aluminium had fallen 0.4%, lead was down 0.2% and the September copper contract was unchanged at 46,420 yuan per tonne ($6,729.96 per tonne) at the time of writing.

Spot copper prices in Changjiang was unchanged at 46,370-46,490 yuan per tonne but remain visibly under pressure while the LME/Shanghai copper arbitrage ratio has edged lower to 7.80.

Precious metals
On average, the precious metals complex was up 0.4% at the time of writing amid signs simmering geo-political tensions in the Middle East. Also, the better than expected US non-farm payroll in June, which came in at 224,000 - well above market estimate of 160,000, raised major questions about the certainty of an interest rate cut by US Federal Reserve. As such, spot gold and silver prices both edges higher by 0.3% and 0.5% respectively and was last trading at $1,403.86 per oz and $15.04 per oz respectively.

Meanwhile, the platinum price is consolidating from recent sell-off this morning, up 0.8% and was at $813.20 per oz at the time of writing. Sister-metal palladium continues to keep most of the gains made in June but appears a tad weak at $1,564.50 per oz, down 0.1% this morning.

The precious metals complex on the SHFE was weaker, down a full 1% on average. The December gold contract was off by 1% while silver was down 1.1%.

Wider markets
Spot Brent crude oil price reacted higher to $64.34 per barrel, off from the recent low of $62.07 per barrel basis the close of July 2.

Meanwhile, benchmark US 10-year treasuries continue to hover above the 2% mark but remain under pressure, down 1.15% at 2.0134%. The German 10-year bund yield still trades at record negative territory and was last seen at -0.3800%.

Major Asian equity indexes were all under selling pressure, with China CSI300 leading the decline down (-2.32%), Hang Seng index (-1.64%) amid continued protest in Hong Kong, ASX down (-1.17%), Nikkei (-0.98%) and Topix off by (-0.89%).

This follows the negative closes in major US indices on Friday July 5, with the Dow Jones Industrial Average down 0.16%, the S&P500 off by 0.18% and Nasdaq down a mild 0.1%.

Currencies
The dollar index is coming off from its recent high of 97.45 as seen on Friday July 5 and currently trades at 97.22, down 0.03% at the time of writing. Meanwhile, the Japanese yen has weakened to 108.39, a contrast to last week’s strength when it was trading at 107.52 on July 3.

The other major currencies edged a tad higher on the back of the weaker dollar, with the euro up 0.03% at (1.1228) while the sterling was last at (1.2523), unchanged at the time of writing. Meanwhile, the Australian dollar was trading at 0.6989, up 0.12%.

The yuan has continued to strengthen to 6.8837. However, the risk of a weaker yuan remains as trade negotiations between the United States and China is still in a gridlock, with little results to show for.

Key data
Data out in the early Asian trading session saw Japanese bank lending data of 2.3% which came in below market expectation of 2.6%. Adding fresh worries to the Japanese economy is the weaker core machinery orders numbers that was down 7.8%, a contrast from previous month growth of 5.2%. In Europe, German industrial production number came in slightly better than last month’s reading, up 0.3%.

For the rest of the day, economic data looks fairly light, with only US consumer credit data later in the evening.

Today’s key themes and views

Better than expected US job report numbers has dampened market expectation that the US Federal Reserve will cut 50 basis point on interest rate in the July FOMC meeting. Although this has given the dollar index a strong boost higher, the jury is still out as to which directional bias it will take. In fact, market participants will have to scrutinise what Fed chairman Powell will say on his speech to congress as he testifies for two days on July 9 and 10. Further reiteration of a dovish remark may have little impact since most of the rate cut expectations have been priced in. A surprise hawkish view on the US economy could stir market sentiment and shift global investors interest and potentially a stronger dollar.

Against such backdrop, interest on haven-assets and the price performance in the LME base metals complex remain vulnerable to new rhetoric from the US Fed as well as any fresh development from the simmering geo-political tensions in the Middle East.



Andy Farida

andy.farida@fastmarkets.com

Published

Andy Farida

July 08, 2019

09:35 GMT

London