MORNING VIEW: Rebound in LME base metals prices capped by stronger dollar

The bullish momentum seen on Tuesday June 25 seems to have run its course because base metals prices were mostly mixed in the early Asian trading session on Wednesday.

Markets seem to have already priced in the positivity surrounding an upcoming meeting between US president Donald Trump and China’s Xi Jinping at the Group of Twenty (G20) summit in Japan later this week.

Both countries are seeking to defuse current trade tensions with top US and Chinese trade negotiators having agreed to resume talks just days before the G20 summit. But there is no sign that the two sides are anywhere near a trade deal, and negotiations are likely to fuel further uncertainty going into the second half of the year.

  • Geopolitical tensions in the Middle East have shown no signs of easing but demand for haven assets like gold has cooled.
  • The dollar recovered following overnight comments from US Federal Reserve Chairman Jerome Powell.
  • Powell emphasized that monetary policy is under review but he did not openly state that an interest rate cut in July is on the way.

Base metals
The London Metal Exchange three-month base metals prices were broadly weaker this morning, down by an average of 0.2% as at 6.30am London time. Tin was the sole exception to the weakness but was untraded at $19,025 per tonne. Nickel and lead both fell by 0.4%, while copper, aluminium and zinc were all down by 0.1%, with copper at $6,012 per tonne.

In China, base metals prices on the Shanghai Futures Exchange performed rather positively, up by 0.5% on average. Leading the gains was the most-traded August zinc and nickel contracts with increases of 1.5% and 1% respectively, while August copper was up by 0.8% and August aluminium rose by 0.2%.
On the down side, August lead and September tin declined by 0.2% and 0.3% respectively.

Spot copper prices in Changjiang were up by 0.7% at 47,210-47,350 yuan per tonne and the LME/Shanghai copper arbitrage ratio has edged up to 7.95 from 7.88 at a similar time on Monday.

Precious metals
Spot precious metals prices were down by an average of 0.2% this morning. Spot gold and silver have pulled back from their monthly highs of $1,439.00 per oz and $15.54 per oz respectively on the back of some profit-taking.

Platinum continues to hover above the psychological price level of $800 per oz and is currently up by 0.3% at $807 per oz but is struggling to clear overhead resistance at $825 per oz. Meanwhile, sister-metal palladium is up by 0.1% and its discount with platinum has widened to around $717 per oz – palladium was recently trading at $1,524 per oz.

The December gold and silver contracts on the SHFE were down by 0.9% and 0.8% respectively.

Wider markets
The spot Brent crude oil price remains well supported by geopolitical tensions in the Middle East and was last trading at $65.88 per barrel.

Meanwhile, benchmark US 10-year treasuries managed to rebound following the less dovish remarks from Fed chairman Powell, with a 1.02% gain to 2.0076%. But the German 10-year bund yield still trades in negative territory and was last seen at -0.3200%, a contrast to last week’s -0.2500% amid persistent worries that the global economy is heading into a recession.

In equities, Asian markets were broadly weaker this morning, with Topix (-0.59%), Nikkei (-0.51%), ASX 200 (-0.26%) and CSI300 (-0.18%) all declining. The Hang Seng Index (+0.13%) managed to shrug off the broad-based weakness, however.

This follows negative closes for major US indices on Tuesday, with the Dow Jones Industrial Average down by 0.67%, the S&P500 down by 0.95% and the Nasdaq sliding by 1.51%.

Currencies

Following Tuesday’s low of 95.84, the dollar index has attracted some dip-buying and was last trading at 96.25. As a result of the firmer dollar, the Japanese yen (107.39) has weakened.

The other major currencies we follow were weaker too, with the euro down 0.03% to 1.1362 and sterling down by 0.12% at 1.2673. The Australian dollar was firmer however, with a gain of 0.28% to 0.6978 as it extends Monday’s gains.

The yuan has strengthened to 6.8838, up by 0.06% at the time of writing.

Key data
In data on Wednesday, inflation report hearings from the United Kingdom and the US’ durable goods orders, goods trade balance and crude oil inventories are of note.

Today’s key themes and views

Although global risk sentiment has stabilized, the rebound momentum in the LME base metals three-month prices seen earlier this week may have all but been a short-covering exercise and it seems that bulls will need further convincing that a US-China trade deal is still possible before getting excited enough to chase prices higher.

Meanwhile, the spot gold price has come off its Tuesday high of $1,439 per oz. It was beginning to look like an overcrowded trade but the emergence of some dip-buying has kept the pullback limited to around $1,404 per oz at the time of writing. As confidence starts to improve on the macro front, more profit-taking in haven assets is likely though any pullback may well be a consolidation phase from recent gains.

Another bout of buying in haven assets could emerge if geopolitical tensions in the Middle East escalate further or the G20 summit fails to produce any clear picture on the simmering trade war between the United States and China.

base metals
precious metals

Andy Farida

andy.farida@fastmarkets.com

Published

Andy Farida

June 26, 2019

09:53 GMT

London