MORNING VIEW: LME base metals prices remain under pressure despite record-setting US equities

Trading across most of the base metals is leading to price weakness – this despite record-setting levels seen in the S&P 500 and Nasdaq Composite on Tuesday. The exception is aluminium, where prices have been edging higher in recent days.

  • Asian equities give up early gains; in the US, earnings and dovish Federal Reserve sent shares to, or near to, record highs
  • Top US officials travel to Beijing to continue trade talks
  • Market likely to focus on German Ifo business climate data for signs of recovery

Base metals

Three-month base metals prices on the London Metal Exchange were for the most part little changed during morning trading on Wednesday April 24, with aluminium off by 0.3% and nickel up by 0.4%, while the rest were little changed. Three-month copper was recently quoted at $6,415 per tonne, up by $1 per tonne from Tuesday’s close.

The market continues to wait for concrete developments on the US-China trade deal, a new deal is expected to boost business confidence and that in turn could lead to more restocking as industry is believed to be running with low stocks.

But while reaching a deal has become a long drawn-out ordeal, stale long liquidation seems to have taken over from the more positive sentiment seen in the first quarter of the year.

Low volume, with just 4,128 lots traded on LME Select by 6.39am London time, compared with 7,224 lots at a similar time on Tuesday, suggests minimal bargain-hunting into the price weakness, with buyers remaining in hand-to-mouth mode.

In China, base metals prices on the Shanghai Futures Exchange were negative across the board, with prices down by an average of 0.7%, with the June nickel, lead and zinc contracts all off by around 1%, while the June copper and aluminium contracts were down by 0.4% and 0.3% respectively, and September tin was down by 0.1%. The June copper contract was recently quoted at 48,970 yuan ($7,286) per tonne, compared with 49,150 yuan per tonne at Tuesday’s close.

Spot copper prices in Changjiang were down by 0.3% at 48,860-49,070 yuan per tonne and the LME/Shanghai copper arbitrage ratio was recently at 7.63.

Ferrous
In other metals in China, the September iron ore contract on the Dalian Commodity Exchange was down by 1.7% at 618.50 yuan per tonne from 629 yuan per tonne at the close on Tuesday.

On the SHFE, the October steel rebar contract was down by 1.4% at 3,726 yuan per tonne compared with 3,777 yuan per tonne at Tuesday’s close.

Precious metals

Spot precious metals prices were mixed this morning with gold, silver and palladium down by between 0.1% for gold and 03% for palladium, while platinum was up by 0.2%. The overall trend in gold and silver is to the downside, with prices triggering various negative chart patterns. Meanwhile, the platinum group metals have pulled back from the respective highs, but are holding up better. Gold was recently quoted at $1,270.07 per oz, down by 0.1% from Tuesday’s close at $1,271.45 per oz.

On the SHFE, the June gold and silver contracts were down by 0.3% and 1% respectively from Tuesday’s closing levels.

Wider markets
In wider markets, the spot Brent crude oil price has generally strengthened after the US has further tightened its sanctions against Iranian exports. Prices were recently quoted at $74.12 per barrel, compared with around $71 per barrel in mid-April.

The yield on US 10-year treasuries was recently quoted at 2.5505%, while the yields on the US 2-year and 5-year treasuries have returned to a small contango - they were recently quoted at 2.3407% and 2.3415% respectively. The German 10-year bund yield was recently quoted at 0.0023%.

Asian equity markets were mixed on Wednesday: the Nikkei (-0.27%), the CSI 300 (+0.14%), the Hang Seng (-0.44%), the Kospi (-0.88%) and the ASX 200 (+0.99%).

This follows a strong performance in western markets on Tuesday: in the United States, the Dow Jones Industrial Average closed up by 0.55% at 26,656.39, and in Europe, the Euro Stoxx 50 was up by 0.13% at 3,503.85.

Currencies
The dollar index broke higher on Tuesday to reach a high of 97.78, this is the highest since June 2017, when it was on the way down from the January 2017 peak at 103.82. The stronger dollar is weighing on the other major currencies to varying degrees: the euro (1.1311), sterling (1.2924), the yen (111.83) and the Australian dollar (0.7035). The stronger dollar also helps explain the weakness in bullion prices.

The yuan remains range bound, it was recent quoted at 6.7235. The other emerging market currencies we follow do generally seem to be on a back footing, which is not surprising given the strength of the dollar.

Key data
On Wednesday, there is data on EU Ifo business climate that is expected to edge higher, having been trending lower since last August. There is also a European Central Bank economic bulletin, data on UK public sector borrowing, Chinese leading indicators and US crude oil inventories.

Today’s key themes and views
With the exception of aluminium that is holding up well, the rest of the base metals have been showing weakness in recent days, although for lead, the weakness has been fairly continuous since mid-March. Indeed, the same is true in tin, where the new regulations that are likely to free up more tin for export seem to be weighing on prices.

So from treading water while waiting for a new US/China trade deal, those holding metal now seem to be having second thoughts and stale long liquidation seems to be emerging.

We still feel that as the trade dispute has caused the global economy to slow down so much, that a new deal will breathe new life into the global economy. And, that will lead to restocking and a pick-up in capital spending – but it is still a waiting game.

We had though gold prices were looking quite vulnerable and now the stronger dollar is leading to a price correction. Given we expect a US-China trade deal to emerge over the next few months, the need for haven assets may well diminished further. That is unless tighter US sanctions on Iran increase geopolitical tensions.

base metals prices
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William Adams

william.adams@fastmarkets.com

Published

William Adams

April 24, 2019

09:37 GMT

London