MORNING VIEW 29/04: Mixed start to the week, but some dip-buying evident

London Metal Exchange base metals prices have generally been weak in recent days but some dip-buying seems to be emerging, which for now is providing support. But, with much of Asia in, or heading for, Golden Week and Labor Day holidays, liquidity is likely to shrink either leading to more volatility, or quiet trading in the days ahead.

  • Asian equities firmer this morning helped by strong US gross domestic product data on Friday
  • Dollar index remains in high ground
  • Market waiting for China’s purchasing managers index (PMI) data on Tuesday

Base metals

Three-month base metals prices on the LME were mixed on the morning of Monday April 29, with copper and aluminium off by an average of 0.25%, with copper recently quoted at $6,390 per tonne. Zinc was little changed, while the rest were up by an average of 0.3%.

The market continues to wait for concrete developments on the US-China trade deal which may be forthcoming over the next few weeks as there are high level meetings in Beijing this week and in the United States next week.

A new deal is expected to boost business confidence and that in turn could lead to more restocking because industry is believed to be running with low stocks. That said, given US President Donald Trump’s maverick approach to these meetings may bring with them more nervousness, after a good few months when there has been optimism over a deal.

In China, base metals prices on the Shanghai Futures Exchange were for the most part stronger, with the June contracts for aluminium, lead, zinc, nickel and September tin up by an average of 0.7%, while June copper prices were little changed at 48,840 yuan ($7,257) per tonne, compared with 48,860 yuan per tonne at Friday’s close.

Spot copper prices in Changjiang were unchanged at 48,730-48,755 yuan per tonne and the LME/Shanghai copper arbitrage ratio was slightly weaker at 7.64, compared with 7.66 at a similar time on Friday.

Ferrous

In other metals in China, the September iron ore contract on the Dalian Commodity Exchange was up by 1.6% at 630 yuan per tonne from 620 yuan per tonne at the close on Friday. On the SHFE, the October steel rebar contract was up by 1% at 3,770 yuan per tonne compared with 3,733 yuan per tonne at Friday’s close.

Precious metals

Spot precious metals prices were for the most part weaker this morning, the exception was platinum that was up by 0.3% at $898.90 per oz, compared with $896 per oz at Friday’s close. Gold and silver were both down by 0.2%, with gold at $1,283.96 per oz, compared with $1,285.95 per oz at the close on Friday, while palladium prices were off by 0.8%.

On the SHFE, the June gold and silver contracts were up by 0.2% and 0.3% respectively from Friday’s closing levels.

Wider markets
In wider markets, the spot Brent crude oil price has weakened to $71.69 per barrel, this after its recent show of strength that saw it rise to $75.58 per barrel on April 25, when it reacted to the US tightening its sanctions against Iranian exports. Oil prices started to correct after Trump urged Opec to lower prices last week.

Treasuries rose and yields fell as US price data pointed to low inflation. The yield on US 10-year treasuries was recently quoted at 2.5135%, compared with 2.5246% at a similar time on Friday. The yields on the US 2-year and 5-year treasuries have returned to a small contango – they were recently quoted at 2.2952% and 2.3016% respectively. The German 10-year bund yield was recently quoted at 0.01000%, compared with -0.0150% at a similar time on Friday.

Asian equity markets were for the most part stronger on Monday: the Nikkei (closed), the CSI 300 (+0.28%), the Hang Seng (+0.86%), the Kospi (+1.70%) and the ASX 200 (-0.41%).

This follows a stronger performance in western markets on Friday: in the US, the Dow Jones Industrial Average closed up by 0.31% at 26,543.33, and in Europe, the Euro Stoxx 50 was up by 0.24% at 3,500.41.

Currencies
The dollar index broke higher on April 23, and climbed to a high of 98.35, the highest since June 2017, when it was on the way down from the January 2017 peak of 103.82. It is now consolidating and was recently quoted at 97.96. The stronger dollar was weighing on the other major currencies but since it has started to consolidate, the other currencies have managed to get some lift: the euro (1.1161), sterling (1.2940), the yen (111.70) and the Australian dollar (0.7055).

The yuan has weakened out of its two-month sideways range, which is in line with the dollar’s recent strength. It was recently quoted at 6.7285. The other emerging market currencies we follow are also generally seeing some rebound now that the dollar’s climb has halted and it is consolidating.

Key data
Economic data already today includes data on EU M3 money supply, and private loans, but key will be the US personal consumption expenditures (PCE) price data as that will give further insight into inflation. Other data out includes data on personal income and spending. Some of the US data will show figures for February and March.

Today’s key themes and views
Dip-buying appears to be emerging into the recent price weakness and while metals prices have been weak on the back of poor economic data, now there are signs of some better data, there may well be room for some optimism. We wait to see what the next round of manufacturing PMI data reveals. But, the combination of better data and a new trade deal could be a double positive whammy for the base metals. That said, with extended Labor Day holidays approaching, combined with the fact the market is likely to be nervous about the trade talks until a deal is struck, this may be one occasion where it is best to wait for concrete news before getting more involved.

We had thought gold prices were looking quite vulnerable and the stronger dollar has weighed on gold prices, although in recent days the precious metals have run into some dip-buying. For now, we see the path of least resistance as to the downside. Given we expect a US-China trade deal to emerge over the next few weeks, the need for havens may well diminish further. That is unless tighter US sanctions on Iran increase geopolitical tensions, or if trade talks turn sour.

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William Adams

william.adams@fastmarkets.com

Published

William Adams

April 29, 2019

09:50 GMT

London