MORNING VIEW: Economic, trade worries dominate while metals’ fundamentals tighten in background

Markets remain jittery while US-China trade war rhetoric escalates with the latter raising the possibility of including rare earth minerals in their trade negotiations. Equity markets have sold off and bond yields have fallen as investors move into havens.

  • Trade war rhetoric escalates
  • Equites sell off on Tuesday, while Treasury yields fall further
  • Market now indicating increased likelihood of two US interest rate cuts by year-end

Base metals
Three-month base metals prices on the London Metal Exchange were for the most part weaker during morning trading on Wednesday May 29, the exception was tin which was up by 0.2%. The others were down by an average of 0.4%, led by a 0.7% fall in zinc. Copper was recently quoted at $5,946 per tonne, off by 0.3% compared with Tuesday’s close of $5,966 per tonne.

The rallies that started last Thursday appear to have stalled on Tuesday and prices are now pulling back. Given the deteriorating trade climate it is difficult to see why consumers would be in any hurry to chase prices higher.

That said, with backwardations flaring up in zinc, it does look as though some shorts are being caught short and with deficits still expected in most of the metals - indicating still tight fundamentals - the elastic bands may be being stretched on the downside, which could lead to some swift rebounds if the trade winds change direction.

In China, base metals prices on the Shanghai Futures Exchange were down across the board on Wednesday, with July nickel leading the decline with a 2.1% decline, while September tin is off the least with a 0.1% dip. The rest were off by between 0.4% and 0.6%, with July copper off by 0.6% at 46,930 yuan ($6,792) per tonne.

Spot copper prices in Changjiang were down by 0.5% at 46,860-47,010 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 7.89.

Precious metals
Gold prices are consolidating recent moves within the downward trend, with resistance evident above the mid-$1,280’s per oz and support available just below the $1,270 per oz level. Silver and platinum are extending lower and are following the industrial metals more, while palladium appears to have found support and is edging higher once again.

On the SHFE, the December gold contract is little changed compared with Tuesday’s close, while December silver is off by 0.8%.

Wider markets
In wider markets, the spot Brent crude oil price is consolidating and was recently quoted at $69.63 per oz, down by 0.7% from Tuesday’s close at $70.12.

The yield on benchmark US 10-year Treasuries has fallen further and was recently quoted at 2.2397% compared with 2.3090% at a similar time on Tuesday. The yields on the US two-year and five-year treasuries remain inverted.

The German 10-year bund yield fell further into negative territory and was recently quoted at -0.1700%, compared with -0.1400% at a similar time on May 24.

Asian equity markets were mixed this morning: Nikkei (-1.21%), Hang Seng (+0.08%), CSI 300 (+0.47%), the Kospi (-1.18%) and the ASX 200 (-0.74%).

This follows weakness in western markets on Tuesday. In the United States, the Dow Jones Industrial Average closed down by 0.93% at 25,347.77, while in Europe the Euro Stoxx 50 was down by 0.45% at 3,348.86.

Currencies
The dollar index has become quite choppy, it was recently quoted at 97.90, following May 24’s low at 97.54 and a high at 98.38 on May 23. For now, the index seems to be consolidating its latest show of strength.

The other major currencies are mixed; the euro (1.1165) is consolidating in low ground, as is sterling (1.2664), while the Australian dollar (0.6930) is slightly more upbeat and the Japanese yen (109.24) is near recent highs, highlighting haven demand.

The yuan has flattened out in low ground and was recently quoted at 6.9137, compared with around 6.7100 in mid-April before the escalation in the US-China trade dispute.

Key data
Economic releases on Wednesday includes data French consumer spending and gross domestic product, on German unemployment and US data includes the Richmond manufacturing index. In addition, Germany’s Bundesbank President Jens Weidmann is speaking.

Today’s key themes and views
Numerous cross currents are affecting the metals markets, with the noise and frustration surrounding the trade war weighing on business sentiment, while funds seem to riding the short side. Given fundamentals are still tight for most of the metals, when the trade winds do change direction, then a combination of short-covering, restocking and relief-buying are likely to be bullish forces. Until a trade deal starts to look imminent again, the metals are expected to find levels to build bases.

With considerable uncertainty over trade, the political situation in Europe and over Iran, all of which has been driving treasury yields lower as investors seek havens, it noteworthy that gold is still struggling to get back above $1,300 per oz – it may have some catching up to do.

base metals prices
precious metals prices

economic data

William Adams

william.adams@fastmarkets.com

Published

William Adams

May 29, 2019

08:30 GMT

London