MORNING VIEW: Metals prices firmer but path of least resistance remains to downside

One disappointment after another in the world of trade and economic data, with the only relief coming in the form of potential for easier monetary policy, makes for a gloomy outlook.

The outlook could be saved if a trade deal arrives soon, otherwise it looks like the global economy is being wounded as it suffers one blow after another.

  • International Monetary Fund cuts its 2019 economic growth forecast for China to 6.2%
  • US, Mexico fail to reach a trade deal that would have averted tariffs
  • Equities in Asia generally weaker, gold prices buoyant

Base metals
Despite having little to be cheery about, three-month base metals prices on the London Metal Exchange varied between being unchanged, or little changed, to higher during morning trading on Thursday June 6.

Zinc led the rebound with a 0.9% gain and copper was up by 0.4% at $5,811 per tonne, after a low on Wednesday at $5,789, while the rest were little changed. Volume was, however, quite high with 8,731 lots traded as of 06.44am London time.

In China, base metals prices on the Shanghai Futures Exchange were mixed on Thursday, with the July contracts for copper, aluminium and nickel off by an average of 1%, with copper at 45,989 yuan ($6,655) per tonne – a fresh two-year low. The July contracts for zinc and lead and the September tin contract were up by an average of 0.3%.

Spot copper prices in Changjiang were down by 1.2% at 45,900-46,050 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 7.91, compared with 7.89 at a similar time on Wednesday.

Precious metals
Gold prices are going from strength to strength and were recently quoted at $1,332.29 per oz, up from $1,328.99 per oz at a similar time on Wednesday. Prices are, however, off from Wednesday’s high of $1,344.10 per oz. Silver has followed gold’s lead, but platinum prices have failed to hold on to most of their gains and palladium prices have ignored the run-up in gold.

On the SHFE, the December gold and silver contracts were both up by 0.5% compared with Wednesday’s close.

Wider markets
Concerns about the slowdown in global economic activity have weighed on oil prices with the spot Brent crude oil price recently quoted at $60.77 per barrel, down from $61.77 per barrel at a similar time on Wednesday and down sharply from the $70-per-barrel level it was trading at on May 27.

As the market once again gets used to the elevated nervousness of recent days, the yield on benchmark US 10-year Treasuries has drifted higher again and was recently quoted at 2.1166%, compared with 2.0975% at a similar time on Wednesday. The yields on the US two-year and five-year treasuries continue yo-yoing around each but for the second day now are in contango – they were recently quoted at 1.8338% and 1.8569% respectively.

The German 10-year bund yield fell further into negative territory and was recently quoted at -0.2300%, compared with -0.2250% at a similar time on Wednesday.

Asian equity markets were mixed this morning: Nikkei (-0.01%), Hang Seng (-0.01%), CSI 300 (-0.79%), Kospi (+0.10%) and the ASX 200 (+0.38%).

This follows a strong performance in western markets on Wednesday; in the United States, the Dow Jones Industrial Average closed up by 0.82% at 25,539.57, while in Europe, the Euro Stoxx 50 closed up by 0.19% at 3,339.95.

Currencies
The dollar index rebounded on Wednesday and was recently quoted at 97.31, this after dropping to a low of 96.74 on Wednesday. The stronger dollar may be the result of expectations that the European Central Bank (ECB) may sound more dovish at today’s meeting.

The rebound in the dollar has turned other major currencies lower: the euro (1.1225), sterling (1.2669) and the Australian dollar (0.6968). The Japanese yen (108.19) was an exception to the weakness while it consolidates in high ground.

The yuan has flattened out in low ground and was recently quoted at 6.9132, the flatness of the range since mid-May suggests a supported market, but one that looks vulnerable.

Key data
Economic data on Thursday showed weakness in German factory orders that climbed by 0.3%, compared with a 0.8% rise previously. Data out later includes EU final employment change and revised gross domestic product, with US data on Challenger job cuts, revised non-farm productivity and unit labor costs, trade balance, initial jobless claims and natural gas storage.

In addition, it is a busy day for central bankers with Bank of Japan governor Haruhiko Kuroda and Bank of England governor Mark Carney speaking, the ECB making its rate decision, issuing a statement and holding a press conference and US Federal Open Market Committee member John Williams speaking.

Today’s key themes and views
The base metals are for the most part trending lower; they run into bouts of buying/short-covering, but the mood remains bearish. The exception is lead, where prices have been climbing solidly for five days now and are up $120 per tonne from mid-May’s low. The fact central banks are taking a more dovish stance may give the markets some comfort but it is a sign central banks see trouble ahead and that is an overall negative outlook.

The dominating themes are trade uncertainty and deteriorating economic growth and unless a trade deal comes in to brighten up the outlook, it is hard to see why consumers would be in a hurry to restock. At the same time, the fundamentals are likely to re-exert themselves but until they do the path of least resistance is likely to remain sideways-to-lower.

Gold prices are buoyant, boosted by concerns about the state of economic growth, trade and political headwinds, while looser monetary policy reduces the opportunity cost of holding the yellow metal. Given prices have rallied $69 per oz in five days, a pause would not be surprising, but while concerns escalate gold may well continue to be seen as a relatively cheap haven asset.

base metals prices
precious metals prices

economic data

William Adams

william.adams@fastmarkets.com

Published

William Adams

June 06, 2019

09:43 GMT

London