MORNING VIEW: Evidence of dip-buying in LME base metals, but complex remains vulnerable amid macroeconomic uncertainty

Geopolitical tensions in the Middle East showed no sign of abating over the weekend after the United States claimed that it had carried out a cyber-attack on Iranian weapons systems in retaliation for the latter shooting down a US drone last week.

While the threat of a war between the two remains a possibility, global investors have taken refuge in haven assets amid the rising uncertainty in the region. The elevated prices of gold and silver indicate that investors continue to opt for less risky commodities.

That said, three-month base metals prices on the London Metal Exchange were firmer at the start of a new trading week, with a potential meeting between Chinese president Xi Jinping and US president Donald Trump at the Group of Twenty (G20) summit in Japan at the end of the week giving some respite to global markets.

Although there has been no evidence that the two leaders will come to an agreement at the meeting, there remains a possibility that the icy relationship between China and the US could thaw somewhat and trade negotiations may move forward once more.

  • Trump appears ready to welcome Iran to negotiations in an apparent move to defuse tensions.
  • US secretary of state Mike Pompeo says additional sanctions on Iran could be implemented today.

Base metals
The LME three-month base metals prices were firmer this morning, Monday June 24, up by an average of 0.3% as at 6.27am London time. Leading the gains was tin with an increase of 0.6%, followed by zinc (+0.5%), aluminium (+0.3%), nickel (+0.3%) and copper (+0.2%). Lead was the lone metal in negative territory, dropping by 0.1% while sellers attempt to take the metal below the price below the psychological price level of $1,900 per tonne.

Sentiment was slightly bearish in China as base metals prices on the Shanghai Futures Exchange were under selling pressure, down by 0.3% on average. The most-traded August nickel contract was down by 0.7% at 98,510 yuan per tonne ($14,337 per tonne) while September tin was down by 0.6%. This was followed by August zinc (-0.4%), aluminium (-0.3%) and copper (-0.1%). Strangely, the August lead contract was up by 0.2% at the time of writing.

Spot copper prices in Changjiang were down 0.1% at 46,770-46,910 yuan per tonne and the LME/Shanghai copper arbitrage ratio dipped lower to 7.88.

Precious metals
A strong start in the precious metals complex this week, with average gains of 0.4% this morning. Spot gold (+0.3) and silver (flat) have kept most of their recent gains, with the metals’ prices slightly firmer at $1,402.97 per oz and $15.32 per oz respectively.

Platinum managed to trade above the psychological price level of $800 per oz and is currently up by 0.6% at $812 per oz. Meanwhile, sister-metal palladium is up by 0.9%, the strongest in the complex and more gains in the coming days cannot be ruled out just yet.

On the SHFE, the December gold contract was up by 0.9%, while the December silver contract was unchanged.

Wider markets
The spot Brent crude oil price remains well supported by geopolitical tensions in the Middle East and was last trading at $65.68 per barrel, up from $64.37 per barrel at a similar time on Friday.

Meanwhile, benchmark US 10-year treasuries is down by 0.61% at 2.0448%. The German 10-year bund yield still trades in negative territory and has slid to -0.3000%, 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 higher across the board though gains remain fairly limited: ASX 200 (+0.22%), CSI300 (+0.19%), Hang Seng (+0.13%), Nikkei (+0.13%) and Topix (+0.12%).

This follows negative closes for major US indices on Friday, with the Dow Jones Industrial Average and S&P500 both down by 0.13% and the Nasdaq down by 0.24%.

Currencies
Following the June 18 high at 97.77, the dollar index has run into persistent selling pressure as market participants react to a dovish US Federal Reserve. The dollar was recently at 96.18 and its technical configuration has deteriorated after it successfully broke below the 2019 low uptrend line. As such, the weaker dollar and demand for haven assets have strengthened the Japanese yen to 107.42.

The other major currencies we follow were slightly mixed, with the euro up by 0.04% to 1.1373 while Brexit uncertainty continues to undermine strength in the sterling (1.2723), down by 0.11%. Despite talks of further rate cuts by the Reserve Bank of Australia (RBA), the Australian dollar is up by 0.34% at 0.6945.

The yuan has strengthened to 6.8811, up by 0.14% at the time of writing.

Key data
It is a light day for data on Monday with only Germany’s Ifo business climate reading of note.

Today’s key themes and views
Expectations of rate cuts from various global central banks are providing global risk sentiment with some respite from the simmering geopolitical tensions in the Middle East. A potential meeting between US and Chinese leaders at the upcoming G20 summit should provide global markets with much-needed direction on the ongoing US-China trade war.

The LME three-month base metals prices attracted mild dip-buying interest in the early Asian trading session on Monday, but these gains are mild and remain vulnerable should trade rhetoric turn negative or tensions ratchet up in the Middle East again.

As such, risk-averse investors are seeking comfort from haven assets like gold and silver. These two metals should continue their upward momentum and sustain the current move as the dollar index continues to weaken.

base metals
precious metals

macroeconomic data

Andy Farida

andy.farida@fastmarkets.com

Published

Andy Farida

June 24, 2019

09:40 GMT

London