MORNING VIEW: Dovish Fed fuels rallies in the metals, gold at multi-year high

More dovish central bank talk, this time from the US Federal Open Market Committee (FOMC), has pumped fuel into the price rebounds in equities, bonds and the metals this morning, Thursday June 20.

Markets had started to rebound at the start of the week on the back of optimism that a US-China trade talks may start making progress again, but prices then consolidated on Wednesday.

  • FOMC leaves door open for a rate cut in July
  • Asian equities firmer, led by a 2.9% gain in China’s CSI 300 index

Base metals
Three-month base metals on the London Metal Exchange were up across the board on Thursday morning, with average gains of 0.9%. Copper led the charge higher with a 1.5% gain to $5,981 per oz, after a close of $5,895 per tonne on Wednesday. Zinc was up by 1.3%, with aluminium, nickel and lead up between 0.8% and 0.9%, while tin was little changed.

In China, base metals prices on the Shanghai Futures Exchange were mixed this morning; the August zinc and July lead contracts were down by 1.2% and 1% respectively, September tin was little changed, August copper and aluminium were both up by 0.2% and August nickel was up by 0.6%. The August copper contract was recently quoted at 46,910 yuan ($6,793) per tonne.

Spot copper prices in Changjiang were down by 0.1% at 46,700-46,840 yuan per tonne and the LME/Shanghai copper arbitrage ratio has edged higher to 7.89, after 7.88 at a similar time on Wednesday.

Precious metals
The dovish FOMC stance combined with the low US treasury yield environment and continued tension in the Middle East are boosting the spot gold price that was up by 1.7% this morning at $1,382.76 per oz. This morning's high of $1,392.60 has cleared the 2014, 2017 and 2018 peaks on the charts that ranged between $1,357.55 and 1,388.70 per oz.

Silver is following gold’s lead but is failing to keep up, with gold/silver ratio at 1:90. Platinum is struggling to track the yellow metal’s upward move, while palladium is bullish but is being driven by its own supply fundamentals.

On the SHFE, the December gold and silver contracts were up by 2.2% and 1.6% respectively.

Wider markets
The spot Brent crude oil price continues to work higher, it was recently quoted at $63.54 per barrel, up by 1.9% compared with $62.37 per barrel at a similar time on Wednesday. The combination of increased optimism over a US-China trade deal and the conflict in the Middle East, could well drive oil prices higher still.

Demand for US treasuries remains upbeat, with the yield on benchmark US 10-year treasuries falling below 2%, it was recently down at 1.9877%, compared with 2.0673% at a similar time on Wednesday. Meanwhile, the German 10-year bund yield still trades in negative territory and was recently quoted at -0.3137%, compared with -0.3100% at a similar time on Wednesday.

In Asia, equities were stronger on Thursday: Nikkei (+0.60%), Hang Seng (+0.95%), CSI300 (+2.90%), Kospi (+0.31%) and the ASX 200 (+0.59%).

This follows slight strength in western markets on Wednesday. In the United States, the Dow Jones Industrial Average closed up by 0.15% at 26,504, while in Europe, the Euro Stoxx 50 was up by 0.05% at 3,454.70.

Currencies
The dovish stance by the FOMC has led to dollar weakness with the dollar index dropping to 96.87 this morning, compared with 97.61 at a similar time on Wednesday.

The other major currencies we follow are stronger: the Australian dollar (0.6905), the yen (107.70), sterling (1.2692), while the euro is weaker at 1.1270.

The yuan is also firmer at 6.8637, compared with 6.9043 at a similar time on Wednesday, which highlights the optimism on trade talks.

Key data
In data on Thursday, the Bank of Japan kept monetary policy unchanged while Japan’s all industries activity climbed 0.9%, this after been negative for the past five months.

Later there is a European Central Bank (ECB) economic bulletin, data on UK retail sales and the Bank of England’s (BoE) Monetary Policy Committee (MPC) decision on interest rates.

In the US, the focus is likely to be on the Philly Fed manufacturing index, unemployment claims, leading indicators. BoE governor Mark Carney is also speaking at the Mansion House dinner at 9pm London time.

Today’s key themes and views

From sideways-to-lower trends, most of the base metals are now getting a boost which is probably being driven by a combination of bargain hunting and short-covering. The two metals not joining in are tin and zinc. While there may be room for considerable short-covering, we would be surprised if consumers were ready to chase prices higher until a trade deal between China and the US is made.

The fact the ECB and FOMC have turned more dovish highlights the fragile state of the major economies and their concerns that recessions may follow.

The price of gold has broken up through major resistance, which has extended the series of higher highs and higher lows out of the 2015 trough. Next resistance is the rebound peak from August 2013 at $1,444 per oz, clearance of that would suggest prices have climbed out of the saucer-shaped base.

base metals
precious metals

macroeconomic data

William Adams

william.adams@fastmarkets.com

Published

William Adams

June 20, 2019

10:07 GMT

London