MORNING VIEW: Base metals prices consolidate after poor economic data wipes out trade optimism

Optimism that the resumption of US-China trade talks meant a trade deal was once again on the agenda led to a relief rally in base metals prices in early trading on Monday July 1, but disappointing manufacturing purchasing managers’ index (PMI) data across most regions has led to the gains being reversed.

  • Manufacturing PMI data for Japan, China, Australia, Taiwan, South Korea, Mexico, the EU and JPMorgan’s global PMI, all came in below 50, indicating manufacturing was in contraction
  • The US’ Dow Jones Industrial Average and S&P 500 set fresh record highs on Monday

Base metals
The London Metal Exchange three-month base metals prices were for the most part consolidating on Tuesday morning, with copper and aluminium showing gains averaging 0.2%, zinc and lead were both off by 0.2%, while tin and nickel were weaker with losses of 2.1% and 1.1% respectively.

In China, base metals prices on the Shanghai Futures Exchange were for the most part weaker, the exception was the August zinc contract that was up by 0.2%, while September tin led on the downside with a 4.7% fall. The August contracts for the remaining metals were down between 0.8% for aluminium and 3.5% for lead. August copper was down by 1.4% at 46,620 yuan ($6,790) per tonne.

Spot copper prices in Changjiang were down by 1.4% at 46,500-46,600 yuan per tonne and the LME/Shanghai copper arbitrage ratio was unchanged at 7.82.

Precious metals

Spot gold and silver prices were consolidating after Monday’s weakness, with gold up by 0.2% at $1,389.60 per oz - this after a low of $1,381.88 per oz on Monday. Silver was recently quoted at $15.15 per oz, unchanged from Monday’s close. The gold/silver ratio remains high at 1:91.7.

Platinum and palladium prices were also consolidating and were holding up relatively better than gold has.

The December gold contract on the SHFE was down by 0.2%, while the December silver contract was off by 0.1%.

Wider markets
The spot Brent crude oil price consolidated June 28’s gains on Monday and was recently quoted at $65.46 per barrel, this compared with last week’s high of $66.84 per barrel.

The yield on benchmark US 10-year treasuries continues to hover above the 2% mark and was recently at 2.0171%, down from 2.0281% at a similar time on Monday. The German 10-year bund yield is trading deeper in negative territory and was last seen at -0.3650%, compared with -0.3254% at a similar time on Monday.

Equities in Asia were for the most part consolidating on Tuesday, with the ASX, Nikkei and the CSI 300 up by 0.08%, 0.11% and 0.08% respectively. The Hang Seng was up by 1.3%, it was closed on Monday so had some catching up to do, while the Kospi was down by 0.36%.

Currencies
The dollar index shot higher on Monday, but gains are being consolidated this morning, the index was recently quoted at 96.76, this after a low last week of 95.84. The rebound has weighed on other major currencies: euro (1.1295), sterling (1.2634), the yen (108.32) and the Australian dollar (0.6987).

The yuan is also consolidating and was recently quoted at 6.8608.

Key data
Data out already this morning shows further weakness in Germany where retail sales dropped by 0.6%. Key data out later includes EU producer price index and US total vehicle sales. In addition, there is an Organization of Petroleum Exporting Countries (OPEC) meeting and US Federal Open Market Committee member John Williams is speaking.

Today’s key themes and views

Most of the base metals saw some price strength in June, the exception was tin that has remained weak, but the lack of anything concrete on trade, combined with continuing weak economic data means there is little to foster buying. While buyers may be in no hurry to buy in this economic climate, the underlying feeling is that the metals’ fundamentals are tightening, even for tin, so the longer prices stay down or drift lower, the greater the reaction is likely to be once a trade deal opens the door for business confidence to return. But, given a trade deal could still be a long way away, we expect more sideways-to-lower prices.

With the strong gains in gold in June it is not surprising that a profit-taking correction has been seen. As the tensions in the Middle East and general weakness in economic data, have not gone away and a trade deal is still not on the horizon, the bullish backdrop for gold is still present. It will be interesting to see if this bout of correction is short-lived, if it is then that will suggest investors are still nervous about the big economic and financial market pictures.

base metals
precious metals

macroeconomic data

William Adams

william.adams@fastmarkets.com

Published

William Adams

July 02, 2019

08:55 GMT

London