MORNING VIEW: Nickel strength inspires gains across LME base metals complex

Misplaced optimism seems to be driving gains in the London Metal Exchange’s three-month nickel price, especially amidst weak global economic growth and ongoing trade tensions between the United States and China; granted there is growing concern over nickel supply from Indonesia but this remains a long-term play.

  • Fresh global economic jitters, escalating US-China trade tensions negatively affect equities.
  • Subsequently, haven demand has returned while investors re-think their risk exposure.

Base metals
The LME three-month base metals prices gave a positive performance in the early Asian trading session on Thursday July 18, with the complex up by an average of 0.9%. At 8,093 lots as of 6.30am London time, trading volume was considerably high.

Nickel was the main mover of the LME base metals, with follow-through buying pushing the metal’s price up by 3.3% to $14,845 per tonne. Although LME nickel’s recent positive price action has facilitated further buying, the speed and steepness of the rally masks a nagging concern that the metal is now highly vulnerable to a sharp reversal once the misplaced optimism fades.

Elsewhere on the LME, tin recovered above $18,000 per tonne with a gain of 1% this morning, while zinc and lead were up by 0.7% and 0.5% respectively. Only copper (-0.2%) and aluminium (-0.1%) struggled to attract bids.

In China, there was frantic buying in nickel on the Shanghai Futures Exchange this morning, with the metal’s most-traded August contract climbing 5.8%. The other SHFE base metals were largely up as well with September contracts for tin, lead and zinc up by 1.6%, 0.8% and 0.7% respectively, while September copper was down by 0.3% at 46,840 yuan ($6,810) per tonne and September aluminium was unchanged.

Spot copper prices in Changjiang were weaker at 46,690-46,880 yuan per tonne, down by 0.2%, while the LME/Shanghai copper arbitrage ratio was at 7.87, little changed from a day ago.

Precious metals
The spot silver price remains the strongest performer of its complex this week after securing more follow-through buying, it was recently trading comfortably above $16 per oz. There was buying interest in gold on Wednesday and some consolidation is taking place this morning, with the yellow metal trading at $1,420.25 per oz recently, up from $1,404.94 per oz at a similar time on Wednesday.

The platinum group metals were firmer this morning with the spot platinum price up by 0.8% at $849 per oz and sister-metal palladium up by 0.6% at $1,542.10 per oz.

Chinese investors were strong buyers of precious metals on the SHFE this morning; the most-traded December gold and silver contracts were up by 0.9% and 3.5% respectively.

Wider markets

With no sign that geopolitical tensions in the Middle East have escalated, the spot Brent crude oil price continues to run into profit-taking and it has edged down to $63.72 per barrel - a contrast to the $66.70 per barrel seen at the start of the trading week.

The yield on benchmark US 10-year treasuries was under fresh selling pressure while investors turned to government bonds as they diversify away from riskier assets, with the yield dropping to 2.0347% after being at 2.0973% at a similar time on Wednesday. Similarly, the German 10-year bund yield has dipped to -0.2943%, compared with Monday’s open of -0.2600%.

In equities, major Asian indices were down on Thursday: Nikkei (-2.20%), Hang Seng (-0.60%), Topix (-2.28%), ASX200 (-0.36%) and CSI300 (-0.59%).

This follows weakness in US markets overnight with Dow Jones Industrial Average down by 0.42%, the S&P500 Index down by 0.65% and the Nasdaq Composite off by 0.46%.

Currencies

The dollar index was a tad weaker in the early Asian trading session on Thursday, down by 0.12% at 97.07. Much of the expectations for a 25-basis-point cut at the end of the have been priced in already, however, leaving the market much less excited unless hints of a 50-basis-point cut emerge.

Against the weaker dollar, the Japanese yen has strengthened to 107.67. The other currencies we follow were marginally higher as well, with the pound sterling at 1.2439, the Australian dollar at 0.7033 and the yuan at 6.8757.

Key data

On the economic front this morning, Japan’s trade deficit stood at 0.01 trillion yen, better than the expected deficit of 0.14 trillion yen. Other data out later includes UK retail sales and US releases that include the Philadelphia Federal Reserve Manufacturing Index, unemployment claims and Conference Board Leading Index.

In addition, US Federal Open Market Committee John Williams is speaking and day two of the Group of 7 (G7) summit gets underway in Paris, France.

Today’s key themes and views
Almost all of the base metals seem content to embrace some form of relief buying despite the fact that very little has changed on the macroeconomic front. But LME copper, the leading barometer of global economic health, has struggled and this signals a rather worrying picture that the current rally seen in the rest of its peers is on a weak footing.

Buying pressure in the precious metals complex remains strong while government bond yields face fresh downside pressure. With rising market expectations of additional rate cuts from various global central banks, the devaluation of paper money should attract investors to move their assets into gold and silver as a form of wealth protection.

base metals
precious metals

macroeconomic data

Andy Farida

andy.farida@fastmarkets.com

Published

Andy Farida

July 18, 2019

10:10 GMT

London