MORNING VIEW: Weakness creeps into LME base metals prices, market not helped by weaker US GDP

With economic growth still deteriorating - the United States’ second quarter gross domestic product (GDP) came in at 2.1%, compared with 3.1% in the first quarter - the markets have little to cheer about this morning, Monday July 29.

  • Economic headwinds, geopolitical tension in the Middle East and in Hong Kong, combined with some record equity levels make for an unstable market platform.
  • A likely US interest rate cut will no doubt provide some relief, but the fact it is having to be made bodes ill.

Base metals
Three-month base metals prices on the London Metal Exchange were mixed this morning; nickel and lead are the main movers on the downside as they correct recent strength, they are down by 1.5% and 0.6% respectively. The rest continue to oscillate sideways while they consolidate, with aluminium and zinc up by 0.2% and 0.3% respectively, while copper and tin are little changed, with the former off by 0.1% at $5,957.50 per tonne.

In China, base metals prices on the Shanghai Futures Exchange were for the most part weaker led by a 1.2% drop in October nickel, conversely September zinc was up by 1.3%. The rest of the complex were down between 0.3% for the September copper and aluminium contracts, with the former at 46,920 yuan ($6,820) per tonne, and a 0.7% retreat in the September lead contract.

Spot copper prices in Changjiang were down by 0.1% at 46,840-46,900 yuan per tonne and the LME/Shanghai copper arbitrage ratio was recently stronger at 7.87, up from the 7.84 reading on Friday.

Precious metals
Spot precious metals prices were generally correcting and consolidating on Monday morning with spot gold at $1,418.63 per oz, unchanged from Friday’s close.

On the SHFE, the December gold contract was up by 0.5%, while the December silver contract was unchanged.

Wider markets

The spot Brent crude oil price was recently at $63.07 per barrel, down by 0.35% from Friday’s close.

The yield on benchmark US 10-year treasuries was slightly weaker this morning at 2.0604%, compared with 2.0664% at a similar time on Friday. The German 10-year bund yield has continued to weaken and was recently at -0.3910%, compared with -0.3790% on Friday morning.

In equities, Asian indices were for the most part weaker on Monday: Nikkei (-0.19%), Hang Seng (-1.44%), Kospi (-1.78%) and the CSI 300 (-0.16%), while the ASX200 bucked the trend with a 0.48% gain.

This follows a firmer performance in western markets on Friday, where in the US the Dow Jones Industrial Average close up by 0.19% at 27,192.45, and in Europe where the Euro Stoxx50 closed up by 0.41% at 3,524.47.

Currencies
The dollar index continues to climb and was recently quoted at 98.06, the index breached resistance at 97.77 on July 24 and 97.82 on July 25 - next resistance is the double top from April (98.35) and May (98.38).

The other major currencies we track were weaker: the Australian dollar (0.6909), euro (1.1121), the Japanese yen (108.62), sterling (1.2352) and the Chinese yuan (6.8884).

Key data

Today's economic agenda is light, with Spanish consumer price index and UK M4 money supply and lending data. The market’s focus is now likely to turn to the US Federal Open Market Committee interest rate decision announcement on Wednesday.

Today’s key themes and views
The metals are consolidating, the June- to mid-July shows of strength in copper, aluminium, nickel and lead have now waned, zinc continues to bounce along the bottom and tin prices remain weak. Overall, we feel the base metals have either found bases, or soon will, and then it will be a case of waiting for the demand outlook to improve and that is likely to take a new trade deal between China and the US. We wait to see whether this week’s US-China trade talks make any progress.

Gold prices are generally holding up well, especially considering the stronger dollar. Overall, given the uncertainty surrounding trade, Iran, Brexit, global growth and the sustainability of record breaking US equities, there are plenty of reasons why investors may like the insurance that gold offers, especially as the opportunity cost of holding gold is low.

base metals
precious metals

macroeconomic data

William Adams

william.adams@fastmarkets.com

Published

William Adams

July 29, 2019

09:20 GMT

London