MORNING VIEW: Metals prices consolidate, US-China trade talks likely to set next direction

In the absence of fresh economic news on Monday July 29, the early weakness in metals prices ran into dip-buying. While the base metals have not followed equities to fresh highs, far from it, the underlying supply fundamentals do seem to be providing support.

While wider markets may be waiting for Wednesday’s US interest rate decision, the metals are likely to wait for news on US-China trade talks.

  • Markets likely to tread water ahead of Wednesday’s US interest rate decision
  • US-China trade talks likely to set the next direction for metals
  • Asian equities upbeat this morning

Base metals

Three-month base metals prices on the London Metal Exchange were for the most part firmer on Tuesday, with the complex up by an average of 0.3%, led by a 0.8% gain in zinc to $2,480 per tonne. Zinc has been one of the sleepier metals in recent weeks, so we wait to see if it starts to follow sister metal lead higher. Since the May lows in lead and the early July low in zinc, lead prices have climbed 16% while zinc is up by 5%. Copper is in the middle of its recent range with the price trading just above $6,000 per tonne.

In China, base metals prices on the Shanghai Futures Exchange were up across the board with gains averaging a healthy 1.1%, led by a 2.6% rebound in October nickel, while September copper was up by 0.9% and back above 47,000 yuan ($6,819) per tonne, recently quoted at 47,310 yuan per tonne.

Spot copper prices in Changjiang were down by 0.8% at 47,190-47,280 yuan per tonne and the LME/Shanghai copper arbitrage ratio was recently stronger at 7.88, up from the 7.87 reading on Monday.

Precious metals
Spot precious metals prices were consolidating on Tuesday morning, but they remain well placed to push higher. Spot gold at $1,423.46 per oz, was down by 0.1% from Monday’s close.

On the SHFE, the December gold contract was up by 0.2%, while the December silver contract was up by 0.1%.

Wider markets
The spot Brent crude oil price was recently at $64.12 per barrel, up from $63.07 per barrel at a similar time on Monday.

The yield on benchmark US 10-year treasuries was slightly weaker this morning at 2.0576%, compared with 2.0604% at a similar time on Monday. The German 10-year bund yield has continued to weaken and was recently at -0.3960%, compared with -0.3910% on Monday morning.

In equities, Asian indices were firmer on Tuesday: Nikkei (+0.28%), Hang Seng (+0.28%), Kospi (0.45%), the CSI 300 (+0.51%) and the ASX200 (+0.33%).

This follows a mixed performance in western markets on Monday, where in the United States the Dow Jones Industrial Average closed up by 0.11% at 27,221.35, and in Europe where the Euro Stoxx50 closed down by 0.03% at 3,523.58.

Currencies

The dollar index continues to climb and was recently quoted at 98.17, having breached resistance between 97.77 and 97.82. The next resistance is the double top from April (98.35) and May (98.38). Clearance of these levels would target 103.80, the highs from January 2017.

The other major currencies we track are split into two groups; the euro (1.1136) and yen (108.61) are consolidating in low ground, while the Australian dollar (0.6898) is weaker and sterling (1.2150) collapsed after the risk of a hard Brexit is looking higher under UK prime minister Boris Johnson’s leadership - this is the lowest sterling has been since March 2017 - the post-Brexit referendum low being 1.1807 in October 2016. The Chinese yuan (6.8892) is slightly weaker too.

Key data
While the market will be focused on Wednesday’s US Federal Open Market Committee interest rate decision, there is some important data out on Tuesday including: French gross domestic product, German GfK consumer climate and consumer price index, with US data including personal income and spending, house price index, pending home sales and consumer confidence.

Today’s key themes and views
The metals are consolidating, but as we have been saying of late, we feel they 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. That said, another leg down in metal prices cannot be ruled out if there is deterioration in the trade situation and tariffs increase.

As such, it remains a waiting game. A US interest rate cut and the potential for further dovish monetary policy in the US, Europe and Japan, may also provide some stress relief for markets, especially if a US rate cuts leads to a weaker dollar.

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, especially where interest rates are negative.

base metals
precious metals

macroeconomic data

William Adams

william.adams@fastmarkets.com

Published

William Adams

July 30, 2019

08:58 GMT

London