MORNING VIEW: Relief rally underway prompted by better-than-expected Chinese trade data, but markets still face many headwinds

A 3.3% year-on-year rise in China’s exports in US dollar terms, which was above expectations, has provide some relief to markets, with Asian equities, base metals and precious metals up across the board.

How long the more cheerful mood lasts is a moot point when generally the economic data is weak, there seems no let-up in trade disputes and judging by the strength of gold and the yen, and the weakness in US treasury yields, havens are in strong demand.

  • Gold price reaches fresh high of $1,510.30 per oz - a level last seen in April 2013.
  • The backwardation in US treasury yields between three-months and ten years is the widest it has been since 2007…
  • …and with central banks cutting rates and numerous geopolitical issues, Iran, Brexit and trade disputes, the outlook does not bode well.

Base metals

On the London Metal Exchange, three-month base metals prices were up across the board by an average of 0.7% this morning, Thursday August 8. Nickel has been the standout performer in recent weeks with prices up by 1.2% at $15,640 per tonne this morning, although in the early hours prices spiked up briefly to $16,690 per tonne, which looks like a blow-off top as stops were hit.

Volume has been massive for nickel with 7,071 lots traded as of 6.34am London time, compared with an average of 1,400 lots at a similar time across last week.

The rest of the LME three-month base metals price were up between little changed for zinc and 1.5% for tin, which seems to have been spooked higher on the back of nickel’s run higher. Copper was up by 0.3% at $5,765.50 per tonne, this after a 0.7% rise on Wednesday, which we put down to the Glencore cutback announcement.

In China, base metals prices on the Shanghai Futures Exchange were for the most part stronger, the exception is October zinc that was down 1.3%, while the rest were up between 0.2% for October aluminium and 6% for October nickel. October copper was up by 0.9% at 46,520 yuan ($6,595) per tonne.

Spot copper prices in Changjiang were up by 0.7% at 46,360-46,510 yuan per tonne and the LME/Shanghai copper arbitrage ratio eased to 8.07 compared with 8.10 on Wednesday - the recent rise in the ratio suggesting LME copper prices have been harder hit than those in Shanghai, but with prices rebounding now, it looks as though LME copper is rising at a faster pace than SHFE prices.

Precious metals
Spot gold continues to hold up well with prices recently at $1,502.15 per oz - we wait to see whether the pick-up in risk appetite this morning starts to prompt profit-taking in gold, we think it may. Silver ran up to a high of $17.24 per oz on Wednesday, it was last at $17.17 per oz, and is following gold’s moves, which the platinum group metals are not - they continue to consolidate.

On the SHFE, the December gold and silver contracts were up by 1.7% and 3.2% respectively.

Wider markets
The spot Brent crude oil price is trending lower again and was recently quoted at $57.80 per barrel, it dipped as low as $55.86 per barrel on Wednesday, so is seeing some bargain-hunting today. The overall weakness though, is a sure sign that economic woes have overtaken the geopolitical standoff in over Iran.

The yield on benchmark US 10-year treasuries has also seen some bargain-hunting after recent weakness, it was recently quoted at 1.7380% compared with 1.6875% at a similar time on Wednesday. The German 10-year bund yield is holding down in low ground - it was recently at -0.5510% compared with -0.5540% at a similar time on Wednesday.

In equities, Asian indices were up: Nikkei (+0.37%), Hang Seng (+0.73%), Kospi (+0.57%), the CSI 300 (+1.35%) and the ASX200 (+0.75%).

This follows a mixed performance in western markets on Wednesday; in the United States the Dow Jones Industrial Average closed down by 0.09% at 26,007.07 and in Europe the Euro Stoxx50 closed up by 0.56% at 3,309.99.

Currencies
The dollar index reached a high of 98.94 on August 1, but it has since dropped back to 97.57, where it seems to be consolidating, as do the other major currencies we follow: the yen (106.17), the euro (1.1205), the Australian dollar (0.6770) and sterling (1.2166), although the latter two are doing so in low ground and the yen is consolidating in high ground.

The yuan is weak at 7.0436 and most of the emerging market currencies we follow are also consolidating after the weakness they have seen in recent weeks.

Key data
Economic data already out Thursday showed China’s trade surplus was down at $45.1 billion in July, compared with $51 billion in June, but it was better than the $43.2 billion expected. China’s exports grew by 3.3% year on year, better than the 2% expected, and imports dropped by 5.3%, which was less than the 8.3% expected. Japan’s economy watchers sentiment dropped to 41.2 in July from 44 in June.

Data out later from the US includes initial jobless claims, wholesale inventories and natural gas storage.

Today’s key themes and views
A relief rally seems to be underway while bargain-hunting steps into the weakness seen in recent days. The buying seems to be widespread, so may run for a while, but with the background still looking weak in terms of economic data and trade disputes, buying may be restricted to short-covering and some bargain-hunting, but consumers may feel in no rush to restock, or chase prices too high.

For copper, the Glencore cutback is a sign that some producers are prepared to be proactive and that could make an already tight supply situation even tighter next year, which could start to instill confidence in the copper market. Nickel’s run higher seems premature if it is tied into the likelihood of Indonesia continuing with its plans to ban the export of ores again in 2022 - but nickel does have a habit of running well ahead of the fundamentals, only to correct.

Gold’s strength is a warning that all is not good in the global economy, but with a risk-on mood unfolding on Thursday, gold prices may pull back for a while - how far they do and how long it lasts will provide fresh insight into how robust underlying sentiment is.

base metals
precious metals

macroeconomic data

William Adams

william.adams@fastmarkets.com

Published

William Adams

August 08, 2019

09:20 GMT

London