MORNING VIEW: China’s attempts to boost domestic demand may provide relief from trade gloom

With gold prices up at near six-year highs, markets remain nervous on Wednesday August 28 about just how much damage the United States-China trade war is doing and whether it will be reversible before it leads to a global recession.

Most base metals prices have fallen to low levels and are failing to get any support while the depressed macro environment dominates. The exceptions are nickel, and to a lesser extent lead, with the former facing a potential supply disruption should Indonesia bring forward its ore export ban and lead where the extended halt of production at Port Pirie is underpinning the market. 

  • Asian equity markets are mixed as they wait for news on the trade war 
  • Comments from last week’s Jackson Hole symposium suggest central bankers have little control because politically-motivated trade policy is now setting the agenda 
  • China considers measures to boost domestic consumption

Base metals
The three-month base metals prices on the London Metal Exchange were mixed this morning. Most are oscillating sideways to lower awaiting “big-picture” developments to set the direction. Lead prices are knocking on resistance again and supply concerns may see prices push up through overhead supply above $2,100 per tonne. Nickel prices are consolidating in high ground; we wait to see if the rally has run out of steam – this could be a “buy the rumor sell the fact” situation.

In China, base metals prices on the Shanghai Futures Exchange were for the most part firmer; the exceptions were the November nickel and January tin contracts, which are down 0.1% and 0.2% respectively. The October contracts in the rest of the metals were up by an average of 0.9%, led by 1.3% and 1.4% gains in zinc and lead respectively. October copper was recently at 46,560 yuan ($6,503) per tonne, up by 0.5% from Tuesday’s close.

China announced on Tuesday that it was considering ways to boost domestic consumption, especially targeting the auto industry, which is no doubt why metal prices in China have outperformed those on the LME today.

Spot copper prices in Changjiang were up by 0.3% at 46,510-46,590 yuan per tonne and the LME/Shanghai copper arbitrage ratio was higher at 8.19, compared with 8.13 on Friday.

Precious metals
The spot gold price was recently quoted at $1,539.89 per oz. They ran up on Friday and Monday when the trade and economic outlook deteriorated and the silver price has continued to run higher – it was recently quoted at $18.27 per oz, with the gold/silver ratio falling to 1:84, down from 1:93 in early July. The platinum group metals are more subdued.

On the SHFE, the December gold and silver contracts were up by 0.4% and 2.8% respectively. The outperformance in silver suggests a pick-up in retail interest in the precious metals.

Wider markets
The spot Brent crude oil price was recently quoted at $60 per barrel - its recent range being $55.86-61.48 per barrel.

The yield on benchmark US 10-year treasuries also highlights increased concern; it was recently quoted at 1.4811% having been at 1.6566% at a similar time on Friday. The German 10-year bund yield is weaker too at -0.7000%, compared with -0.6100% at a similar time on Friday.

In equities, Asian indices were mainly mixed on Wednesday: Nikkei (+0.11%), Hang Seng (-0.12%), Kospi (+0.86%), the ASX200 (+0.45%) and the CSI 300 (-0.37%).

This follows a mixed performance in Western markets on Tuesday: in the US, the Dow Jones Industrial Average closed down by 0.47% at 25,777.90 and in Europe the Euro Stoxx50 closed up by 0.65% at 3,370.47.

Currencies
The dollar index is consolidating after recent volatility and was recently quoted at 98.06 - the recent range being 97.56-98.46. The yen (105.77) has eased from recent strength at 104.79, the euro (1.1088) is drifting lower again, as is the Australian dollar (0.6737), while sterling (1.2273) is firmer.

The yuan has weakened further and was recently at 7.1606.

Key data
Economic data already out on Wednesday, shows German GfK consumer climate was unchanged at 9.7 and German import prices dropped by 0.2%. Later there is data on EU M3 money supply, private loans and US crude oil inventories.

Today’s key themes and views
In the base metals, weak demand dominates where there are not imminent supply concerns. What the markets need is a new US-China trade deal. If metal prices are already on the floor, as many appear to be, then if China can stimulate its domestic demand that will be a step in the right direction that could provide some support.

The robustness of the gold rally and continuing fall in government bond yields do not bode well for the broader markets.



William Adams

william.adams@fastmarkets.com

Published

William Adams

August 28, 2019

09:53 GMT

London