MORNING VIEW: Poor Chinese economic data, sharply higher oil prices drag LME base metal prices lower

Over the past week the metals have looked stronger and some dovish comments by United States President Donald Trump over US-China trade relations seem to have provided a slight confidence boost, but headwinds are being felt this morning, Monday September 16.

An 11% rise in crude oil prices this morning following an attack on a Saudi Arabian oil refinery, combined with weak Chinese industrial production and retail sales data, have pushed most of the base metals into negative territory.

  • Crude oil prices spiked above $71 per barrel after Saudi oil production affected by terrorist attack
  • Equities in China and Hong Kong fall, while gold prices climb amid concerns over oil supply

Base metals
Three-month base metals prices on the London Metal Exchange were for the most part weaker this morning, the exception was tin which was up by 1.1% to $16,830 per tonne, but the others were down by an average of 0.7%, after poor Chinese data poured cold water on the recent stronger tone.

Nickel led on the downside with a 1.4% drop to $17,515 per tonne - the mood from Fastmarkets’ Asian Nickel conference in Jakarta, Indonesia, was that high nickel prices and a four-month window in which Indonesia could still export nickel ores would lead to a pick-up in supply and stockpiling that would weigh on prices in the short to medium term. Copper was down by 1% at $5,904 per tonne.

Overall with most of the LME metals appearing to have put in bases in recent weeks, which suggests much of the gloom about poor economic data is priced in for now, the next direction is likely to be set by what progress is made on an interim US-China trade deal, if any is forthcoming.

In China, the base metals traded on the Shanghai Futures Exchange were mixed this morning; November nickel and January tin led on the downside with falls of 3.1% and 2.9% respectively, with November aluminium off by 0.7%, October lead and November zinc were little changed and November copper was up by 0.8% at 47,650 yuan ($6,730) per tonne. With China closed last Friday, today’s movements have been in reaction to the movements seen on the LME on Friday as well as to today’s developments.

The spot copper price in Changjiang was up by 0.8% at 47,650-47,830 yuan per tonne and the LME/Shanghai copper arbitrage ratio was recently at 8.07.

Precious metals
Spot gold prices were up by 1.1% this morning at $1,504.92 per oz while the market reacts to the increased concerns over the oil supply disruption. Last week gold prices had been under pressure after haven demand waned, with prices finding support either side of $1,485 per oz. Silver and platinum had followed gold lower, while palladium prices held up in high ground.

The gold/silver ratio has climbed back to 1:85, from recent lows around 1:79.

Wider markets
The spot Brent crude oil price was recently quoted at $66 per barrel, it closed Friday at $60.12 per barrel. We expect volatile trading while the market tries to determine how much damage has been done and how vulnerable the oil supply chain is.

The yield on benchmark US 10-year treasuries continues to show a more relieved market, it was recently quoted at 1.8616%, compared with 1.5739% on September 6. The German 10-year bund yield has also started to recover and was recently quoted at -0.4640%, compared with -0.5920% on September 6.

Asian equities were mixed on Monday: The Hang Seng (-1.17%), the CSI 300 (-0.65%), the ASX200 (+0.06%) and the Kospi (+0.64%), while the Nikkei is closed.

This follows a stronger performance in Western markets on Friday: in the US, the Dow Jones Industrial Average closed up by 0.14% at 27,219.52 and in Europe the Euro Stoxx50 closed up by 0.32% at 3,550.11.

Currencies
The dollar index is correcting lower and was recently quoted at 98.21, this after the early September multi-year peak at 99.38. A pullback in the dollar may well help underpin the metals.

As the dollar slips, the euro (1.1070), sterling (1.2460) and the Australian dollar (0.6872) are rebounding. The yen (107.83) had been weakening, suggesting money has been coming out of havens, but the attack in Saudi has seen it strengthen from Friday’s low of 108.26.

Key data
Monday’s economic data has been focused on China were weakness has been seen in fixed asset investment, industrial production and retails sales, although the unemployment rate dropped to 5.2% from 5.3%. Data out later includes the US’ Empire State manufacturing index.

Today’s key themes and views

The tide seems to have turned in the base metals with upward trends developing, although for the likes of nickel that had been trending higher for a long time, some correction seems to be getting underway. While the drawn out negative effects of the US-China trade war have weighed on prices, signs that progress may be being made may well be enough to instill some confidence in the markets and that could lead to a switch from destocking to hand-to-mouth buying, or even some light restocking.

While we think nickel’s fundamentals have changed significantly, the $7,200-per-tonne price rally, a move of 62% since the June low, probably means the market has adjusted enough for now. The market may well tighten further down the road that could justify further gains, but in the short term it is looking overbought.

Gold had started to correct, reflecting more risk-on in other markets, the correction has been interrupted by the attack on Saudi oil supply, but that may be a temporary reprieve. While we would not be surprised to see a deeper pullback in gold and silver, the need for havens has not gone away given the many political, economic and financial uncertainties the world faces, so once again it will be interesting to see how far gold prices do pull back.

base metals
precious metals

macroeconomic data

William Adams

william.adams@fastmarkets.com

Published

William Adams

September 16, 2019

09:23 GMT

London