MORNING VIEW: Metals prices rise in broad-based recovery fueled by better-than-expected economic data

The broad-based rally across markets continues with investors focusing more on the improving economic data than they are on the uncertain economic impact of the Wuhan coronavirus (2019-nCoV).

Claims by Chinese media that a treatment for the virus had been found fueled the rallies yesterday, but the World Health Organization talked down the news.

  • Asian equity indices up either side of 2% this morning
  • Copper price led the advance on LME and SHFE
  • Metal markets concerned about supply disruption 
Base metals
Three-month base metals prices on the London Metal Exchange were once again up across the board during early trading on Thursday February 6, led by a 1.5% gain in copper to $5,810 per tonne, while the rest of the base metal complex was up by an average of 0.6%.

Trading volumes have been above average, with 8,483 lots traded as of 5.42am London time, but this is below the average of 15,515 lots that had been traded by a similar time on Monday, Tuesday and Wednesday.

In China, the most-traded base metals contracts on the Shanghai Futures Exchange were, for the most part, firmer this morning - the exception once again being March lead, which was down by 0.4%. The rest were up by an average of 0.5%, led by a 1.3% gain in March copper that was most recently trading at 46,140 yuan ($6,623) per tonne.

The spot copper price in Changjiang was up by 1.2% at 45,650-45,940 yuan per tonne and the LME/Shanghai copper arbitrage ratio has started to ease, it was at 7.95, compared with 8.01 at a similar time on Wednesday and was around 7.88 before the Lunar New Year holiday. This suggests that LME and SHFE copper prices are starting to get realigned again.

Precious metals
Precious metals are mixed this morning. The spot gold price was little changed - down by $0.2 per oz at $1,556.70 per oz - while the more industrial precious metals are firmer, with silver up by 0.5% at $17.70 per oz, platinum up by 0.4% at $983 per oz and palladium up by 0.4% at $2,441.50 per oz.

Wider markets
The yield on benchmark United States 10-year treasuries was recently quoted at 1.67%, compared with 1.58% at a similar time on Wednesday; and the German 10-year bund yield was firmer too - recently quoted at -0.36%, compared with -0.4% at a similar time yesterday. This is another sign of risk-on returning.

Asian equities were putting in a strong performance across the board this morning, with the Nikkei (+2.38%), the Kospi (+2.83%), China’s CSI 300 (+1.98%), the ASX 200 (+1.05%) and the Hang Seng (+2.85%) all up.

This follows a stronger performance in Europe and the North America on Wednesday. In the United States, the Dow Jones Industrial Average closed up by 1.68% at 29,290.85 and the S&P 500 and Nasdaq Composite indices closed at record highs; in Europe, meanwhile, the Euro Stoxx50 closed up by 1.22% at 3,777.84.

Currencies

The dollar index (98.31) continues to work its way higher, fueled by better-than-expected economic data, especially the US ADP non-farm employment change that showed 291,000 new jobs, compared with the 157,000 expected.

The stronger dollar has weighed on the yen (109.93), the euro (1.0998) and sterling (1.2982), while the Australian dollar (0.6755) is firmer, no doubt helped by the rebound in commodity prices and sentiment.

The Chinese yuan at 6.9661 is also stronger, compared with 6.9984 at a similar time on Wednesday morning and Monday’s weak point of 7.0246. It was around 6.8450 on January 17.

Key data
Today’s economic agenda is busy, starting with German factory orders, followed by a speech from European Central Bank (ECB) president Christine Legarde and an ECB economic bulletin and forecast.

US data includes Challenger job cuts, preliminary non-farm productivity and unit labor costs, initial jobless claims and natural gas storage data.

In addition, US Federal Open Market Committee member Robert Kaplan is speaking.

Today’s key themes and views

On the surface, the rally in broad markets suggests investors are less concerned about the impact of the Wuhan coronavirus, but in the metals sector, the run-up in prices is reflecting concerns that, as well as hitting Chinese domestic demand, the coronavirus is also likely to hit supplies, because production and exports of metals and products are likely to be disrupted. This could lead to regional supply/demand imbalances, which may well affect regional premiums.

Given that it is still early days in terms of discerning the medium-term impact of the coronavirus on China and, indeed, on the global economy, the risks remain large and trading is likely to remain choppy. We would not get too comfortable with the rallies.

Gold prices have pulled back from recent high ground, with the stronger dollar, better economic data and buoyant equity markets likely to have been headwinds. But prices have not collapsed and that suggests there is still demand for gold as a haven asset in these uncertain times. There is still a risk that the coronavirus will spread aggressively outside China and that could affect supply chains and trigger a correction in the equity markets.



William Adams

william.adams@fastmarkets.com

Published

William Adams

February 06, 2020

08:48 GMT

London

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