MORNING VIEW: Metals mainly weaker after coronavirus concerns escalate again

The equity markets barometer suggests concerns over the economic impact of the novel coronavirus (2019-nCoV) have picked up again over the past 24 hours, with Asian equities weaker this morning, Friday February 21, as are most of the metals.

We said on Thursday that markets were focused on coronavirus developments more so than the impact to supply chains, but it seems that traders are now getting more in tune with how the supply chain disruptions could be far-reaching even if they are short-lived.

  • The latest coronavirus data shows 76,200 confirmed cases, 2,247 deaths, but 18,177 recoveries; however, South Korea reported 52 new cases on Thursday.
  • Deutsche Bank’s shipping tracker indicates economic activity in China has stopped contracting…
  • …but with gold at $1,628.40 per oz haven buying is mounting.

Base metals
Three-month base metals prices on the London Metal Exchange were mixed this morning, but most are near the lower levels of recent ranges. The exceptions are lead and tin that are consolidating in mid-range.

Copper and lead are slightly firmer this morning with gains of $3 and $9 per tonne, at $5,740 and $1,870 per tonne respectively, while the rest are weaker by an average of 0.3%.

Trading volume of 6,675 lots as at 5.45am London time is slightly above this week’s average of 6,649 lots for this time of day.

The most-traded base metals contracts on the Shanghai Futures Exchange were also mostly weaker, the exception was April lead that was up by 0.4%, while the rest were down by an average of 0.4% - led by a 0.8% drop in April nickel, while April copper was off by 0.2% at 46,300 yuan ($6,595) per tonne.

The spot copper price in Changjiang was down by 0.2% at 45,860-45,960 yuan per tonne, while the LME/Shanghai copper arbitrage ratio was at 8.07, compared with 8.03 on Thursday.

Precious metals
Spot gold prices are rallying strongly and were recently quoted at $1,628.40 per oz, up from February 14’s close at $1,583.85 per oz. Silver was recently quoted at $18.50 per oz, up from $17.74 per oz a week ago, but the platinum group metals are consolidating recent strong gains with palladium recently quoted at $2,681 per oz and platinum at $981 per oz. Weak car sales in China and Europe may well be dampening the sentiment in the latter two metals.

Wider markets
The yield on benchmark United States 10-year treasuries is weaker this morning and was recently quoted at 1.49%, compared with 1.56% at a similar time on Thursday. The German 10-year bund yield was also weaker and was recently quoted at -0.45%, compared with -0.42% on Thursday. The weaker yields highlight more of a risk-off stance across broader markets, which ties in with the stronger gold and dollar.

Asian equities were weaker this morning: Nikkei (-0.32%), China’s CSI 300 (-0.05%), the ASX 200 (-0.33%), the Kospi (-1.49%) and the Hang Seng (-0.94%). Pre-market western equity indices are weaker too.

The dollar index (99.83) is holding on to most of Thursday’s gains - the index reached 99.91 yesterday. Strong economic data and the US’ image as a safe-haven are underpinning the dollar’s strength. The euro (1.0791) is unchanged from where it was at a similar time on Thursday morning, but it is holding down in low ground.

Sterling (1.2895), the Australian dollar (0.6599) and the yen (111.96) are all weaker too as they retreat against the dollar.

Key data
Friday’s economic agenda is busy, with flash purchasing managers’ index (PMI) data for manufacturing and services out across Japan, Europe and the US. Japan’s manufacturing PMI for February dropped to 47.6, with January’s reading revised down to 48.8 from 49.3. Given PMI data is a leading indicator, today’s releases should provide good insight into how economies are adjusting for the impact of the virus.

Other key data includes the European Union’s consumer price index and US existing home sales.

In addition, US Federal Open Market Committee members Robert Kaplan, Lael Brainard, Richard Clarida and UK Monetary Policy Committee member Silvana Tenreyro are speaking.

Today’s key themes and views
The disruption to production and shipping in China is expected to be ‘V’-shaped, but the impact of the disruption may not have been felt in the global economy yet and therefore there may be more negative economic news ahead, before the situation gets better. Given the stimulus in China and elsewhere and not forgetting the phase one US-China trade deal, the recovery could well be brisk. As such, while we think there may be more room on the downside for prices in the short term, the outlook for the year as a whole is looking good. The caveat being that the virus is brought under control in China and elsewhere in the next month or so.

For now, metal prices seem to be taking their cue from the equity markets and equities are looking weaker.

We said on Thursday that gold seems to be waving a warning flag as it move up to multi-year highs and the dollar seems to be saying the same, we wait to see if broader markets take note - it seems as if broader markets are starting to take note now.


February 21, 2020

08:30 GMT