China remains in a very difficult position as it needs to ramp-up the return to work, while at the same time the virus is not contained. China exported $60 billion of auto parts in 2019, according to China’s customs data, so there is significant danger of supply chain disruptions across the globe, which could slow manufacturing globally.
- China signals it will provide more fiscal and monetary stimulus as well as provide long-term funding for the economy.
- Gold has gapped higher to $1,663 per oz, up from Friday’s close at $1,643.58 per oz.
- Disruptions now and stimulus points to a ‘V’-shaped sell-off
Three-month base metals prices on the London Metal Exchange were mixed this morning, but the heavyweights of copper, aluminium and zinc were down by an average of 0.9%, with copper at $5,712 per tonne. Nickel, tin and lead meanwhile were up by an average of 0.5% - see table below for more details.
Trading volume has picked up again, with 10,829 lots traded as of 5.45am London time, this compares with last week’s average of 6,649 lots for this time of day.
The most-traded base metals contracts on the Shanghai Futures Exchange were mostly weaker, the exception was June tin that was up by 1.1% (tin was also up by the most on the LME). April lead was unchanged, while the rest were down by an average of 1.3%, where April copper was off by 0.5% at 45,950 yuan ($6,538) per tonne.
The spot copper price in Changjiang was down by 0.9% at 45,460-45,570 yuan per tonne, while the LME/Shanghai copper arbitrage ratio was at 8.05, compared with 8.07 on Friday.
Spot gold prices are accelerating higher and were recently quoted at $1,363.27 per oz, up by 1.2% from Friday’s close, while demand for haven assets picks up. Silver ($18.66 per oz) is following gold’s lead, although with the gold/silver ratio at 1:89 it is lagging behind gold to some extent. Platinum is under pressure, while palladium is consolidating. Weak car sales in China and the potential for supply-chain disruptions to global manufacturing could hit demand for the platinum group metals.
The yield on benchmark United States 10-year treasuries is weaker this morning and was recently quoted at 1.47%, compared with 1.49% at a similar time on Friday and 1.58% a week ago. The weaker yield highlights more of a risk-off stance across broader markets, which ties in with the stronger gold prices.
Asian equities were weaker this morning: Nikkei (closed), China’s CSI 300 (-0.37%), the ASX 200 (-2.25%), the Kospi (-3.87%) and the Hang Seng (-1.6%). Pre-market western equity indices are weaker too.
The dollar index (99.58) is working higher again after Friday’s consolidation, the index peaked on Thursday at 99.91. Friday’s weaker-than-expected flash manufacturing purchasing managers index (PMI) from the US, which fell to 50.8 from 51.9, dented the dollar.
The other major currencies we follow are also consolidating after Friday’s reversals: euro (1.0817), sterling (1.2936), the Australian dollar (0.6593) and the yen (111.57).
Monday’s economic agenda is light with business climate data from Germany’s Information and Forschung (Ifo) and Chinese leading indicators.
In addition, UK Monetary Policy Committee member Andrew Haldane and US Federal Open Market Committee member Loretta Mester are speaking.
Today’s key themes and views
The economic dangers are multi-fold, but the two main ones seem to be the spread of the virus into other countries could means it takes longer to get the coronavirus under control and secondly, the disruption to international supply chains from China could hit manufacturing on a global basis and therefore that could slow demand for the metals.
As such we expect more downward pressure on the metals. Any disruption to global manufacturing will create pent-up demand and more stimulus and funding could lead to even stronger demand down the road - hence we see this as likely being a ‘V’-shaped correction.
We said on February 20 that gold seems to be waving a warning flag as it moved up to multi-year highs - the broader markets have started to take note now.