Hopes that the reopening of economies will lead to an economic recovery are boosting equities but the United States-China trade dispute is worsening, which is not going to help the global economy recover and that seems to be weighing on the base metals that are below the highs seen last week.
- Oil prices continue to move higher with spot Brent crude recently quoted at $36.85 per barrel, compared with $34.35 at a similar time on May 22.
- Japan lifts state of emergency having brought Covid-19 under control, while India relaxes restrictions due to economic necessity while the virus is not under control.
Three-month base metals prices on the London Metal Exchange were mixed with zinc ($1,971.50 per tonne), tin ($15,315 per tonne) and nickel ($12,275) down by 0.7%, 0.4% and $5 per tonne respectively, while the rest were up between 0.7% and 1%, with copper up by 1% at $5,357 per tonne - see table below for more details.
The most-traded base metals contracts on the Shanghai Futures Exchange were also mixed with August nickel off slightly, July zinc down by 0.4% and July tin down by 0.9%, while the July contracts of lead, aluminium and copper were up by 0.1%, 0.9% and 0.8% respectively, with the latter at 43,800 yuan ($6,136) per tonne.
Spot gold prices were slightly lower this morning with prices recently off by 0.2% at $1,733.27 per oz, while the other precious metals were stronger by between 1.5% and 3.6%. The gold/silver ratio has fallen to 1:99 from 1:101 last week.
The yield on benchmark US 10-year treasuries has firmed and was recently quoted at 0.7%, this after being at 0.64% at a similar time on May 22 - the range in recent weeks has been 0.61-0.74%. This morning’s firmer rate supports the more risk-on market view.
Asian-Pacific equities were stronger this morning: the Nikkei (+2.56%), China’s CSI 300 (+1%), the ASX 200 (+2.93%), Kospi (+1.76%) and the Hang Seng (+2.18%).
The US dollar index is consolidating and was recently quoted at 99.55 - the range since early April has been 98.54-100.87.
The other major currencies we follow are for the most part firmer: the euro (1.0924), the Australian dollar (0.6580) and sterling (1.2246), while the yen (107.85) is weaker, which again supports the risk-on view with less need for havens. But given Japan has lifted its state of emergency with Prime Minister Shinzo Abe declaring the ‘Japan model’ has beaten the coronavirus, it would not be surprising if the yen strengthened as more foreign investment headed to Japan.
Economic data showed Japan’s all industries activity index fell by 3.8%, but this was for March and core consumer price index (CPI) fell by 0.1% in April. Germany’s GfK consumer climate index came in at -18.9 for May, it had been -23.4 in April and 2.7 in March, down from a fairly steady rate either side of 10 before that.
Data out later in Europe includes UK realized sales from the Confederation of British Industry (CBI) and there is a European Central Bank financial stability review report.
US releases include data on house prices, consumer confidence and new home sales. In addition, US Federal Open Market Committee member Neel Kashkari is speaking.
Today’s key themes and views
We continue to expect trading in the base metals to be choppy within the overall medium-term upward trend with hopes for a recovery to boost buying, while trade war rhetoric is likely to bring bouts of weakness.
But there also seems a growing risk of the virus spreading again in those countries that are forced to open up for economic reasons before they have been able to contain it and that is likely to polarize the global economy and travel, with some economies recovering while others suffer more and travel between some countries allowed and others remain quarantined. The spread of the virus in countries that reopen too early, could also increase the risk of the virus affecting more remote mining areas.
Given the pick-up in geopolitical tensions it is surprising that gold is not firmer, but the broader shift to risk-on may be prompting some initial profit-taking in gold too. We expect gold to remain well supported, unless there are reports of distress selling by central banks.