MORNING VIEW: Markets buoyant on continued widespread stimulus, but US jobs report may prompt a reality check

The metals were mixed this morning, Friday June 5, but Asian-Pacific equities were mainly stronger, as were pre-market major western equity index futures.

  • The unemployment rate in the United States is expected to climb to 19.4%.
  • Equities have followed history by focusing on governments’ monetary/fiscal actions…
  • …but can money alone right the impact of the virus, or can only a vaccine do that - when, if at all, will this dawn on the market?

Base metals

Three-month base metals prices on the London Metal Exchange were for the most part firmer this morning. The exception was zinc that was down by 0.2% at $2,023.50 per tonne, while the rest were up by an average of 0.3%. Copper was up 0.1% at $5,532 per tonne.

Although prices were generally lower this morning, the underlying trends are upward, which suggests prices are just pausing this morning. But unlike some of the equity indices that have recovered much of the Covid-19 losses, the base metals are still around 14% below their January highs, while the S&P 500 is around 8% below its 2020 highs.

The most-traded base metals contracts on the Shanghai Futures Exchange were mixed, with July aluminium, July zinc, July lead and August tin down by an average of 0.3%, while August nickel and July copper were up by 0.8% and 0.3% respectively, with the latter at 44,910 yuan ($6,309) per tonne.

Precious metals
Spot gold prices were consolidating this morning and were recently quoted at $1,709.74 per oz, with the range so far this week being $1,689.05 -1,745 per oz.

The other precious metals were mixed with silver ($17.70 per oz) up by 0.1% and palladium ($1,955 per oz) up by 0.9%, while platinum ($835.50 per oz) was down by 0.4%.

Wider markets
The yield on benchmark US 10-year treasuries is climbing out of its recent range and was recently quoted at 0.83%, which suggests a more risk-on climate and helps explain the strength in equities of late - the range in recent weeks had been 0.61-0.74%. The stronger yield is not, however, supporting the dollar.

Asian-Pacific equities were mainly higher this morning: the Nikkei (+0.41%), the ASX 200 (+0.12%), the Hang Seng (+0.02%) and the Kospi (+1.3%), but China’s CSI 300 (-0.27%) is weaker.

Currencies
The US dollar index is weakening and was recently quoted at 96.63. Sentiment has turned bearish for the dollar, which seems to be a delayed reaction to the US Federal Reserve’s extremely dovish developments in recent months that include the central bank’s pumping of dollars into the international market via international swap lines.

Given the dollar’s weakness, it is not surprising that most of the other major currencies we follow are strengthening: the euro (1.1354), the Australian dollar (0.6978) and sterling (1.2616), although the yen (109.26) continues to weaken while safe-haven trades are unwound.

The Chinese yuan (7.0923) is recovering from recent weakness, it set a low at 7.1770 in late-May. The stronger yuan suggests some easing in US-China tension.

Key data
Friday’s economic agenda will focus on the US employment report, but ahead of that there is data on Germany factory orders and Italian retail sales.

Data already out showed the United Kingdom’s GfK consumer confidence index fell to -36 from -34 and Japan’s household spending fell by 11.1% in April, after a 6% fall in March.

Today’s key themes and views
The metals are consolidating this morning after steady gains in recent weeks that have no doubt been supported by buoyant equities. The metals also have the promised spending on infrastructure to look forward to, although US President Donald Trump’s much-discussed $1 trillion spend on infrastructure is not expected to be put before Congress until after the July recess.

The physical market remains quiet, so we do wonder whether a lot of the recovery news is already priced in the metals and they may be at risk of correcting should equity markets undergo a reality check. Today’s US employment report could be a catalyst for that.

The rebound in equities is hard to justify given the economic damage and the likelihood that business and household spending across the globe will be restrained because unemployment has shot higher and while people will be saving more in the face of all the uncertainty. Less spending does not bode well for corporate earnings.

Gold prices are consolidating either side of the $1,700-per-oz level and are holding up well given the strong equity rebounds. But given that the rebound in equities may have run ahead of itself and there is still a lot of uncertainty as to how we recover from this pandemic, it seems likely that investors will want to continue to hold higher levels of gold in their portfolios. As such, we expect dips will be well supported. The weaker dollar should also add support.




William Adams

william.adams@fastmarkets.com

Published

William Adams

June 05, 2020

08:13 GMT

London