The Federal Reserve’s action to extend buying to a wider base of corporate debt suggests the central bank will “do whatever it takes” to support market sentiment, and indeed markets, if it can.
- Base metals prices on both the London Metal Exchange and Shanghai Futures Exchange were up across the board this morning.
- Asian-Pacific equity markets and pre-market major western equity index futures were up sharply this morning, with the Nikkei up by 4.9%.
- US President Donald Trump is proposing a $1 trillion infrastructure stimulus program – not new news, but the market likes hearing it again.
Three-month base metals prices on the LME were up by an average of 0.9% this morning, led by a 1.3% rise in copper ($5,814 per tonne), followed by a 1.1% rise in tin ($17,015 per tonne) and a 1% rise in aluminium ($1,603 per tonne) - the rest were up by around 0.7%.
Volume has been above the recent average with 8,284 lots traded as at 6.18am London time, compared with an average of around 6,500 lots at a similar time each morning last week.
The most-traded base metals contracts on the SHFE were also up across the board this morning with gains averaging 1%, led by a 1.4% rise in August nickel, with July copper up by 0.6% at 47,030 yuan ($6,642) per tonne.
Spot gold prices were little changed this morning and were recently quoted at $1,729.34 per oz, they did dip to a low of $1,704.05 per oz on Monday, but once again the sell-off ran into buying. Silver followed gold’s lead, while the platinum group metals continue to trade sideways.
In line with the return in risk-on, the yield on the US 10-year treasuries has climbed and was recently quoted at 0.74%, compared with 0.65% at a similar time on Monday.
Asian-Pacific equities were stronger this morning: the ASX 200 (4.31%), the Kospi (4.87%), the Nikkei (4.9%), the Hang Seng (2.88%) and China’s CSI 300 (1.35%).
With equities rallying, the US dollar has weakened again; it was recently quoted at 96.52, this after 97.31 at a similar time on Monday.
With the dollar weakening, most of the other major currencies have strengthened: the euro (1.1335), the Australian dollar (0.6939) and sterling (1.2664), although the yen (107.47) is weakening while it loses safe-haven demand.
It is a busy day on the economic data front. Key data includes the German consumer price index, UK unemployment claims and unemployment rate, European Union and German economic sentiment indicators from the ZEW.
US data includes retail sales, industrial production and capacity utilization rate.
In addition, Federal Reserve chairman Jerome Powell and Federal Open Market Committee member Richard Clarida are speaking.
Today’s key themes and views
Markets are once again focused on the liquidity coming from central banks rather than on the state of economic growth, while the Fed’s and other central bank bond buying will help companies keep afloat, the whole global economy needs household and businesses to be buying things. As such, there seems a race against time as to whether companies can survive long enough on debt before actual turnover supports their business activity.
Infrastructure projects will help boost demand for the metals, but projects take a long time to plan and get approval before the orders start to flow. As such, we do worry whether the buying that has been done over the past few months can held on to for long enough to see physical demand pick up. Perhaps in this ultralow interest rate environment financing can last for an extended period.
Overall, we would say the risks still lie to the downside for now because we see the demand side of the equation as having been hit a lot harder than the supply side and we expect the demand recovery will be drawn out, especially if second waves of the virus get out of control.
For now gold prices seem to be following the lead in broader markets, which seems somewhat odd given its safe-haven status. For now, prices seem to have established a $1,675-1,750 per oz range.