MORNING VIEW: Markets torn between better economic data and worsening Covid-19 situation

There are many crosswinds for the markets to contend with this morning, Wednesday July 1, with better manufacturing data in Asia and interest rate cuts in China, but a deteriorating Covid-19 situation - especially in parts of the Americas - and raised geopolitical tension over Hong Kong.

  • China’s Caixin and Japan’s manufacturing purchasing managers’ indices (PMIs) climbed to 51.2 from 50.7 and 40.1 from 37.8 respectively.
  • Gold sets fresh highs above $1,785 per oz.

Base metals
Three-month base metals prices on the London Metal Exchange were mixed this morning. Copper led on the upside with a 0.7% gain and was recently quoted at $6,079 per tonne, but nickel and lead were lower by 0.4% and 0.2% respectively, while aluminium, zinc and tin were up 0.1%, 0.2% and 0.5% respectively - see price table below for more details.

The most-traded base metals contracts on the Shanghai Futures Exchange were also mixed this morning with October nickel and August zinc down by 0.5% and 0.2% respectively, while the rest were up by an average of 1.1%, led by a 1.6% rise in August copper to 49,320 yuan ($6,975) per tonne.

Precious metals
Spot gold prices were up by 0.2% this morning at $1,784.82 per oz, they set a fresh multi-year high on Tuesday at $1,785.80 per oz. Silver ($18.23 per oz) has yet to break higher, but looks well placed to do so, while platinum ($831 per oz) and palladium ($1.924 per oz) were holding within their sideways trading patterns. We wait to see if the present V-shaped recoveries in markets flows through into demand for vehicles, which may be what the platinum group metals need to break higher.

Wider markets
The risk-on market performance in recent days has fed through to the yield on US 10-year treasuries that was firmer at 0.68% this morning, compared with 0.63% at a similar time on Tuesday. With the yield rising and the yen weaker, it does look as gold is acting as the main haven asset at present.

Asian-Pacific equities were mixed this morning: the ASX 200 (+0.62%), the CSI 300 (+1.69%), the Nikkei (-0.75%), the Kospi (-0.08%) and the Hang Seng was closed.

Currencies
The US dollar index is consolidating this morning; it was recently quoted at 97.36, this after 97.53 at a similar time on Tuesday. Overall, the dollar seems to be consolidating after the fall from the 100 level seen over the March-May period - but the question is whether this consolidation is mapping out a half-way bearish flag on the charts?

The other major currencies were mainly consolidating: sterling (1.2387), the Australian dollar (0.6905) and the euro (1.1227), while the yen (107.63) is weaker.

Key data
Wednesday’s economic agenda is busy. In addition to Chinese and Japanese manufacturing PMI data mentioned above, other releases already out showed Japan’s second-quarter Tankan manufacturing index fall to -34 from -8 and Japan’s consumer confidence rise to 28.4, from 24. In Europe, German retail sales climbed by 13.9% month on month in May, after a 5.3% fall in April.

Data out later includes PMI data out across Europe and the United States, German unemployment change and further US data including Challenge job cuts, ADP non-farm employment change, construction spending, crude oil inventories and total vehicle sales.

In addition, UK Monetary Policy Committee member Jonathan Haskel is speaking and the Federal Open Market Committee meeting minutes will be released this evening.

Today’s key themes and views

Copper is trending higher and has reached levels it was trading at in early January, the rest of the base metals are range-trading near recent highs but lack the momentum that copper has. Concerns about the potential for copper supply disruptions in Chile seem to be singling copper out.

While we see the potential for greater supply disruptions should Covid-19 directly affect more producers, we still feel the demand damage has been overlooked by the market. Infrastructure spending will be good in the long run, but it takes a lot of time for infrastructure spending promises to turn into order-flow. In addition, if equities pullback, then metals are likely to follow too. As such, we would be wary about whether the market can hold on to recent gains.

In line with the above, the strength in the gold price suggests a strong level of safe-haven interest from investors.




William Adams

william.adams@fastmarkets.com

Published

William Adams

July 01, 2020

09:18 GMT

London