- Geopolitical tensions rise after the United States warns the European Union that Russia might invade Ukraine.
- Given the EU has become rather dependent on Russian natural gas, Russia may feel it has the upper-hand.
- US Dollar Index continues to climb.
Three-month base metals prices on the LME were mixed this morning; it looks as though traders are hesitant about whether the pause in the recent sell-off is indeed a dip-buying opportunity. Given the strong dollar and a possible rise in geopolitical tensions in Europe that could affect energy supply, this may be a time to be on the sidelines.
Nickel was up by 0.1% at $19,755 per tonne and tin was up by 0.3% at $37,850 per tonne, the rest were down by an average of 0.3%, with copper down by 0.3% at $9,603 per tonne.
Conversely, most of the December base metals contracts on the SHFE were firmer, the exception being zinc that was down by 5 yuan ($0.78) per tonne. The rest were up by an average of 1.3%, led by a 2.4% rise in tin, with aluminium, nickel and lead each up by around 1.2%, while copper lagged behind with a 0.4% gain to 70,530 yuan per tonne.
The precious metals were mixed this morning: gold was down by 0.2% at $1,858.60 per oz, but it has been rallying strongly in recent days; it is up from around $1,760 per oz as recently as November 3. It does look as if the pick-up in inflation is driving gold, this is especially so given gold prices are up while the dollar is rallying. A pick-up in geopolitical tension could add fuel to the rally.
The yield on US 10-year treasuries remains relatively strong at 1.56% this morning, compared with 1.55% at a similar time on Thursday – once again we see this as the market being more hawkish than the Federal Reserve.
Asia-Pacific equities were mainly firmer on Friday morning: the Nikkei (+1.13%), the ASX 200 (+0.83%), the Kospi (+1.5%) and the Hang Seng (+0.18%), while the CSI 300 (-0.18%) was weaker.
The US Dollar Index was extending gains this morning and was recently at 95.18, compared with 95 at a similar time on Thursday.
With the US dollar climbing, the other major currencies were under pressure: the euro (1.1446), the Australian dollar (0.7293), sterling (1.3371) and the Japanese yen (114.21).
Friday’s economic agenda includes German wholesale price index, EU industrial production and US data on job openings, preliminary University of Michigan consumer sentiment and inflation expectations and there is a US treasury currency report.
In addition, there are Economic and Financial Affairs Council (Ecofin) meetings and UK Monetary Policy Committee member Jonathan Haskel and Federal Open Market Committee member John Williams are scheduled to speak.
Friday’s key themes and views
This week has been about consolidation and an attempt to rebound in the base metals, but usual dip-buying is struggling to attract follow-through buying. For the big picture, we see the slowdown in China as a major headwind, but the rest of the world still looks structurally bullish, with infrastructure projects under way, shipping congestion and low stock levels affecting availability, which in turn in creating pent-up demand, all of which seems bullish. But, in the short term, we expect the market may well get more nervous about the geopolitical situation than they are currently.
Given today’s performance in gold, the yen and US treasury yields, haven-demand has not picked up yet. Given the potential geopolitical situation and the inflation back drop, gold may well attract more haven interest.