Not giving up our long base metals/short precious metals view

• Global risk-on sentiment pauses. Base metals pull back and precious metals gain some upward momentum.
• The economic agenda is fairly busy today. Although volatility across financial markets may surge, we expect risk appetite to resume in the very near term.
• As a result, base metals (and palladium) are likely to continue to perform better than precious metals this week.

Base metals on the LME retreated on Monday, November 28, in part in response to a pause in global risk-on sentiment, after experiencing significant price gains last week. Zinc, selling off 2.1%, was the worst performer while tin, edging 0.5% higher, was the only industrial metal to end in positive territory. Precious metals were a touch stronger – while palladium gained further upward momentum and set fresh 2016 highs, other precious metals were attempted to rebound after falling for a third straight time last week.

This morning, base metals on the LME are slightly weaker amid decent volumes as profit-taking continues. Copper, dropping 2%, is hit the most. Precious metals are under marginal selling pressure, with the complex edging 0.2% lower on average.

In Shanghai, the base metals contracts are moving a little lower, with the complex down 0.6 percent on average. Copper, tumbling 3.3%, is again the worst performer, while lead, rallying nearly 5%, continues to outperform as domestic tightness intensifies. Meanwhile, spot copper in Changjiang is down 1.4 percent at 47,820-48,020 yuan, while the backwardation with the futures is at $117 per tonne, and the LME/Shanghai copper arb ratio remains open at 1:8.16.

Bonds – The US government bond market strengthened a little yesterday after weakening sharply last week on stronger economic and inflation expectations. Key economic data on US inflation and employment are due to be released this week. Any positive surprise may prompt a renew wave of US government bond selling, pushing yields higher.

Stocks – Broad equities were a touch weaker on Monday. US equities retreated somewhat after hitting fresh all-time highs last week, with the Dow Jones closing 0.3 % down at 19,098. European equities continued to lack of underlying strength, having traded in a narrow range since August. The Euro Stoxx 50 moved 1.04% lower but remained above the psychological 3,000 mark. Given growing political uncertainty in Europe, we expect further capital flows from Europe to the US, thereby underpinning the outperformance of US equities relative to European equities. Looking at equities this morning, Asian equities are trading weaker, with the exception of CSI 300 (+1%), because investors adopt a cautious stance after the pause in risk sentiment seen in the Western countries the day before.

FX – The dollar is stabilising in the early hours of the trading day, with the DXY firmly above 101, after being under selling pressure yesterday. The DXY climbed last week to its highest since March 2003. Contrary to precious metals, base metals have been insensitive to the surging dollar. We expect the dollar to gain further upward momentum this week, which should exacerbate the divergence between precious and industrial metals.

In terms of the day ahead, the economic agenda will be fairly busy. We will kick off in Europe with inflation statistics in Germany and Spain for November as well as French consumer spending for October. In the US, we will pay a close attention to the release of the preliminary Q3 GDP reading and the CB consumer confidence index for November. In addition, Fed governor Powell is due to speak about the economic outlook and as such, may influence the market’s conviction about a Fed’s rate increase at the December 13-14 meeting. Against this, volatility across base and metal precious could pick up, we feel.

Near-term outlook:

Base metals may continue to enjoy further upward pressure because investors are likely to boost further their allocation in favour of risk assets at the expense of “risk-free” assets. Given that US stocks are at record highs, investors may tactically favour base metals. We are friendly toward all base metals over a 1-month horizon but we see downside risks to our forecasts growing for copper because of overstretched speculative positioning (raising the likelihood of a reversal) and tin because of unconvincing technicals.  

Precious metals are likely to experience renewed selling pressure once global risk-on sentiment resumes. We expect investors to continue to unwind their elevated long exposure to safe-haven assets, most notably gold and silver, and lift their exposure to risk assets in a bid to take advantage of stronger growth dynamics expected next year.

 

Overnight Performance
GMT	05:11	+/-	+/- %	Lots
Cu	5759	-116	-2.0%	5302
Al	1733	-2	-0.1%	1606
Ni	11390	-130	-1.1%	2134
Zn	2846	25.5	0.9%	4272
Pb	2461.5	18.5	0.8%	586
Sn	21100	150	0.7%	28
	Average		-0.1%	13,928
Gold	1191.2	-3.4	-0.3%
Silver	16.611	-0.059	-0.4%
Platinum	925.8	1.8	0.2%
Palladium	753.5	-2.5	-0.3%
	Average PM		-0.2%

 

SHFE Prices 05:11 GMT	RMB	Change	% Change
Cu	47010	-1590	-3.3%
AL	13625	-395	-2.8%
Zn	23850	155	0.7%
Pb	22060	1035	4.9%
Ni	93580	-2350	-2.4%
Sn	145700	-1180	-0.8%
Average change (base metals)			-0.6%
Rebar	3188	-93	-2.8%
Au	272.65	-0.55	-0.2%
Ag	4184	1	0.0%

 

Economic Agenda
GMT	Country	Data	Actual	Expected	Previous
7:00am	EU	German Import Prices m/m		0.6%	0.1%
–	EU	German Prelim CPI m/m		0.1%	0.2%
7:45am	EU	French Consumer Spending m/m		0.2%	-0.2%
8:00am	EU	Spanish Flash CPI y/y		0.5%	0.7%
1:30pm	US	Prelim GDP q/q		3.0%	2.9%
1:30pm	US	Prelim GDP Price Index q/q		1.5%	1.5%
2:00pm	US	S&P/CS Composite-20 HPI y/y		5.3%	5.1%
2:15pm	US	FOMC Member Dudley Speaks
3:00pm	US	CB Consumer Confidence		101.3	98.6
5:40pm	US	FOMC Member Powell Speech

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