Base metals vulnerable to renewed worries over China

• Global risk sentiment deteriorates as investor fears over China mount – most risk asset classes are vulnerable to further selling pressure.
• Base metals stabilise thanks to a weaker dollar so far this morning, while precious metals rebound strongly on increased safe-haven bids.
• The economic agenda is busy today – we expect risk aversion to continue in the days ahead, leading us to favour precious metals relative to base metals.

 

This morning, Thursday December 29, base metals on the LME are stabilising somewhat, posting an average gain of 0.3%, after witnessing broad-based downward pressure yesterday as a result of profit-taking, reflected in the loosening of nearby spreads, on the back of a resurgence of risk aversion. Copper and nickel are the strongest performers, rising 0.6% each. Tin, down 0.3%, is the only base metal on the LME to post a loss.

In Shanghai, base metals on the SHFE are broadly stable, posting an average gain of 0.2%. While zinc is the strongest performer, climbing 2.3%, aluminium, down 1.3%, is falling the most. At the same time, spot copper in Changjiang has edged 0.9% lower to 44,970-45,170 yuan, while the contango with the futures is at $96 per tonne, and the LME/Shanghai copper arb ratio is unchanged from yesterday at 1:8.2.

This morning, precious metals continue their rebound, with the complex showing an average gain of 0.9%, after a strong session yesterday, in which silver and palladium managed to outperform gold and palladium in spite of a lower level of risk appetite.

The US government bond market strengthened yesterday, driving yields lower, in part in response to an increase in risk aversion amid disappointing domestic pending home sales in November and renewed investor fears over China’s capital outflows. The 10-year US bond yield closed at 2.51%, down from its recent peak of 2.60% from December 15.

Broad equities lost ground yesterday amid thin trading volumes. In Europe, the Euro Stoxx 50 was little changed to close at 3,279 amid a muted data flow. In the USA, weaker-than-expected data prompted investors to take some profits – the Dow Jones retreated 0.56% to close 19,834 while the S&P 500 moved 0.80% lower to finish the trading day at 2,251. In Asia this morning, equities are witnessed selling pressure. Apart from the CSI 300 (+0.24%), the Nikkei 225 (-1.49%), the Hang Seng (-0.10%) and the Kospi (-0.04%) are trending lower early in the trading session. 

The US dollar is consolidating strongly this morning, with the DXY trading at 102.87 at the time of writing, after strengthening against most other currencies yesterday, especially the euro as a result of increased political tensions and the yuan driven by capital outflows from China. But the dollar weakened slightly against the yen, in part reflecting the unwinding of carry trades amid the pick-up in risk aversion. We believe that the long dollar trade has become somewhat crowded so we would not be surprised to see a weaker dollar in the days ahead, especially if risk aversion continues, which may give a boost to base and precious metals.

The economic agenda is busy today. In Europe, investors will pay attention to the release of M3 money supply and private loans for November to better assess whether economic conditions are improving in the area. In the US, investors will particularly focus on the release of the latest weekly unemployment claims to see whether the labor market continues to tighten and changes in US crude oil inventories, which could have a direct impact on oil prices and thus indirect implications of metals pricing. Volatility across the metals markets may therefore surge, especially when taking into account the poor liquidity conditions during the year-end quasi-holiday.

Base metals may remain vulnerable to additional profit-taking in the coming days because investors seem to express renewed fears over the capability of the Chinese government to prevent accelerating capital outflows from destabilising the economy. Due to poor liquidity conditions, we think that tin may be the most vulnerable base metal to downside in case of a more pronounced wave of risk aversion.

Precious metals may continue to strengthen in the coming days amid renewed turbulence across risky assets as we witnessed early this year. Indeed, we expect investors to turn increasingly risk-off amid renewed investor fears over China’s FX reserves, which should prompt renewed buying interest across the complex. In this environment, we may continue to overweight gold and platinum over silver and palladium. 

Overnight Performance
GMT	04:31	+/-	+/- %	Lots
Cu	5546	30.5	0.6%	619
Al	1705	1	0.1%	475
Ni	10180	65	0.6%	635
Zn	2585	4	0.2%	637
Pb	2028.5	8.5	0.4%	115
Sn	20875	-65	-0.3%	17
	Average		0.3%	2,498
Gold	1149.63	7.13	0.6%
Silver	16.176	0.171	1.1%
Platinum	907.4	9.4	1.0%
Palladium	673	7	1.1%
	Average PM		0.9%

 

SHFE Prices 04:31 GMT	RMB	Change	% Change
Cu	45640	110	0.2%
AL	12635	-170	-1.3%
Zn	21110	480	2.3%
Pb	17655	-130	-0.7%
Ni	86210	-150	-0.2%
Sn	147740	1560	1.1%
Average change (base metals)	0		0.2%
Rebar	2976	-39	-1.3%
Au	268.55	2	0.8%
Ag	4092	49	1.2%

 

Economic Agenda
GMT	Country	Data	Actual	Expected	Previous
9:00am	EU	M3 Money Supply y/y		4.4%	4.4%
9:00am	EU	Private Loans y/y		1.9%	1.8%
1:30pm	US	Unemployment Claims		277K	275K
1:30pm	US	Goods Trade Balance		-61.5B	-61.9B
1:30pm	US	Prelim Wholesale Inventories m/m		0.1%	-0.4%
4:00pm	US	Crude Oil Inventories			2.3M

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