denisovail1986: METALS MORNING VIEW 26/04: Metals prices under pressure from stronger dollar, 3% yields

Base metals prices on the London Metal Exchange were weaker across the board by an average of 0.6% this morning, Thursday April 26.

Aluminium, nickel and zinc led the decline with losses ranged between 0.7% and 1%, while the rest were all down by 0.3%, with the three-month copper price at $6,955 per tonne.

This follows a mixed performance on Wednesday when consolidation set in following recent weeks of volatility that has revolved around the United States’ spat with Russia over sanctions.

Volume has been exceptionally low at 1,609 lots traded as of 05.56 am London time.

Precious metals prices were firmer this morning, with gains ranged between 0.1% for gold ($1,323.55 per oz) and 0.4% for platinum ($11.80 per oz). This follows a day when most prices were weaker on Wednesday, with the complex closing down with average losses of 1%.

On the Shanghai Futures Exchange this morning, metals prices were for the most part weaker – the exception is tin where prices were up by 0.2%. The rest of the base metals were down by an average of 0.8%, although that was skewed by a 2.7% fall in zinc prices. Copper prices were off by 0.2% at 51,640 yuan ($8,170) per tonne.

Spot copper prices in Changjiang are little changed at 51,690-51,890 yuan per tonne and the LME/Shanghai copper arbitrage ratio is at 7.42.

In wider markets, spot Brent crude oil prices remain strong, with prices up by 0.54% at $74.44 per barrel and the yield on US 10-year treasuries is holding above 3% at 3.03%, with the German 10-year bund yield at 0.63%.

Equity markets in Asia were mixed with the Nikkei (+0.46%) and Kospi (1.13%) firmer, while the rest were weaker: ASX 200 (-0.26%), Hang Seng (-0.7%) and CSI 300 (-1.41%). This follows a mixed performance in western markets, where in the US the Dow Jones closed up by 0.25% at 24,083.83, and in Europe where the Euro Stoxx 50 closed down by 0.71% at 3,485.83. We wait to see if the above 3% US treasury yields shake market confidence.

The dollar has been lifted by the stronger bond yields with the dollar index at 91.16, it having broken above the previous peak at 90.94 from March 1. The stronger dollar combined with softer economic growth numbers are likely to remain headwinds for metals prices.

Dollar strength is undermining the earlier strength in other major currencies that are looking weaker: euro (1.2174), yen (109.33), sterling (1.3942) and the Australian dollar (0.7574). The yuan is also weaker at 6.3255 and the tide has turned across the emerging market currencies we follow, which are all showing weaker trends now. This weakness may be an alarm bell we should be listening to.

Data out today includes Germany’s GfK consumer climate, Spanish unemployment, UK high street lending and CBI realized sales and the European Central Bank (ECB) rate decision and press conference. US data includes durable goods orders, initial jobless claims, goods trade balance, wholesale inventories and natural gas storage. With the European Union showing signs of slower growth, the market is likely to listen carefully to what ECB President Mario Draghi has to say.

Ignoring the sanction-induced volatility for now, it does look as though the base metals prices are drifting lower while traders adjust to the strong gains seen in 2016 and 2017. With economic data pointing to softer growth consumers probably feel in no need to be too active, while lack of upside price progress is likely to be leading to stale long liquidation. In addition, those metals that saw prices ramp higher in recent weeks have been met by forward selling judging by the forward price spreads. The 3/27-month spread on LME aluminium averaged $64 per tonne contango in the first quarter, a week ago it had moved out to $135 per tonne backwardation, although it has since fallen to $18 backwardation.

There are now likely to be more cross currents for the markets to come to terms with. Reduced trade tensions could boost confidence in global growth again, but countering that higher bond yields could raise concerns of strong headwinds for global growth as debt servicing becomes more expensive.

Gold and the other precious metals prices are correcting and we put that down to the stronger dollar, with palladium reacting to developments over the Russian sanctions. Silver seems to be continuing to follow gold’s lead, while platinum prices are once again looking the weakest. For now we expect the stronger dollar to remain a headwind, but we expect support levels to hold.

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