METALS MORNING VIEW 24/09: Metals prices shake off early weakness

Three-month base metals prices on the London Metal Exchange were initially unchanged to weaker on the morning of Monday September 24, with prices down by an average of 0.5%. Trading had been quiet with Chinese and Japanese markets closed for holidays, but prices firmed after European trading picked up.

Nickel led the decline with a 1.4% drop, followed by lead and zinc – which were off either side of 0.5%. The rest of were little changed, with copper at $6,355 per tonne.

Volume across the complex has been low with 3,639 lots traded as at 07.37am London time.

This follows a strong performance last Friday which was largely driven by short-covering. Nickel and copper led the rebounds with gains of 4.9% and 3.6% respectively.

The precious metals were weaker across the board with prices down between 0.3% and 0.6%, with spot gold prices at $1,195.50 per oz. A rebound in the dollar has weakened sentiment.

In wider markets, spot Brent crude oil prices were back above $80 per barrel and were recently quoted at $80.35, driven higher after Saudi Arabia and Russia seem in no hurry to raise output. The yield on US 10-year treasuries has eased and was recently quoted at 3.0677%. The German 10-year bund yield has also eased and was recently quoted at 0.4530%.

Most Asian equity markets are closed on Monday, but the Hang Seng is off by 1.78% and the ASX 200 is down by 0.12%.This follows a strong performance in western markets last Friday; in the United States, the Dow Jones closed up by 0.32% at 26,743.50, with the index earlier in the day setting a fresh record high at 26,769.16, while in Europe the Euro Stoxx 50 was up by 0.81% at 3,430.81.

The dollar index is rebounding from the weakness seen at the end of last week – it was recently quoted at 94.32 after a low of 93.81 last Friday. On the chart, the index has triggered a bearish Head-and-Shoulder Pattern, the rebound is now testing that breakdown level.

With the dollar firmer, most of the other major currencies we follow are consolidating recent gains: the Australian dollar (0.7259), the yen (112.51) and the euro (1.1730), although sterling is weaker at 1.3073.

On the economic agenda there is data on German Ifo business climate, Confederation of British Industry (CBI) industrial order expectations from the United Kingdom and a Bank of England Financial Policy Committee statement. In addition, European Central Bank President Mario Draghi is speaking.

Most of the base metals accelerated higher on Friday and the move seems to have been driven by short-covering, which was something the market was on the lookout for. With the trade tensions continuing, we wait to see if a fully-fledged rebound can get underway ahead of a trade agreement, but the stronger tone may well unnerve more of the shorts which could lead to further short-covering rallies.

Longer term, we do favor the upside from these levels.

Gold prices are struck in a sideways range either side of $1,200 per oz. The more industrial-based precious metals have been able to rally, but they are consolidating gains this morning as is the metals complex as a whole. For now we would watch the dollar, but with a US Federal Open Market Committee statement on Wednesday and high expectations for a rate rise, gold prices may face a headwind until after the rate decision.

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