METALS MORNING VIEW 09/11: Weakness in base metals continues in spite of encouraging Chinese data

This comes despite stronger-than-expected Chinese  inflation data for October, which should have prompted financial investors to rebuild some long positioning across the board as the reflation trade appears to be well alive.

This follows an overall weak session yesterday in which the LMEX weakened 1.7%, dragged down by aluminium (-2.9%), nickel (-2.0%), and copper (-1.7%). With the exception of nickel, the weakness in base metals prices was the result of long liquidation rather than fresh selling, judging by the declines in open interest.

Precious metals are slightly stronger today, with the complex posting an average gain of 0.3% as we type. It seems that safe-haven flows driven by renewed risk aversion are supportive of the complex. This comes after a mixed session yesterday in which silver (-0.7%) and platinum (-0.2%) dropped, while palladium (+1.6%) and gold (+0.1%) moved higher.

On the Shanghai Futures Exchange (SHFE) today, the base metals complex is under marked downward pressure, down an average 1.3%. Aluminium (-3.3%) is again the weakest, while tin (-0.3%) is the most resilient. Spot copper prices in Changjiang are ticking 0.1% higher at 53,450-53,750 yuan per tonne and the LME/Shanghai copper arb ratio stands at 7.85 (compared with 7.84 yesterday).

Equities are mixed this morning. While the Hong Kong Hang Seng Index (+0.69%) and the CSI 300 index (+0.42%) are pushing higher thanks to stronger inflation dynamics, the Nikkei 225 (-0.20%) is under downward pressure after the release of disappointing Japanese macro data showing bank lending at +2.8% year-on-year in October against +3.0% expected, while the KOSPI index (-0.07%) is almost flat. Yesterday, the Dow Jones was little changed (+0.3%), closing at 23,653, while the Eurostoxx 50 closed down 0.10% at 3,655. The fear index (VIX) dropped 1.1% to close at 9.78, indicative of a deep complacency.

The dollar index is slightly down (-0.16%) at 94.71 this morning, having traded sideways in a tight range of 94.50-95.00 since late October. But should investors become more risk averse in the days ahead, some carry trades could be unwound while US bond yields could uphold their downward trajectory, which could pressure the dollar lower.

The economic calendar is relatively quiet today. After the release of encouraging inflation data in China, investors will probably pay close attention to weekly unemployment claims in the USA to better assess the tightness in the labor market. This could have implications on the dollar and global risk appetite, and thus on the metals complex.

For base metals, we expect some buy on the dips after the current wave of profit-taking. But acknowledging that volatility across risk assets is more likely to rise than to fall and that China’s financial conditions are set to become tighter, base metals are vulnerable. The absence of positive reaction across the space in spite of stronger-than-expected inflation data in China confirms the cautious attitude adopted by financial players. Still, we do not see a negative swing in sentiment at this juncture.

For precious metals, we expect further upside in the immediate term, supported by a weaker dollar and lower US real rates. It seems that specs are rebuilding some long positioning across gold and silver after cutting steadily their net long positions in the past seven weeks. That said, we recognize that the fluctuations of the dollar and US real rates will play a key role in the direction of the precious metals complex.
 
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