MORNING VIEW: Base metals’ recent corrections once again run into dip-buying

Base metals prices on the London Metal Exchange and Shanghai Futures Exchange were mainly positive on the morning of Tuesday May 25, with only SHFE lead showing significant weakness.

Broader markets seem to have become more risk on again after US central bankers stuck to their dovish guidance.

  • Asia-Pacific equities were firmer this morning, especially in China where government action has calmed inflation fears
  • US treasury yields slip lower

Base metals
LME three-month base metals prices were mainly stronger this morning, with the exception of nickel, which was down 0.1% at $17,115 per tonne. The rest of the base metals complex was up by an average of 0.3%, led by a 0.8% rise in copper to $10,060 per tonne. The rest were up between 0.1% and 0.3%.

While volume was higher on Monday morning into the price sell-off (13,606 lots), volumes have been below average into this morning’s rebound with 5,231 lots traded as at 6am London time.

The most-active SHFE base metals contracts were mixed, but the gains outweighed the losses. The main exception was July lead that was down by 1.2% and the July contracts for zinc and aluminium were little changed and unchanged respectively. The June contracts for tin, nickel and copper were up by 0.9%, 1.2% and 1.6% respectively, with copper at 72,880 yuan ($11,337) per tonne.

Precious metals
Precious metals were mixed on Tuesday; spot palladium is rebounding after recent weakness, it was up by 0.8% at $2,752.70 per oz, platinum is off by 0.1% at $1,175.50 per oz and silver was down by 0.4% at $27.60 per oz. While the platinum group metals have been weakening of late, silver and gold have held up better, with gold down by 0.2% this morning at $1,876.72 per oz – the recent high was at $1,889.80 per oz on May 19.

Wider markets
The yield on US 10-year treasuries has slipped again and was recently quoted at 1.6%, down from 1.62% at a similar time on Monday.

Asia-Pacific equities were firmer across the board on Tuesday: the ASX 200 (+0.82%), the Nikkei (+0.55%), the CSI 300 (+2.58%), the Hang Seng (+1.39%) and the Kospi (+0.79%).

Currencies
The US Dollar Index extended lower last Friday to set a multi-month low of 89.65 and is currently consolidating in low ground at around 89.79 this morning. The weaker dollar, no doubt helping to underpin the metals.

With the dollar consolidating in low ground, most of the other major currencies were consolidating in high ground, but were little changed from yesterday: the euro (1.2220), sterling (1.4176), the Australian dollar (0.7752) and the yen (108.76).

Key data
Tuesday economic agenda is busy with data and central bank speakers. Data already out showed the Bank of Japan’s core consumer price index fall by 0.1% in April, this after being flat in March. German final gross domestic product fell 1.8% in the first quarter, the preliminary reading had shown a 1.7% fall, after a 0.3% rise in the fourth quarter last year.

Key data out later includes German Ifo business climate, United Kingdom realized sales data from the Confederation of British Industry, with US data on house prices, consumer confidence, new home sales and the Richmond manufacturing index.

Central bankers scheduled to speak today include Federal Open Market Committee (FOMC) members Charles Evans and Randal Quarles and Bank of England Monetary Policy Committee member Silvana Tenreyro.

Today’s key themes and views
The corrections in the base metals from the recent highs, those seen in May, have averaged 7.7%, with aluminium (11.5%) showing the biggest pullback and tin (4.9%) showing the smallest, with copper correcting 8.9%. While today is generally seeing some lift, it may be too early to say the correction is over, even though it is tempting to.

If the pullback is over, then once again it will tell us underlying sentiment is robust. The metals have had a very strong run over the past year so a deeper pullback would not be surprising, hence we would remain cautious for a while longer. We remain long-term bullish though.

Gold prices were consolidating recent gains this morning, this despite the dollar weakness and lower treasury yields, which suggests it is taking a backseat while risk-on flows back into other asset classes. While we think the backdrop for gold is supportive, having run up toward $1,890 per oz, from March’s low around $1,677 per oz, a 12.7% climb, there may be room for some profit-taking and consolidation, especially if risk-on gathers pace.

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