Base metals edged lower on Friday, posting an average loss of 1.1 percent, in part reflecting a renewed appreciation of the US dollar, triggered by a better- than-anticipated April US inflation report and reinforced by a more hawkish-than-expected Fed Chair Yellen’s speech in Providence. Nickel was the worst performing base metal, down 2.1 percent, followed by lead (-1.6 percent), zinc (-1.4 percent), and copper (-1.3 percent). Meanwhile aluminium and tin were broadly unchanged.
Similarly, precious metals were slightly weaker on Friday, in part driven by an appreciating US dollar combined with higher US real interest rates as Fed Chair Yellen reiterated her confidence in the US economic outlook, which would inevitably lead to monetary policy normalisation. Platinum was down 0.8 percent while silver was down 0.4 percent. Meanwhile, gold remained unchanged and palladium posted a small gain of 0.1 percent.
On net, it appears that the precious metals complex held relatively better than the base metals complex as the former benefitted from safe-haven flows stemming from growing fears that the Greek government might default on its June IMF payment amounting to 1.541 billion euros.
This morning, the base metals complex is slightly up, with nickel up 1.8 percent, followed by zinc (+1.1 percent), lead (+0.8 percent) while both copper and aluminium are up 0.5 percent. The precious metals complex is mixed, with gold and silver down by 0.2 and 0.1 percent, respectively, while platinum and palladium are both up 0.3 percent.
In Shanghai, the July base metals contracts are firmer, with nickel performing the best (+1.5 percent), followed by lead (+1.4 percent), zinc (+0.9 percent), copper (+0.6 percent), aluminium (+0.3 percent) and tin (+0.1 percent). Meanwhile, spot copper in Changjiang is up 0.3 percent at Rmb 44,900-45,050, while the contango with the futures is at $16.11 per tonne and the LME/Shanghai copper arb ratio is at 1 to 7.23. In the precious metals complex, gold and silver are slightly firmer, up 0.2 percent and 0.4 percent, respectively.
Equities – Asian shares closed higher on Monday amid low volumes with a number of markets closed for holidays, including the London Stock Exchange (Whit Monday holiday) and the US markets (Memorial Day). In Europe, the Euro Stoxx 50 ended 0.64 percent lower, with the Athens Composite Index down 3.11 percent as Greek interior minister Voustis warned this weekend the Greek government would not be able to reimburse the four instalments for the IMF in June , starting with a payment of 301 million euros on June 5, without a bailout deal with its creditors. In contrast, equities in Asia rose yesterday, with the Nikkei 225 reaching its highest level since 2000 on the back of a depreciating yen and a better-than-expected trade balance, and the Shanghai Composite Index finishing at its highest level since January 2008, triggered by the release by China’s state planning agency of a list of 1,043 projects (amounting to 1.97 trillion yuan or 317.75 billion dollars) soliciting private capital in the form of public-private partnerships (PPP). In Asia this morning, the Nikkei 225 is marginally up 0.05 percent, the Hang Seng and the CSI 300 are firmly up by 1.42 percent and 1.49 percent, respectively, while the Kospi is down 0.15 percent.
Currencies – The US dollar continued to strengthen against most currencies on Monday after a bette- than-expected April inflation report released on Friday. Although the CPI increased 0.1 percent in April, at a slower pace than in March (+0.2 percent), the core CPI (i.e. excluding food and energy) rose 0.3 percent, above market expectations of 0.2 percent, marking the largest increase since 2013. The positive impact of the April inflation report on the US dollar was further reinforced by the Fed Chair Yellen’s speech, in which she reiterated her view that the US economy would likely continue to improve, thereby warranting an initial rise in the federal funds (FFR) rate at “some point this year”.
The economic agenda is quite heavy today.
Economic data already out today indicated that in Japan, the Services Producer Price Index (SPPI) in April rose 0.7 percent from the previous year, in line with market expectations (0.6 percent), slowing down from a revised 3.1 percent year-on-year in March.
Economic indicators released later today will include a host of US data: the Flash Services PMI, the CB consumer confidence index, and the Richmond Manufacturing Index for May, (core) durable goods orders and new home sales for April, and, the House Price Index (HPI) and tyhe S&P/Case-Shiller 20-City index for March.
The base metals complex is slightly up although the strong positive trend appears to have come to an end earlier this month. While weakness could re-emerge today, in part reflecting an appreciating US dollar, we believe that the underlying sentiment has not turned bearish, suggesting that buyers could potentially adopt a “buying on the dips” posture, which could exert upward pressure on base metals.
In contrast, the precious metals complex is looking weaker, most notably for palladium, after having posted strong gains in the first half of May. While we attribute the recent weakness to the strengthening of the US dollar, we are somewhat surprised that gold prices have failed to push higher given the sharp decline in US real interest rates of late (which should have, in theory, pushed gold prices higher).
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