METALS MORNING VIEW – Metals under pressure amid hawkish Fed stance

Date 7/31/2015 9:08:54 AM

Base metals edged down yesterday after pushing noticeably higher on Tuesday, reflecting a stronger US dollar, which exerted downward pressure on the complex as well as a cautious investor sentiment ahead of the release of the July FOMC statement, which proved to be a bit less accommodative than investors had anticipated. Except for copper, which was the only base metal posting a gain, albeit modest (+0.3 percent), the rest of the complex finished lower, with zinc, down 1.2 percent, followed by lead and tin, down 0.8 percent and 0.6 percent, then nickel, down 0.4 percent, and aluminium, off 0.3 percent.


In contrast, precious metals were firmer, on net, posting an average gain of 0.5 percent. Taking a closer look, silver performed the most (+1.0 percent), partly reflecting short-covering due to its extreme short speculative positioning; followed by platinum (+0.5 percent), then palladium (+0.3 percent), while gold performed the worst, up only 0.2 percent. The positive market action, albeit tepid, was likely the result of a pick-up in long speculative positions in anticipation that the Fed would not likely make significant changes in its July monetary policy statement given insufficient information received since the prior FOMC meeting, in June.


This morning, base metals are broadly unchanged amid thin volumes, with lead and nickel, up 0.2 percent each, followed by zinc, up 0.1 percent. On the other hand, aluminium is down 0.2 percent, copper is off 0.1 percent, while lead remains flat. The precious metals complex is trading slightly lower, with gold and silver down 0.3 percent each, while platinum is up 0.4 percent, and palladium is unchanged.


In Shanghai, the July base metals contracts are modestly weaker, with zinc and tin leading the declines (-0.7 percent each), followed by nickel (-0.6 percent), aluminium (-0.5 percent), and copper (-0.2 percent). Lead is the only metal posting a gain this morning, albeit modest at 0.6 percent. Meanwhile, spot copper in Changjiang is down 0.8 percent at Rmb 39,300-39,550, while the backwardation with the futures is at $99.8 per tonne and the LME/Shanghai copper arb ratio is slightly up at 1 to 7.76, suggesting that the arb window is open to most traders. In the precious metals complex, silver continues to outperform gold, with the former up 0.4 percent and the latter down 0.5 percent.


Bonds – US government bonds sold off on Wednesday, pushing Treasury yields higher amid a risk-on environment after the central bank of China (PBOC) took a number of measures in a bid to restore stability in the Chinese equity market. Although Treasury yields pushed lower following the release of the FOMC statement (which could suggest a more dovish than anticipated statement), this counterintuitive move was eventually reversed, as evidenced by the US 10-year, which closed up 2.52 basis points (or 1.12 percent) at 2.2571 percent, and which continues to push higher this morning (+2.71 basis points or 1.19 percent), currently trading at 2.3130 percent. In fact, investors likely interpreted the latest US monetary policy statement as slightly more hawkish than expected in so far as the Fed upgraded its assessment of the US economic outlook, particularly with respect to labor market conditions. Specifically, the FOMC indicated that “the labor market continued to improve, with solid job gains and declining unemployment”, which could suggest that the Fed remains confident that economic conditions may warrant a less accommodative monetary policy as soon as September. Against this backdrop, the US 10-yiear finished the day up 2.52 basis points (or 1.12 percent) at 2.2571 percent, and continues to push higher this morning (+2.71 basis points or 1.19 percent), currently trading at 2.3130 percent. Meanwhile, European yields also moved sharply higher, with the Germany 10-year yield up 2.8 basis points (or 4.06 percent) at 0.717 percent, the France 10-year yield up 3.4 basis points (or 3.48 percent) at 1.010 percent, and the Spain 10-year yield up 4.6 basis points (or 2.41 percent) at 1.957 percent.


Stocks – Broad equities moved up yesterday, for the second straight day, partly reflecting an improved sentiment after the central bank of China (PBOC) managed to restore stability in Chinese equities, while US equities accelerated their gains after the release of the US monetary policy statement, as although the FOMC’s stance was a little more hawkish than expected, the Fed did not provide specific details regarding the timing of the initial rate increase, which likely provided some relief in the near term to stock investors. As such, US equities posted strong gains, with the S&P closing up 0.73 percent at 2,109 and the Dow Jones ending up 0.69 percent at 17,751. European equities also trended higher, partly boosted by positive earnings results from a number of companies, such as PSA Peugeot Citroën, with the Euro Stoxx 50 ending up 0.60 percent at 3,576.  In Asia this morning, equities are mixed. Although the Nikkei 225 is up almost 1 percent, partly reflecting a weaker yen after the release of the FOMC statement, the Hang Seng is down 0.07 percent, the CSI 300 is off 0.19 percent, while the Kospi is pushing lower (-0.85 percent).


Currencies – The foreign exchange value of the dollar continued to increase against the currencies of major US trading partners yesterday, as the return to a risk-on environment, in which riskier assets such as equities tend to perform well, resulted in a pick-up in euro and yen carry trade positions, pushing these so called key funding currencies lower; and therefore strengthening the greenback. The appreciation of the dollar was underpinned by the release of the FOMC statement as the Fed’s more hawkish stance likely prompted investors to continue to see the September FOMC meeting as the most likely time for the start of monetary policy normalisation, although the statement did not provide specific information on the future path of the federal funds rate (FFR). The dollar appreciated against the yen, the euro, the sterling, the Canadian dollar, the Aussie, and the yuan, but it was down against a number of emerging market (EM) currencies, including the Russian rubble, the Mexican peso, and the Brazilian real. On net, the US dollar index (DXY) closed up 0.40 percent at 97.158, but it is still down from 97.2440 at the start of the week.


The economic agenda is quite busy today. Economic data published earlier indicated that Japan’s prelim industrial production increased 0.8 percent month-on-month in June, above market expectations of 0.4 percent, and up from an upwardly revised -2.1-percent growth in May. Economic data published later today will include German prelim CPI for July, German unemployment for June, Spanish flash CPI and GDP for July, US goods trade balance for June, US unemployment claims for the week ending July 24, and the Q2 US GDP report, including advance GDP and advance GDP price index.




Although the release of the July FOMC statement resulted in a strong appreciation of the US dollar, the base metals complex held relatively well. We continue to expect base metals to strengthen further after strong losses earlier in July on the back of short-covering rather than a sustainable shift in sentiment reflecting a reassessment of the longer-term forward fundamentals. That said, the upside potential driven by short-covering should be restrained by a continuing appreciation of the foreign exchange value of the dollar.


In line with our expectations, the market action within the precious metals complex has been fairly positive despite the release of the less accommodative than anticipated US monetary policy statement, suggesting that the extreme short speculative positioning before the FOMC meeting elicited some short-covering activity once the FOMC statement was released. Although we acknowledge that further short-covering could continue to drive prices higher in the near term, the risks to prices are titled to the downside in the near term in so far as we believe that the Fed is progressively moving toward a hawkish stance, which will likely translate into an initial increase in the FFR at the September 2015 FOMC meeting.


BST       05:32     +/-   +/- %     Lots

Cu  5322      -4.5 -0.1%     1156

Al    1656      -3.5 -0.2%     337

Ni    11260    20   0.2%      627

Zn   1964.5   1.5  0.1%      212

Pb   1721      0.5  0.0%      85

Sn   16200    30   0.2%      19

Steel     300 0     0.0%      Total

      Average (BM ex-Steel)      0.0%             2,436

Gold       1093.1   -3.7 -0.3%    

Silver     14.76     -0.05      -0.3%    

Platinum       988.4     4.4  0.4%     

Palladium     620.9     -0.1 0.0%     

      Average PM       -0.1%    



SHFE Prices 5:32 BST          Change % Change

Cu  38680    -90  -0.2%

AL 12300    -60  -0.5%

Zn   14975    -105       -0.7%

Pb   13160    80   0.6%

Ni    83420    -500       -0.6%

Sn   110740  -800       -0.7%

Average change (base metals)                 -0.4%

Rebar    2092      -6    -0.3%

Au   220.75   -1.05      -0.5%

Ag   3247      14   0.4%



Economic Agenda

BST       Country Data      ACTUAL       Expected      Previous

00:50am       Japan    Prelim Industrial Production m/m   0.8%    0.4%      -2.1%

-      EU  German Prelim CPI m/m       0.2%      -0.1%

8:00am  EU  Spanish Flash CPI y/y            0.1%      0.1%

8:00am  EU  Spanish Flash GDP q/q         1.1%      0.9%

8:55am  EU  German Unemployment Change         -5K -1K

1:30pm  US  Advance GDP q/q           2.6%      -0.2%

1:30pm  US  Goods Trade Balance            -      -

1:30pm  US  Unemployment Claims          268K      255K

1:30pm  US  Advance GDP Price Index q/q      1.5%      0.0%


Edited by SHMET