METALS MORNING VIEW – Metals under pressure ahead of key US employment report

Date 8/10/2015 8:44:34 AM

Base metals continued to move lower yesterday, posting an average loss of 0.3 percent, but it will be remarked that they reversed some of their losses during the second half of the day. The ongoing weakness in the base metals complex reflects deflationary pressure stemming from the steep sell-off in energy prices, and a cautious investor sentiment ahead of the release of the US employment report. Zinc was the worst performing base metal, down 1.3 percent, followed by lead (-0.6 percent), aluminium (-0.3 percent), and copper (-0.1 percent). On the other hand, nickel posted a modest gain of 0.2 percent, while tin finished the day unchanged.


In contrast, the precious metals complex held relatively better, partly reflecting the drop in equities in so far as precious metals tend to be negatively correlated with equities. Further, money managers, who had already sold aggressively the complex, were likely not comfortable with taking on additional short positions ahead of key US employment report, which could influence significantly the US dollar and therefore the precious metals markets.


This morning, base metals are slightly weaker amid thin volumes, led by copper, down 0.4 percent, followed by nickel and zinc, down 0.3 percent each. Lead is down 0.2 percent, aluminium is off 0.1 percent, while tin remains unchanged. On the other hand, the precious metals complex is trading higher, with silver and platinum up 0.4 percent each, palladium up 0.3 percent, although gold is off 0.1 percent.


In Shanghai, the July base metals contracts are weaker, with zinc leading the declines (-1.4 percent). Nickel is down 0.9 percent, copper is off 0.8 percent, while aluminium and lead are down 0.7 percent and 0.2 percent, respectively. Tin is the only metal posting a gain this morning, up 0.4 percent. Meanwhile, spot copper in Changjiang is down 0.7 percent at Rmb 38,250-38,400, while the backwardation with the futures is at $84 per tonne and the LME/Shanghai copper arb ratio is slightly up from yesterday at 1 to 7.43, which indicates that the arb window is now open to most traders. In contrast, the precious metals complex is marginally firmer, with gold and silver up 0.3 percent and 0.2 percent, respectively.


Bonds – Government bonds rallied strongly on Thursday, pushing yields lower, as the sell-off in broad equities likely prompted investors to seek safe-haven assets, such as bonds, while the sharp decline in crude oil prices continued to push inflation expectations down, leading investors to increase their exposure to bonds, which tend to perform better in a low inflation environment. As such, the US 10-year yield fell 3 basis points (or 1.51 percent) at 2.24 percent. In the eurozone, the Germany 10-year yield dropped 4 basis points (or 5.97 percent) at 0.71 percent, the France 10-year yield closed down 5 basis points (or 5.07 percent) at 1.01 percent, while the Portugal 10-year yield was down 4 basis points (or 1.72 percent) at 2.46 percent. The relative outperformance of bonds in core countries relative to peripheral countries suggests that investors are still concerned about difficult negotiations between Greece and its creditors for a Greek bailout #3.


Stocks – US stocks sold off quite sharply yesterday as investors likely preferred to adopt a cautious stance by reducing their stock exposure ahead of the US employment report released later today in so far as the Federal Reserve’s decision-making process regarding the normalisation of its monetary policy may largely be influenced by the employment situation in July. Similarly, European stocks ended lower after reaching a two-week high yesterday, partly reflecting weakness in the energy sector amid lower oil prices. The Euro Stoxx 50 closed down 0.23 percent at 3,668.  In Asia this morning, equities are stronger despite the sell-off in US and European equities yesterday. Although the Kospi is down 0.21 percent, the Nikkei 225 is up 0.25 percent after the Bank of Japan (BoJ) decided to maintain its accommodative stance, in line with expectations, the Hang Seng is up almost 1 percent, while the CSI 300 is up 2.22 percent.


Currencies – The US dollar moved slightly down against most currencies on Thursday after reaching a three-week high earlier this week (on an intraday basis). The greenback was down against the euro after retail PMI in the eurozone surged to its highest level since January 2011, and against the sterling after the Bank of England revealed that only one of its nine policy makers voted for a rate increase at the August meeting, which likely pushed market expectations for an initial increase in UK rate to later next year. On the other hand, the dollar was down against the Japanese yen, the Canadian dollar, the Mexican peso, and the Chilean Peso. On net, the US dollar index (DXY) closed down 0.16 percent at 97.8060.


The economic agenda will be dominated by the release of the US July employment report at 1:30pm, UK time. Meanwhile, the Bank of Japan held its monetary policy meeting yesterday and today, and released its latest monetary policy statement, indicating that it will not increase its monetary policy stance, rather, it will continue to increase its monetary base at an annual pace of 80 trillion yen, suggesting that BoJ Governor Kuroda is confident that inflation will gradually move toward 2 percent over the medium term without the need to expand further monetary stimulus. Moreover, macroeconomic data already released today indicated that Germany recorded a surplus of 22.0 billion euros in June, below market expectations of 23.2 billion euros, and down from a 22.8-billion euro surplus last month, while its industrial production declined 1.4 percent in June, far below market expectations of a 0.3 percent, and down from 0.0 percent in May.




Base metals continue to remain vulnerable to further downside, reflecting weak investor sentiment due to global deflationary pressure stemming from broad-based declines across the commodity markets and the recent weakness in Chinese equities, which is likely to have adverse implications for economic growth in Q3. As such, we believe that the complex will likely continue to weaken further until speculators reach an extreme short positioning, which could therefore lead to a short-covering rally, although we hold the view that a sustainable rally would be possible if and only if a shift in sentiment occurs.


As regards the precious metals complex, given that the spec positioning has deteriorated remarkably since June while the market appears to be technically oversold in the near term, it seems to us that shorts are beginning to run out of steam and are currently not inclined to take on additional positions, which increases the likelihood of a short-covering rally, especially in case of weaker-than-anticipated US employment report.


Overnight Performance

BST 06:05 +/- +/- % Lots

Cu 5163.5 -21 -0.4% 1989

Al 1590.5 -1 -0.1% 162

Ni 10810 -35 -0.3% 572

Zn 1864 -5 -0.3% 784

Pb 1702.5 -3 -0.2% 108

Sn 15450 0 0.0% 0

Steel 300 0 0.0% Total

  Average (BM ex-Steel) -0.2% 3,615

Gold 1088.8 -0.7 -0.1%

Silver 14.7 0.06 0.4%

Platinum 952.8 3.8 0.4%

Palladium 598 2 0.3%

  Average PM 0.3%


SHFE Prices 6:18 BST Change % Change

Cu 37730 -290 -0.8%

AL 11985 -80 -0.7%

Zn 14435 -200 -1.4%

Pb 12845 -30 -0.2%

Ni 80280 -740 -0.9%

Sn 107600 460 0.4%

Average change (base metals) -0.6%

Rebar 2054 -27 -1.3%

Au 219.35 0.6 0.3%

Ag 3216 8 0.2%


Economic Agenda

BST Country Data ACTUAL Expected Previous

4:20am Japan Monetary Policy Statement

Tentative Japan BOJ Press Conference

07:00am EU German Industrial Production m/m -1.4% 0.3% 0.0%

07:00am EU German Trade Balance 22.0B 23.2B 22.8B

07:45am EU French Gov Budget Balance -63.9B

07:45am EU French Industrial Production m/m 0.3% 0.4%

07:45am EU French Trade Balance -3.7B -4.0B

01:30pm US Average Hourly Earnings m/m 0.2% 0.0%

01:30pm US Non-Farm Employment Change 220K 223K

01:30pm US Unemployment Rate 5.3% 5.3%


Edited by SHMET