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Metals show signs of recovering from knee-jerk sell-off

Metals show signs of recovering from knee-jerk sell-off

LONDON: The base metals recovered off their earlier lows yesterday with the complex closing up 0.3 percent on average with zinc and lead rising around 1.7 percent and copper closing up 0.7 percent at $5,185. As the market came more to terms with China’s currency moves it looks as though bargain hunters stepped back into the market. Rebounds have tended to be fragile so we wait to see if anything has changed.

The precious metals put in a strong performance with average gains of 2.1 percent yesterday, led by a 3.8 percent rise in palladium, with gold up 1.4 percent to $1,124.20.

So far this morning the base metals have been consolidating with average highs of 0.6 percent, average lows of 1.1 percent and they are starting in Europe mixed with copper off 0.3 percent at $5,168.50, zinc off 0.6 percent at $1,825, while lead is up 0.2 percent and nickel is up 0.3 percent. Volume is above normal at 6,393 lots, but down on Tuesday’s and Wednesday’s volumes for this time of day, which averaged around 19,000 lots.

Precious metals are mixed with gold off 0.2 percent at $1,122.10, silver is off 0.8 percent at $15.42, while the PGMs are little changed.

In Shanghai, the base metals are up 0.6 percent with zinc up 1.5 percent, copper is up 0.9 percent at Rmb 39,270 and lead is up 0.6 percent. Spot copper in Changjiang is also up 0.9 percent at Rmb 39,400-39,650, the backwardation with the October futures is at an equivalent of $58/tonne, while the LME Shanghai copper arb is open again despite the weaker currency with the arb ratio at 7.68.

Precious metals in Shanghai are stronger with gold up 0.8 percent and silver even firmer with a 1.7 percent gain. Steel rebar is also up 1.1 percent, while iron ore has recovered to around $56.30.

Equities remained weak in Europe yesterday with the Euro Stoxx 50 off 3.4 percent, while the Dow was down 1.6 percent at one stage but closed unchanged. This morning, Asia is generally firmer too with the Nikkei up one percent, the Hang Seng is up 0.4 percent, the Kospi is up 0.4 percent, while the CSI 300 is off 0.3 percent. So for now the jitters over China seem to be subsiding.

The dollar index has started to weaken, which suggests the safe-haven buying has stopped and the market is taking on board that the weaker yuan, which might export deflation, might keep the Fed on hold in September. The dollar index is last at 96.40. The euro is strong at 1.1144, as is sterling at 1.5625, the aussie is rebounding at 0.7382, as is the yen at 124.45, the rouble remains weak at 64.22 and the yuan is correcting, last at 6.4523 after a low of 6.5943. The Peoples Bank of China has held a press conference and the market seems to be taking some comfort from that and the fact the yuan is correcting.

The economic agenda is busy with German and French CPI and US data that includes retail sales, initial jobless claims, import prices, business inventories and natural gas storage – see table below for more details.

The base metals look set to continue yesterday’s rebound, Tuesday’s sell-off seems to have been a risk-off, knee-jerk reaction, which was broad based, but confidence seems to be returning and the spike down in prices may well prompt more shorts to take profits now and that could prompt another round of short-covering rally. The weaker dollar is also likely to add support.

Precious metals have rebounded well – recent history is that rebounds fade, but perhaps with the dollar weaker this rebound will carry on for longer. That said, if fears above China’s currency stance are fading then the market may see the Fed as likely to remain focused on September, which in turn could see the dollar turn higher again. That said, it is possible that the rebound in gold is being driven by concerns that China’s move may be the first crack in the dam that leads to a currency war, especially amongst emerging market economies. If investors are of that view then perhaps they are putting a bit more gold into their portfolios again, with gold once again adopting its non-fiat currency role again.