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January 2022 | Base Metals

Base metals prices mixed, but generally weak as US Fed minutes show hawkish stance

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Base metals prices on the LME were down across the board on the morning of Thursday January 6, while those on the SHFE were mixed, with traders concerned about the more hawkish stance of the US Federal Reserve and the growing impact of the Omicron variant of Covid-19.

* US Federal Open Market Committee (FOMC) minutes reveal more hawkish tone than expected.
* Tighter monetary policy and economic fallout from Omicron variant bode ill for risk-on sentiment.

Base metals
Three-month prices on the London Metal Exchange were down across the board by an average of 0.7%, led by a 1.7% fall in nickel ($20,345 per tonne). The rest were down by between 0.3% - for aluminium, lead and tin - and 0.9% for copper ($9,600 per tonne). Zinc was down by 0.7%. See the table below for more details.

For the most part, prices remain either in high ground or mid ground, with aluminium the one still heading higher.

The most-traded February base metals contracts on the Shanghai Futures Exchange were mixed, with lead, nickel and copper down by between 1% (lead) and 2% (nickel), with copper down by 1% at 69,570 yuan ($10,943) per tonne. The others were up by between 0.1% for tin, 0.3% for zinc and 2.3% for aluminium – so quite a polarized market.

Precious metals
The precious metals were down across the board. This reflects the general risk-off sentiment as well as the higher US treasury yields and stronger dollar. The metals were down by between 0.4% and 0.7%, with spot gold off by 0.7% at $1,802.73 per oz.

Wider markets
The yield on United States 10-year treasuries has climbed further and was recently at 1.72%, up from 1.65% at a similar time on Wednesday. The market is concerned that the higher yields point to an early interest-rate rise, possibly as early as March, and that could create headwinds for high-leveraged companies and for overseas holders of US debt.

Asia-Pacific equities were mainly weaker this morning: the Nikkei (-2.88%), the Kospi (-1.13%), the CSI 300 (-1.02%) and the ASX 200 (-2.74%), while the Hang Seng (+0.19%) bucked the trend.

The US Dollar Index at 96.37 was on the rise again on the back of the hawkish Fed minutes. Resistance levels are now seen lying between 96.70 and 96.94, with support around 95.50.

The other major currencies were mainly weaker this morning: the euro (1.1285), the Australian dollar (0.7158) and sterling (1.3505), but the Japanese yen (115.92) was firmer, suggesting some haven buying.

Key data
Economic data already out Thursday showed China’s Caixin services purchasing managers index (PMI) climbing to 53.1 in December, from 52.1 in November and German factory orders climbing 3.7% in November, from -5.8% in October.

Later there is data on services PMI in the United Kingdom, EU and US, consumer price index (CPI) in Germany and more US data on Challenger job cuts, initial jobless claims, trade balance, factory orders and natural gas storage.

Thursday’s key themes and views
The metals may be weaker this morning given that they reflect the turn down in broader sentiment, but overall they look robust and are either consolidating or trending higher. Although they could be susceptible to a broad market sell-off, on their own they are looking robust and more bullish than bearish.

Also, should Omicron start to weigh on economic data, the Fed could well turn less hawkish between now and March, which seems to be the earliest that the Fed may raise interest rates.

Gold prices picked up into the year-end, and some investors positioned themselves for the holiday period in case geopolitical tensions escalated. The geopolitical issues remain present, and if broader markets are looking toppy, then interest in gold may rise. But for now, the stronger dollar, firmer yields and general risk-off sentiment seem to be a headwind for the metals.