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May 2022 | Base Metals


Base metals mainly up in London, potential rebound under way

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Base metal prices on the London Metal Exchange were mainly firmer on the morning of Tuesday May 17 – the exception being tin. Those on the Shanghai Futures Exchange were more mixed.

• The slide in China’s renminbi yuan has halted for now, as has the dollar’s climb
• China’s industrial production fell by 2.9% in April
• US Empire State manufacturing index double dipped, with -11.6 in May, following 24.6 in April and -11.8 in March

Base metals
Three-month base metal prices on the LME, with the exception of tin, were up by an average of 0.6% on Tuesday morning. Tin was down by 1.3% at $33,750 per tonne. Zinc led on the upside with a 1.4% rise to $3,649.50 per tonne, and copper was up by 0.5% at $9,337 per tonne.

With the metals rebounding, we have to ask the question is this a dead-cat bounce, or has dip buying started to emerge after a more pronounced pullback that has lasted about a month?

The most-traded June contracts on the SHFE were mixed, with aluminium, nickel and tin down by an average of 1.1%, lead little changed, zinc up by 1.4%, and copper up by 0.8% at 71,680 yuan ($10,555) per tonne.

Precious metals
Gold prices have also been rebounding and were recently at $1,827.50 per oz, after Monday’s multi-month low at $1,787.90 per oz. The other precious metals are following gold’s lead.

Wider markets
United States 10-year treasury yields remained elevated on Tuesday morning and were recently at 2.92%, albeit off recent highs of 3.12%

Asia-Pacific equities were stronger on Tuesday: the Nikkei (+0.39%), the Kospi (+0.97%), the CSI 300 (+1.19%), the Hang Seng (+2.51%) and the ASX 200 (+0.3%).

Currencies
The US Dollar Index has been retreating from the previous week’s multi-year high and was recently at 104.03. This came after Friday’s high of 105.02, which was the highest the dollar has been for some 19 years.

The other major currencies were getting some lift from low ground: the euro (1.0450), the Japanese yen (129.26), sterling (1.2351) and the Australian dollar (0.7003). China’s yuan has been consolidating recent weakness this morning at around 6.7652, from around 6.3600 in mid-April

Key data
Key economic data already out on Tuesday includes Japan’s tertiary industrial activity that climbed 1.3% in March, after a 1.3% fall previously, and UK employment data that showed a strong labour market. See the table below for details.

Later, data is due out on EU flash employment change and flash gross domestic product. And US data is being released on retail sales, industrial production, capacity utilization, business inventories and the National Association of Home Builders (NAHB) housing market index.

There are also numerous central bankers scheduled to speak today: UK Monetary Policy Committee member Jon Cunliffe; US Federal Open Market Committee members James Bullard and Loretta Mester; US Federal Reserve chair Jerome Powell; and European Central Bank president Christine Lagarde.

Tuesday’s key themes and views
Considering the economic fallout in China and how that will have affected global manufacturing, given that parts shipments have once again been disrupted, it is not hard to see why metal prices have corrected lower over the past month. And, with some early signs that Shanghai might be easing some of its lockdown measures, it is not surprising that markets are looking a bit brighter. But is it too early? Is this going to turn out to be a dead-cat bounce?

Considering Shanghai’s lockdowns started about six weeks ago, the impact of shipping disruptions on manufacturers around the world may not have been fully felt yet – there could be a long tail to it, and that might keep demand for metals weaker for longer.

That said, the markets are often happy to look ahead, and if China is recovering, then they may well start to anticipate better times down the road. As such, we would run with the rebound but keep an open mind as to how long it may last.

Interestingly, gold prices have mapped the journey that other metals and asset classes have followed, suggesting we have seen broad-based liquidation on the uncertainty that China has caused. Gold looks well placed to rebound, given that the inflation story is still alive.