Market and product

The base metals, after closing down 1.4 percent on average yesterday are down again this morning by an average of one percent led by a 1.7 percent drop in zinc to $1,559.50, while copper is down 1.3 percent at $4,643, having been as low at $4,590. The long term trend line at $4,371, linking the lows in 2002 and the 2008, is now not looking too far away. What is particularly noteworthy today is the large volume in copper where 10,070 lots have traded.

Precious metals were mixed yesterday, gold and silver closed little changed having earlier spiked higher, but the PGMs closed strongly, with average gains of 1.8 percent. This morning prices are generally weaker with gold off 0.4 percent at $1,078.80, silver and platinum are little changed and palladium is off 2.3 percent at $536.60.

In Shanghai, the base metals are down an average of 2.5 percent, led by a 3.5 percent drop in copper to Rmb 34,970, with zinc down three percent and aluminium off the least with a one percent fall. Spot copper in Changjiang is down 2.7 percent at Rmb 34,950-35,450, the backwardation has moved out to an equivalent of $75 per tonne and the LME/Shanghai copper arb ratio is slightly open with the ratio at 7.56.

Equities are managing to shrug off the weakness in commodities, the Euro Stoxx 50 closed up 0.7 percent and the Dow closed up 1.4 percent yesterday and Asia is generally upbeat today with the Nikkei and Hang Seng up 1.2 percent, the ASX 200 up 2.3 percent, the Kospi up 1.1 percent and China’s CSI 300 off 0.2 percent.

Currencies – the dollar continues to climb with the dollar index at 99.60 and closing in on the highs seen in March and April at 100.40 and 99.99, respectively. The euro is weak at 1.0650, sterling is looking weaker at 1.5173, the yen is weak at 123.27 and the aussie is flat at 0.7085. Emerging market currencies are showing some slight weakness again, but other than the rand, they are not near the lows seen in September.

The economic calendar is busy, with Italy’s trade balance, a host of UK price data, German and EU ZEW economic sentiment, US CPI, industrial production and capacity utilisation, housing data and TIC long term purchases, see table below.

The acceleration on the downside suggests deleveraging as longs liquidate. Copper, aluminium, lead have all set fresh lows this morning, while zinc and nickel are close to doing so. Continuing concerns about slow growth in China and emerging markets and the strong dollar continue to weigh on prices and sentiment. The metals are looking oversold, but until something triggers short-covering/profit-taking by shorts, or turns sentiment round, prices can become more oversold. The fact equiies are not weakening also suggests this is a commodity problem for now.

Precious metals remain weak, they are finding some support around recent lows, but are vulnerable, especially with the dollar as strong as it is. Whether the sell-off in commodities and the impact it is having on emerging markets is enough to make the market think the Fed may delay rate rises, remains to be seen. For now it looks as the focus remains on a December rise.