Metals temporarily supported by weaker dollar

• Base metals enjoyed slight upward pressure on Thursday, led by zinc, amid a steep fall in the dollar and a stronger oil price.

• Precious metals benefited from higher risk-aversion post Fed and BoJ meetings, particularly gold and platinum in light of their safe-haven qualities.

• Stronger risk aversion could prevail in the near-term, we feel, so base metals could continue to underperform precious metals in the near and medium terms.

Base metals witnessed slight buying pressure yesterday, with the complex rising 0.7 percent on average, partly driven by noticeable weakness in the dollar after the BoJ decided to keep its monetary policy accommodation unchanged. This unexpected decision, in addition to a slightly less dovish Fed’s message earlier, resulted in stronger risk-aversion, which in turn boosted safe-haven demand, benefiting to precious metals, which strengthened 2.1 percent on average, led by platinum and gold.

This morning, base metals are rising only slightly amid higher volumes than yesterday. Lead is leading the complex, strengthening 0.9 percent, followed by copper and zinc, increasing 0.8 percent each. Nickel and aluminium are posting marginal gains of 0.1 percent each, while tin remains unchanged. Precious metals continue to enjoy strong gains. But contrary to yesterday, silver and palladium are leading the complex, rising 1.1 percent each. Platinum is rising 0.9 percent, while gold is edging 0.7 percent higher.

In Shanghai, the April base metals contracts are recording decent gains, with the complex up 1.0 percent on average. Zinc is the top performer, appreciating 2.4 percent, followed by copper and tin, rising 1.0 percent each. The rest of the complex is showing smaller gains, with nickel increasing 0.7 percent, lead rising 0.5 percent, and aluminium edging 0.2 percent higher.

Meanwhile, spot copper in Changjiang is up 0.9 percent at 37,300-37,500 yuan, while the contango with the futures is at $50.90 per tonne, and the LME/Shanghai copper arb ratio deteriorates slightly from yesterday, down to 1:7.57.

Bonds – US and European bonds continued to rally on Thursday, pushing interest rates lower. This was largely attributable to tighter global financial conditions stemming from the latest monetary policy decisions of the Fed and the BoJ, which prompted investors to seek safe-haven assets like government bonds. The outperformance of bonds in core European countries like Germany relative to that in peripheral European countries like Greece is not surprising in the current environment.

Stocks – Broad equities faced downward pressure on Thursday. In Europe, the Euro Stoxx 50 fell slightly by 0.16 percent to 3,125, but in the US, equities fell at a stronger pace after the release of a disappointing Q1 GDP (0.5 percent quarter-on-quarter versus 0.7 percent expected and 1.4 percent in Q4 2015).  The S&P dropped 0.92 percent to 2,076 while the Dow Jones decreased 1.17 percent to 17,831. In Asia this morning, equities are weakening amid lower risk-appetite. The Nikkei 225 continues to tumble markedly due to a stronger yen, off 3.61 percent, the Hong Kong Hang Seng Index is falling 1.45 percent, the CSI 300 is slightly down 0.05 percent, while the Kospi is pushing 0.51 percent lower.

FX – The dollar continues to consolidate considerably, with the DXY currently trading at 93.45, marking its lowest since August 2015. The yen is strengthening sharply, with the dollar trading now below 107 against the yen, its lowest since October 2014, because investors continue to digest BoJ under-delivery. The yuan has also appreciated remarkably against the dollar since April 27, with the dollar trading at 6.47 against the CNY, after witnessing some weakness around mid-April. The noticeable depreciation of the dollar is recent days is exerting upward pressure on most commodities, including base and precious metals.

The economic agenda will be fairly busy today. In Europe, data will include in France, Q1 prelim GDP, March consumer spending, and April prelim CPI; in Germany, March retail sales and April prelim CPI; in Spain, Q1 flash GDP; in Italy, March unemployment rate and April prelim CPI; and in EU, April CPI and core CPI estimates as well as March unemployment rate. In the US, data will encompass core PCE price index, personal spending, and personal income for March, Q1 employment cost index, and Chicago PMI as well as revised UoM consumer sentiment and inflation expectations for April.

Any negative surprise in economic data could intensify risk-off sentiment that emerged earlier this week after the slightly less dovish tone adopted the Fed and the BoJ, which could exert downward pressure on base metals due to weaker industrial growth prospects and upward pressure on precious metals driven by stronger safe-haven demand.

Near-term outlook:

Base metals could continue to strengthen on weaker dollar despite the resurgence of a risk-off environment. The resilience of base metals since week-start suggests that sentiment remains positively skewed. The ongoing weakness in the dollar despite a slightly less dovish Fed has made shorts increasingly vulnerable, suggesting that the wave of short-covering is likely to continue in the coming days. But should this risk-unfriendly environment prevail for longer and the consolidation in the dollar end, negative pressure in base metals could reappear later in May.

Precious metals are likely to perform well as long as investors remain risk-unfriendly. The Fed and BoJ meetings could have put an end to the risk-rally that started in February. In such a scenario, financial market volatility could start rising firmly in the weeks ahead, prompting investors to sell risk. This could trigger stronger safe-demand, thereby benefiting to precious metals although gold would probably outperform the complex due to its more tangible safe-haven characteristics while silver could underperform as the market looks deeply overbought in near-term.

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Source: Bullion Desk News