MORNING VIEW: Metals prices up again after China's efforts ease fears

A broad base of markets are rebounding after China's move to boost liquidity and stabilize the market convinced many investors that the measures being taken will help cushion the economic impact of the Wuhan coronavirus (2019-nCoV).

Given that it is still early days in terms of discerning the medium-term impact of the Wuhan coronavirus will have on the China and, indeed, the global economy, the risks remain large and trading is likely to remain choppy.

Most Asian equity indices are rebounding, China's CSI 300 Index is up 0.69%.Gold prices are consolidating after Tuesday's $25 per oz drop.US 10-year government bond yields are firmer too. Base metals
Three-month base metals prices on the London Metal Exchange were once again up across the board during early trading on Wednesday February 5, led by a 1.6% gain in nickel to $13,155 per tonne. Lead and tin are little changed, aluminium is up by 0.4%; while copper and zinc are up by 0.9% and 1% at $5,687.50 per tonne and $2,205 per tonne, respectively. 

Trading volumes have been above average, with 10,760 lots traded as of 5.45am London time, but this is below the average of 17,893 lots that had traded by a similar time on Monday and Tuesday.

In China, the most-traded base metals contracts on the Shanghai Futures Exchange were, for the most part, firmer this morning - the exception being March lead, which was down by 0.4%. The rest were up by an average of 0.6%, led by a 1.7% gain in April nickel.

March copper was up by 0.9% and was recently quoted at 45,630 yuan ($6,513) per tonne. The spot copper price in Changjiang was up by 0.6% at 45,080-45,380 yuan per tonne and the LME/Shanghai copper arbitrage ratio was at 8.01 - compared with 7.96 at a similar time on Tuesday and around 7.88 before the Lunar New Year holiday. This suggests that LME copper prices are still weaker relative to SHFE prices than they were before the Wuhan coronavirus started to affect the base metals complex.

Precious metals
Spot gold prices are firmer this morning - up by 0.4% at $1,559.50 per oz - with the rest of the complex stronger too: silver ($17.70 per oz); platinum at $964.50 per oz; and palladium at $2,456.50 per oz). The rebound in gold does suggest that while investors did not want to chase gold prices higher as prices approached $1,600 per oz, they are prepared to buy into dips as they insure against further negative fallout from the virus. 

Wider markets
The yield on benchmark United States 10-year treasuries was recently quoted at 1.58%, compared with 1.55% at a similar time on Tuesday; and the German 10-year bund yield was firmer too - recently quoted at -0.4%, compared with -0.45% at a similar time yesterday. This is another sign of risk-on returning.

Asian equities were firmer across the board this morning: the Nikkei (+1.02%), the Kospi (+0.36%), China's CSI 300 (+0.69%), the ASX 200 (+0.39%) and the Hang Seng (+0.08%).

This follows a stronger performance in Western markets on Tuesday, where in the United States, the Dow Jones Industrial Average closed up by 1.44% at 28,807.63; in Europe, the Euro Stoxx50 closed up by 1.94% at 3,732.28.

Currencies
The dollar index (98) continues to work its way higher - it started to climb on Monday after some strong US economic data and after January 31's downward spike.

The rebound in the dollar and reduced concerns about the economic impact of the Wuhan coronavirus have weighed on the yen (109.40) due to its haven attributes, while sterling (1.3013) and the euro (1.1036) have consolidated. The Australian dollar (0.6739) is firmer, no doubt helped by the rebound in commodity prices and sentiment.

The Chinese yuan (6.9984) is consolidating below Monday's weak point of 7.0246, having traded at around 6.8450 on January 17.

Key data
Economic data out already today shows China's Caixin services purchasing managers index (PMI), dipped to 51.8 in January, from 52.5 in December. Later, there will be services PMI data for Europe and the US. Given the risk-on mood in the markets, good PMI data may add further fuel to the rally, even with the uncertainty over the impact of the coronavirus.

In addition, there is retail sales data out for Europe today, along with other US data - including ADP non-farm employment changes, data on the trade balance and crude oil inventories.

In addition, European Central Bank president Christine Legarde and US Federal Open Market Committee member Lael Brainard are speaking.

Today's key themes and views
While the markets struggle to price the impact of the Wuhan coronavirus on the Chinese and global economies, prices are expected to remain volatile. Regardless of how the virus pans out in the end, there is no doubt that there will be a significant economic impact due to the slow and delayed return to work after the Lunar New Year holiday because that will affect China's domestic demand, and it remains to be seen how imports and exports will be affected. 

Uncertainty will dominate until more is known about when the virus will be brought under control, how much contagion it has caused globally and what the death and recovery rates are. 

Gold is in an interesting space, in that it did not climb to new highs when other markets were selling off aggressively last week, and it has now pulled back as concerns about the virus appear to be easing. For now, we think gold will remain buoyant as there is still considerable risk that the coronavirus could hit the global economy significantly - either because the virus spreads aggressively outside of China, or if supply chains from China are hit. There is also the risk that equity markets could be due for a correction.

China's gold holdings to central bank reserves still low

China has broad effect on gold market

Gold stocks mixed after previous week's huge gains

Large TSXV gold multiple driven up by high Artemis weighting

Monetary-driven precious metals outperform major base metals