Baseline View – Precious Metals:
Headwinds for the precious metal group seem to be easing marginally, as the markets are positioning for a pivot in Fed’s aggressive tightening cycle from 2023. Markets will be seeking clues to reinforce recent speculations of a downshift in Fed rate hikes at the FOMC meeting on Wednesday, if this is the case, we could see precious metal prices rebound.
Baseline View – Industrial Metals:
Fears of weakening global economic growth have continued to weigh on industrial metals. However, pressure from major players in the base metal markets for the LME to ban Russian metals from being traded on the exchange could create a supply issue within the base metals market. Tight supplies will keep prices supported and thus we have metals trading in their well-worn ranges.
All eyes are on the Fed meeting this week, currently, there are some expectations for the Fed to ease the pace of its interest rate hikes as US policy markets are starting to become more concerned that extremely high interest rates will push the US into a recession. Last week saw gold hovering around a two-week peak of $1674.76/oz that was reached on Wednesday.
It is becoming clear that the high inflation and interest rate hikes are weighing on economic performance, with more and more signs that the US economy is on a path to recession. The pace at which the Fed has been hiking is unsustainable and political pressure is now also mounting for it to turn more moderate in how it manages monetary policy. 2023 may be a lousy growth year, but it will also be when central banks turn more accommodative. With such aggressive tightening priced into the Fed, the USD has the most to lose, and the current market reaction to calls for a pivot is not surprising.
Our view: Gold will remain at the mercy of the dollar for now. The first major support level comes in at $1620/oz. To the topside $1700/oz is the first major resistance/congestion area. Looking back at the yellow metals performance in October a high was reached at the start of the month of $1729/oz which we could see come into play if the USD weakens.
Palladium has outperformed gold and silver, as well as sister metal platinum, so far this year the market with the metal’s fortunes changing dramatically as events in Ukraine escalated. Around 45% of the global palladium reserves are in Russia, therefore ongoing supply issues would suggest that the precious metal will continue to be supported. Another factor that will likely also continue to support palladium is increased demand for electric vehicles as the globe starts to become more conscious of emissions.
Our view: The ultimate floor for Palladium is at the year to date low seen in June of $1793.00/oz. Granted the metal has trended low of the October period but we do not see the metal piercing this support level.
The global copper market is expected to see a 155000 tonnes surplus in 2023, however in 2022 the copper market is expected to remain a deficit of about 250000 tonnes. The current deficit will keep the price of copper supported as we trade out the last quarter of 2022
Equally, the latest data from the LME shows that on-warrant stocks for copper have been declining since the start of October, hitting the lowest level since April 2021. Since the start of October total LME stocks have decreased by 5950 tonnes. Tight supplies are a major factor that will be capping a lot of the potential losses in copper prices due to slowing demand from China as further Covid-19 restrictions have been implemented once again.
Our view: 3m LME copper has been hovering between $7419-$7741/ tonne, trending signals are expected to rather mixed until copper gets out of this range. Pulling back the lens the 3m LME contract has tested the $7000.00/tonne level previously and failed to break below suggesting that this is the line in the sand to the downside. A break above $7741/tonne could signal the extension towards $8062/ tonne.
Weakness in the Chinese property market remains a headwind for steel and iron ore, and weakness in steel demand is also emerging outside of China as new housing construction continues to fall. Baoshan Iron & Steel Co., the listed unit of China’s top mill, said steel demand will continue to be battered in the near term by the collapse in the property market, after it reported that third quarter net income plunged 74% as the slowing economy dragged on commodities consumption. Chinas real estate sector accounts for over 40% of the country’s steel needs, and it is unlikely to reverse its downward trend by the end of the year.
The latest data from the World Steel Association (WSA) shows that global steel output rose 3.7% YoY to 151.7mt in September. The majority of the increase came from Asia and the Middle East. Meanwhile, cumulative output over the first nine months of the year fell 4.3% YoY to 1,405mt. Chinese steel production gained 17.6% YoY and 3.7% MoM to total 87mt in September. Year-to-date Chinese steel output is down 3.4% YoY to total 781mt.
Our view: Dalian Iron ore is set for the sharpest monthly drop since February 2020 as China’s factory output has fallen adding to the gloomy outlook for the worlds biggest steel producer. With Covid-19 starting to hear its head again in China, we could see China’s economic dynamism take a hit which will add additional pressures. Dalian Iron is currently trading around CNY613/mt, a major support level for the metal.
Currently, there are no sanctions on Russian aluminium, although a few European buyers are hesitant at purchasing the metal. However, if the LME bans Russian metals and European smelters continue to shut down due to the intensifying energy crisis there is a very high probability that aluminium prices could soar.
Our view: LME aluminium stocks are down another 1200 tonnes in October however currently the market remains in surplus. If Russian metals get banned from being traded on the exchange, we could however see supplies become tighter which would see 3m LME aluminium break the support level at $2150/ tonne.