Metals Face Challenges Amid Changing Macroeconomic Landscape

In recent times, the metals market has encountered a series of challenges, primarily driven by a deteriorating macroeconomic outlook throughout the year. Factors such as the strengthening of the US Dollar since mid-July, a lacklustre physical market, and a noticeable rise in visible inventories, especially in the last two months, have collectively contributed to the metals’ gradual decline. This downward trajectory gained momentum, particularly after the high hopes of Chinese economic recovery held by bullish investors were left unfulfilled. However, one crucial element was missing to trigger this descent, and it came in the form of a hawkish stance from the US Federal Reserve.

Fed’s Surprising Moves

In a surprising turn of events, the US Federal Reserve recently took actions that caught many by surprise. While the market had been estimating a 40% chance of another interest rate hike within the year, the Fed unequivocally signalled its intent to do so. Furthermore, market expectations of a 100 basis points (bps) rate cut in the following year were shattered as the Fed hinted at a more conservative 50 bps cut. These developments were coupled with a substantial increase in US 10-year bond yields, surging by 40 bps within the month to reach levels not witnessed since 2007. 

Some analysts have even started predicting a 5% yield, a significant jump from the current 4.48%. Such a scenario poses a threat to the ongoing economic growth momentum and consequently triggered a sell-off across various financial markets.

The Board Decline

The repercussions of these unforeseen events were felt across the board. US equities tumbled to their lowest point in three months, while the oil market retraced lower by 3% within the last 24 hours

• Copper: A critical base metal, broke below its support level at $8200, reaching its lowest point since June 2023. SHFE Lead, which had been the best-performing base metal over the past three months, witnessed a 3% fall from its recent high, and LME Lead dipped to its lowest level this month.
• Nickel: Plagued by continuously rising LME inventories, it found itself at its lowest point in 14 months.

Aluminium & Zinc Resilience

Interestingly, despite the market turmoil, Aluminium and Zinc showcased resilience. Their LME inventories have been steadily declining, which has contributed to their ability to withstand the sell-off. Aluminium maintained levels above $2200, while Zinc stood strong above $2500.

Copper’s Dilemma

However, it’s a different story for Copper. Nearly everything that could go wrong for Copper Bulls has indeed gone awry. In the past month, the available stocks at LME warehouses reached a two-year high, coinciding with a 4% strengthening of the US Dollar. The latest Chinese data revealed that the country’s refined Copper output hit a record high of 1.12 million tons in August 2023, marking a 22% increase from 2023. 

From a technical standpoint, Copper broke below its support line at $8200 for the first time in 15 months, leading to stop-loss selling and a subsequent drop to $8071. While trade buying managed to recover some of these losses, sellers were still prevalent around the $8200 mark. Technically, Copper appears to be heading towards the range of $6500-7200 in the coming months.

Market Outlook

Considering the continued strength of the US Dollar throughout the year, the metals market faces the challenge of finding reasons to hold its ground. This could potentially be achieved through positive Purchasing Managers’ Index (PMI) data or a pause in inventory inflows into LME warehouses. However, without these factors, the base metals market seems poised to establish new lows for 2023 in the upcoming quarter.

• Copper: Given the deteriorating big picture, Copper seems to be a sell at every rise. The $8000 level serves as the first support, followed by $7500.
• Aluminium: Its resilience is attributed to the absence of inventory inflows. Nonetheless, close attention should be paid to SHFE Aluminium’s weekly report, scheduled for release tomorrow.
• Lead: The prices have their initial support at $2140-50. If the inflow of inventory into LME warehouses, observed throughout the week, recedes, the metal’s Cash-3m spreads may widen once more.
• Nickel: It has found support at $19,200, any potential bounce towards $19,700-19750 is worth considering for selling.
• Tin: The prices appear to be embarking on the next leg of their downward trajectory. A break below $25,000 could accelerate the ongoing sell-off.

OFB’s Insight

The metals market is navigating challenging waters, with the US Dollar’s strength serving as a formidable influence. Investors and market participants will closely monitor data releases and inventory trends as they seek signals for potential market shifts.