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Stronger factory data out of China supportive of base metals prices

January 5, 2021by Nicholas Kabaso0
  • Stronger factory data out of China has ensured that demand dynamics that are supportive of base metals prices remain intact. Copper prices have continued to march higher towards the $8,000 a tonne this morning, while the appreciative tone on the CNY will also be assisting the cop-per price at the margin. PMI data has been broadly supportive of the global economic recovery theme and that will continue to feature promi-nently as a factor.
  • For similar reasons, base metals prices reflected in nickel, zinc and even aluminium enjoyed solid support. While the broader reflation theme remains intact, even through another UK lockdown and threats of a resurgent virus, base metals will remain supported.
  • Stateside, today, the market’s focus will be on runoff elections for two US Senate seats in Georgia, which will determine which party controls the upper house of Congress in the first two years of the Biden administration. If Democrat candidates win both of today’s closely-contested elections, the party will have control over Congress and the White House. This would open the door for more expansive US fiscal policy in the years ahead, which would support EM currencies at the margin and perhaps provide the ZAR-bulls some support through the months ahead.
  • However, in the very near-term, the potential for a “blue wave” sweep of US politics, raises the risk of more regulation and socialist type poli-cies that need to be priced into markets. Just as markets responded favourably to the expectation that the Senate could hold the Democrat-controlled House of Representatives to account, the opposite is also true. It is therefore possible that Democrat control of the Senate will cause a phase of profit taking in financial markets especially equities that performed so well in Q4 2020.
  • In the way of data, the ISM manufacturing PMI will be released to offer a second reading on the manufacturing sector for the month of De-cember. The outcome is likely to be similar to the Markit PMI release yesterday and will similarly show that the manufacturing sector finished off the year on a much firmer footing. Only time will tell whether those gains will be sustained through the resurgent virus.
  • Shifting to the FX markets, the first trading session of the year saw the Kwacha remain on the defensive, with the USD-ZMW pair extending its advance north of the 21.00 mark according to Reuters data. Meanwhile, the trade weighted USD recovered off yesterday’s lows after the UK announced a countrywide lockdown. Risk aversion levels generally rose and the USD caught a safe-haven bid. That being said it remains on the defensive and the risk that the Senate shifts to become more democrat will keep USD bulls a little wary of any significant positioning, especially in what is ultimately thinned-out holiday trade. For now, the balance of forces remains slightly against the USD.

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Nicholas Kabaso

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