FxWirePro: Is trade-war completely factored-in? Stay long in CME base metals contracts

After the US President Donald Trump caused a stir amongst EU members during his visit to Europe last week when he referred to the Union as a (trade policy) “foe” and even shock up Sterling with his comments on Brexit, he will meet the Russian President Vladimir Putin in Helsinki today. Anyone will be aware by now that the world order has changed fundamentally from what we once knew. What matters for the FX market is whether there is any reason to become more risk averse, be it for reasons of security or trade policy.

While the late Tuesday announcement by the US Treasury that it would move forward with plans to impose 10% tariffs on $200 bn worth of Chinese imports later this summer triggered a sharp sell-off in the markets directly in the firing line: industrial metals fell 3.20% on the week, agricultural commodities are down 2.96%, and CNY lost 1.14% against the dollar. Metals have especially taken a beating in the past month, registering double-digit losses (-13.9%).

We certainly haven’t heard of the last of the trade issues and. indeed, how this progresses and whether it is resolved or escalated could prove a defining issue for the second half of the year. The main question for us at this juncture is whether the sell-off in the metals was triggered by trade escalation or rather a capitulation in confidence in the synchronized global growth and late cycle narrative.

With the first volley of US-Chinese tariffs behind us, we believe the recent sell-off across base metals has been too quick and too deep and is largely not fundamentally justified. Moreover, as we highlighted a couple of weeks ago, China’s shift towards a more easing bias over the last month could translate into a stronger pricing environment for base metals over the coming months as better liquidity filters down to first and end-use industries, particularly if trade tensions were to ease.

Finally, as the Euro EASI moved into positive territory in early July for the first time since February, the dollar rally headwind that has also held back industrial metals over the past month seems to be running out of steam, and our FX strategists have increased longs in Europe via outright long EURUSD while also scaling into USD shorts.

We reckon that there is a prospect clubbing all together, for a 2-3 month long rebound in base metals as some of the major negative catalysts (China credit tightening, trade tensions, USD strength) have the potential to ease over the coming quarter. For now, we have chosen to express this bullish view through longs in aluminium and nickel given their relatively cleaner technical picture as well as a strong underlying demand profile and somewhat insulated nature from macro shocks. A rebound in copper or zinc is foreseen in the near future, extra cautious approach at this juncture is needed given recent technical breaks and is looking for further confirmation that a near-term bottom is in place in those metals before layering in length. Courtesy: JPM

Trade tips:

Activate longs in LME aluminum at current levels for Dec’18 delivery for TP (target price) at $2,430/t with a strict SL (stop loss) at $2,010/t.  .

Also, initiate longs in LME nickel for Dec’18 deliveries at current levels for trade TP at $16,270/t with a SL at $13,440/t.