SMM Evening Comments (Mar 4): Shanghai base metals pulled back despite Fed surprise rate cut

SHANGHAI, Mar 4 (SMM) – Shanghai base metals cruised mostly lower on Wednesday, erasing gains from earlier this week, as fears over the global outbreak of the COVID-19 epidemic and downbeat Chinese economic data outweighed the Feb’s interest rate cut overnight.

A gauge of China's service sector activity hit a record low in February amid government measures to contain the coronavirus epidemic. The Caixin China services purchasing managers’ index (PMI) fell to 26.5 in February from 51.8 in the previous month. The February reading was the lowest since the survey began in November 2005. A number above 50 indicates an expansion in activity, while a figure below that points to a contraction.

Wall Street tumbled overnight after the Federal Reserve surprised investors with a half percentage-point cut in interest rates aimed at safeguarding the US from the impact of the epidemic.

On the Shanghai Futures Exchange, lead plunged 1.4% to lead the losses across nonferrous metals, zinc dropped 1.2%, copper fell 0.8%, aluminium shed 0.7%, and nickel lost 0.5%, while tin extended gains by 0.6%.

The Fed’s surprise rate cut, however, appeared to give a boost to base metals on the London Metal Exchange, which moved higher across the board.

The SHFE has suspended night trading session until further notice.

Copper: The most-traded SHFE 2004 contract oscillated in a tight range around 45,250 yuan/mt during the day after a lower open. It closed at 45,280 yuan/mt, giving back gains from the previous session. Resistance at the 20-day moving average is stiff. The contract is expected to struggle to remain above 45,000 yuan/mt in the short term.

Aluminium: The buildup of short positions sent the SHFE 2004 contract below the five-day moving average to a low of 13,155 yuan/mt in morning trade, within striking distance of a three-year low plumbed last Friday. The contract later recovered some ground to end at 13,205 yuan/mt, still below the five-day moving average. SMM calculations showed that average costs for primary aluminium production have climbed to 13,400 yuan/mt. Strong support is expected at 13,200 yuan/mt for SHFE aluminium, as its LME counterpart has strengthened on a weaker US dollar after the Fed’s interest rate cuts.  

Zinc: The most-liquid SHFE 2005 contract climbed on short-covering in the final trading hour, recouping some losses from a lower open, and ended at 16,050 yuan/mt. SHFE zinc appears to have found a bottom, and is expected to consolidate at lows in the near term, awaiting a turning point in inventories in China.   

Nickel: The most-traded SHFE 2006 contract slipped to the 102,400 yuan/mt level in early morning trade, before it clawed back some losses and hovered around the daily moving average at 102,800 yuan/mt to end at 102,810 yuan/mt. The contract now resides between the 10- and 20-day moving averages.

Lead: The withdrawal of longs took the most-liquid SHFE 2004 contract to the 14,400 yuan/mt level, before the contract recovered some ground to close at 14,455 yuan/mt. Continued tightness in battery scrap supply slows the recovery of secondary lead supply, and that will offer strong support to SHFE lead, shielding it from a broad decline.

Tin: The most-traded SHFE 2006 contract bucked the downtrend across nonferrous metals and extended its rally. It ended at an intraday high of 136,420 yuan/mt, standing convincingly above the 20-day moving average. Resistance is seen at the 137,500 yuan/mt level.