Tuesday, August 10, 2010

BASE METALS - EUROPEAN MORNING VIEW - Metals prices pull back on Chinese data and nervousness ahead of FOMC meeting


Forex Special

London, 10 August 2010 - Copper and aluminium put in a somewhat disappointing performance on Monday as they gave back earlier gains, while nickel and tin saw hefty gains of 3.7 percent and 3.2 percent respectively. However, the performance of these two metals suggests the combination of short-covering and thin summer trading conditions. With little economic data out yesterday, it looks as though copper, aluminium and gold, took their lead from the dollar that managed to get some lift.

Overnight the metals are down by an average of 1 percent, with copper down 0.7 percent at $7,357, nickel and tin are down 1.6 percent, while the rest of the pack are down between 0.6 and 0.9 percent, see table on right for more details. Volumes have been average with 1,766 lots of copper and 635 lots of aluminium traded. 

In Shanghai the November contracts are down by an average of 0.8 percent, with copper down 1 percent at Rmb 57,510, aluminium is down 0.9 percent at Rmb 15,590 and the zinc down 0.4 percent at Rmb17,515. Spot copper is down 0.6 percent at Rmb 57,500-57,750, which puts the cash prices in a small back, while the LME/Shanghai arb remains closed with imported LME priced at a premium of some Rmb760, equivalent to some $111.

The dollar has rebounded with the dollar index at 81.20 after Friday’s low of 80.17. The euro is at 1.3160, the pound is weaker at 1.5800, the Aussie is last at 0.9118 and the yen is at 85.88. Gold has pulled back to just below the $1,200 level, while oil is weaker at $80.95. So the slightly firmer dollar does seem to have dragged commodities and currencies lower.

Equities have turned weaker overnight, the Dow closed up 0.4 percent, but Asia is lower with the Nikkei down 0.3 percent, the Hang Seng is down 1 percent, China’s CSI is down 1.6 percent, while the MSCI Asia Apex is down 1.2 percent. Asia's weakness seems to be on the back of signs that growth in China has slowed as export growth slowed as did import growth. Copper imports did climb 4.5 percent month-on-month, but were down year-on-year.

The economic agenda is very full today with data out in all regions, see table on the right, however, the market is likely to be kept on tenterhooks right until the end of the day when the FOMC statement is released. The question is whether the Fed will announce, or hint at, the need to do more quantitative easing.

On balance our view is that metal prices have run ahead of the fundamentals and although so far they seem to be holding up well on the charts (and therefore could extend gains), we feel the greater risk lies to the downside. One reason the metals are being underpinned is that bad US data is weakening the dollar and that is countering the negative impact on dollar metal prices.

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