Boletines
MARKET COMMENTARY
Base metals crumbled during February, with broad based selling palpable across the commodity complex. Several reasons can be attributed to this weakness. Primarily, markets seem not to be impressed with the fact that recovery in global economy remains erratic. Post Lunar New Year holiday period in China, the economic activity has not been encouraging. There have been doubts regarding any uptick in domestic demand in the short run. Retail sales in China during the week -long Lunar New Year festival rose at their slowest pace during the past four years. In addition, speculation is rife that local Chinese government entities may impose further restrictions on housing markets. It is widely reported that Chinese government is planning to move ahead
with plans to increase down payments and loan rates for buyers of second homes in cities where prices are rising too quickly. China’s government has also announced plans to impose a 20% income tax on property gains in an effort to curb speculation.
LME Copper prices breached the significant support of US$8,000/ton, primarily weighed by persistent rise in warehouse stocks and slowing Chinese appetite for imports. LME stocks have surged by literally 60% during this year and cancelled warrants have also fallen substantially, which convey signs of easing supply as well as moderating demand. Meanwhile, China’s refined copper imports during February declined to 20 months low amid high domestic inventories. Relevantly, Codelco has reported that it will reduce refined copper shipments to China this year as the nation’s needs have shifted to concentrate imports. China is moving its import needs from refined metal to copper concentrate, as domestic production for the refined metal has surged. On mine supply, there are strong signs of expansion. In this respect, Chile produced 474,496 tons of copper in January,an impressive 8.6% increase from a year earlier. The country’s output for 2012 came in at 5.455mn tons, up by 3%.
Shanghai copper rose to a 1-1/2-week high in this morning, tracking gains made in the previous session in London and spurred by improving demand in China as it embraces a seasonal upturn in consumption of the metal. Investors are watching the annual gathering of China's parliament and any policy that would affect demand in the world's largest copper consumer, as Beijing struggles to shift away from a resource-intense growth model that has created problems including heavy pollution. But for the next month or so, the rising demand from copper fabricators which supply manufacturers of air conditioners, among others, will support copper prices, analysts said.
"The seasonal increase in copper consumption will materialise, unless we see major disruption from severe problems with economic growth," said Judy Zhu, an analyst at Standard Chartered in Shanghai, who expected copper to rise to $8,400 by the end of April on the demand. The most-traded June copper contract on the Shanghai Futures Exchange rose to 57,160 yuan ($9,200) a tonne, its highest since Feb. 28, before easing to close at 56,850 yuan. Benchmark three-month copper on the London Metal Exchange inched down 0.1 percent to $7,820 a tonne by 1301 GMT, close to $7,883 a tonne hit on Tuesday, its highest level since Feb. 28.
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Most major global commodities have begun 2013 with solid gains, led by strong performance in Base Metals and Energy. The drivers for this upswing were numerous but the main ones were better economic outlook, reduced political risk premiums and continued easy monetary policies. A weaker US dollar against most currencies (barring JPY) also in part perked up the commodities.
Base Metals are looking more positive now and with a spate of strong data in January there may well be room for prices to head higher. However, investors do not rule out supply pressure at higher levels and they expect resistance initially around the September highs for metals like copper, aluminum and nickel that have not surpassed them yet. The approaching Chinese New Year may turn out to be a dampener, unless Chinese consumers feel there is a risk of continuation of the firm trend, in which case there may be some pricing pressure this week ahead of next week’s holidays.
All Base Metals saw impressive gains but aluminum underperformed in January. US GDP dropped 0.1% annual rate, the worst performance since the second quarter of 2009. However, China (largest consumer of base metals) is on track for a GDP growth in the range of 7.5% to 8.5% a year. Surprisingly positive news for base metals was an increase in US Manufacturing PMI, which came in at 53.1. The final week of January saw commodities posting the longest run of weekly gains since 1996. Reports showed that in January, US hiring increased after accelerating more than estimated at the end 2012. China’s manufacturing output expanded, adding to evidence of a steady recovery. Statements by Fed Chairman Ben Bernanke during the FOMC meeting were supportive for base metals. Bernanke said that “to support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue Purchasing additional agency mortgage-backed securities at a pace of US$40 billion per month and longer-term Treasury securities at a pace of US$45 billion per month”. The euro area economy has shrunk for two successive quarters and economists foresee a further decline in GDP in the final three months of 2012. Inflation decreased in the euro zone but high level of unemployment is putting stress on demand.
Copper rose on Friday, for the first time in four days, on a softer dollar and after strong trade data from China signalled improved global growth prospects and recovery in demand from the world's top metals consumer.
China's exports jumped 25 percent in January from a year earlier, topping market forecasts for an increase of 17 percent, while imports surged 28.8 percent, also ahead of analysts' estimate of 23.3 percent. The sharp rise was partly due to the Lunar New Year effect, with the holiday falling in January last year, but the "numbers are still very strong and show the economic recovery is on
China, which accounts for around 40 percent of refined copper demand, imported 350,958 tonnes of copper in January, up almost 3 percent from December as importers brought forward shipments to avoid delays during next week's week-long holiday. "Obviously the China data has helped," Citi analyst David Wilson said. "The dollar today is soft, and the correlation of prices with exchange rates is very strong at the moment, and I think that's the bigger issue."
The dollar was down against a basket of currencies on Friday, and shed 1 percent versus the yen. A softer dollar makes metals less expensive for investors using alternative currencies. Three-month tin was at $24,850 in rings from $24,675 at Thursday's close, while zinc was $2,184 from $2,163. Three-month lead was $2,420 from $2,408, aluminium was $2,106 from a last bid of $2,098 and nickel was $18,280 from $18,180.
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The global economy has faced significant headwinds over the past year, including the European debt crisis slowing Chinese growth and concerns over the fiscal health of the United States. Unsuprisingly, had an adverse impact on the price performance of the industrial metal complex, at least if we look on an average annual basis, with all six LME metals registering declines.
Faring the best was copper, althoug even here average prices still fell almost %10 year-on-year. Next up were the “ugly sisters” of zinc (-11%) and lead (-14%), with the former suprisingly outperforming the latter, despite lead’s superior fundamentals. Meanwhile, the heavily over supplied markets of aluminium (-16%) and nickel (-23.2%) were ranked fourth and sixth, respectively. Finally, and somewhat suprisingly, despite its positive fundamental backdrop, tin prices came in towards the bottom of the rankings, falling 19% on an average annual basis.
Interestingly, if we look at price performance on an intra-year basis, the conclusions change appreciably, with five of the six base metals registering increases. The largest gains were seen in tin and lead, rising by 22% and 15%, respectively. In the former, supply issues in key producers China and Indonesia intensified as the year progressed, helping the buoy prices over the final quarter in particular.
Lagging somewhat behind was copper, despite the onging underperformance of global mine supply. The red metal gained just 4% by end-December 2012 from the level seen at the corresponding period of 2011. The upside for copper was arguably hampered by its enhanced macro credentials relative to some of its other smaller, less liquid, counterparts, as well as its outperformance over previous years. Although a broader improvement in the global economy is forecast for next year, some analysts expect that a shift to over supply will serve the limit the upside potential of the red metal’s price.
This month we look at some of the key factors that will shape the base metal markets in 2013. On the macro front, analysts expect to see some relative stability emerge in the Eurozone as the muddle through continues. Instead, the key questions this year will relate to China’s growth trajectory, and the extent to which the fiscal cliff and debt ceiling issues have harmed the prospects of a US recovery. Answers will start to emerge over the next few months, as it will take time for policy uncertainty to be resolved and for the Chinese market to get going given the Lunar New Year holiday in mid-February.
Price-wise therefore, it might be a somewhat unconvincing start to 2013. However, slowly the focus is expected to shift back to the underlying market fundamentals. While there is scope for the post-New Year demand pick-up in China to disappoint again, the fundamentals overall are not as bad as they could have been given the fiscal/political/macro dramas of the past year and investors should expect a gradual improvement during the course of the year.
London copper held steady on Wednesday, slightly above two-week lows hit in the previous session, propped up by a pick-up in U.S. consumer spending which bolstered risk appetite and prospects of further economic growth in top metals buyer China. U.S. retail sales gained solidly in December as Americans shrugged off the threat of higher taxes and bought automobiles and a range of other goods, suggesting momentum in consumer spending as the year ended. But an ensuing pick up in risk appetite early in Asian hours tempered as investors awaited more clues on global growth, with U.S. industrial production figures out later and China's gross domestic product data due on Friday. "It looks as though there has been some stronger data from China and we’re flagging upside risk to our forecasts. It might be that people are just holding out for confirmation," said Alexandra Knight, an economist with National Australia Bank in Melbourne. "We might see prices a bit elevated in Q1 this year. But for now it sounds reasonable that things remain quiet until after February when the U.S. will resolve the debt ceiling and after the Lunar New Year," she added.
Three-month copper on the London Metal Exchange was trading at $8,000.75 a tonne by 0704 GMT, little changed from the previous day when it hit two-week lows for a second session running at $7,940 a tonne. Upward momentum has fizzled out since copper rose to about $8,250 a tonne, its highest in more than two months, early this year, with buyers from China reluctant to chase prices until after the Lunar New Year holiday in early February, traders said.
China's annual economic growth may have quickened to 7.8 percent in the fourth quarter a Reuters poll showed, snapping seven straight quarters of weaker expansion, but the recovery is likely to be tepid and the economy may need continued policy support. From the United States, two dovish Federal Reserve officials pushed back against some of their more hawkish peers on Tuesday, arguing that the U.S. central bank's accommodative policies are appropriate and may even need to be eased further. "We expect copper to be amongst the better performers in the base metals space in 2013," said ANZ in a research note. "Our expectations for a recovery in China and improving sentiment in the U.S. will underpin stronger demand and push prices to $9,000/t by year end."
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Commodities ended higher over the course of November, with the 19-commodity Reuters-Jefferies CRB index finishing up 1%. The modest rebound was largely due to a pick-up in oil and copper, with energy rising for the first month since August on escalating Mid-East tensions, while copper rallied on better macro numbers coming out of the US and China. Many of the ags remained weak; wheat suffered its largest two-month decline in a year, while soybeans and corn both fell for a third and fourth straight month, respectively. The precious metals group finished higher over the course of the month, although a round of heavy selling hit the complex hard this week. The dollar finished down against the Euro, but gained ground against a plummeting yen. US equity markets ended the month almost flat after an eight-day loss following the presidential elections finally ran its course. US bond prices continued to gain ground over the course of November, as did a host of European sovereigns.
Copper prices worked lower over the first half of November, testing key support at $7500 before bouncing off it to finish the month at its highs. We now are trading above the $8000 mark for the first time in six weeks, as two variables are prompting the push higher. The first is cautious optimism that a fiscal cliff agreement in the US would be reached, while more importantly, we are getting better macro numbers from both China and the US. In China's case, there has been a modest uptick in manufacturing and other economic readings, prompting some to conclude that the Chinese economy has bottomed out. In addition, there are expectations that the new government will make major policy announcements on both interest rates and future stimulus projects imminently. In addition, most analysts now believe that the copper market will be in surplus next year, reversing years of deficits. Despite the mixed signals, most of investors suspect the market will move higher over the next several weeks and would not rule out a test of $8300 on the upside, while on the downside, good support at $7670 should hold.
London copper steadied in this morning after five days of gains fuelled by hopes that U.S. lawmakers would forge a last minute deal to avert a budget crisis, building on optimism over accelerating growth in top consumer China. Easing uncertainty over the U.S. fiscal cliff -- $600 billion in tax hikes and spending cuts which threaten to push the U.S. economy back into recession -- had helped improve sentiment towards metals. "The fiscal cliff is still the big one, if people feel that progress is going made then we should move higher," said Singapore-based analyst Ivan Szpakowski at Credit Suisse.
Three-month copper on the London Metal Exchange edged down 0.25 percent to $8,055 a tonne by 0335 GMT, reversing gains from the previous session when it hit its highest since Oct.19. Copper prices have increased for the past five sessions, adding to a rise off two-and-a-half month lows reached on Nov 9. Prices are up 6 percent so far this year.
Republicans in Congress and President Barack Obama consumed much of Wednesday talking up their positions on the fiscal cliff, with Obama saying a deal could be reached in a week if his opponents would compromise on taxes. "Everyone knows that the fiscal cliff issue will be resolved... top that with a weaker USD and technicals looking good. Copper has all the chances to keep on going," said a trader in New York. Metals prices have also firmed on signs demand is improving in top consumer China, despite record stockpiles.
"The consensus on China has improved. Strong China PMI has been supportive. We have some more figures on Sunday that could have an impact on Monday," Szpakowski added. China's industrial production and inflation figures will be announced on Sunday. Annual growth in China's factory output, investment and retail sales may have gained pace in November thanks to recent pro-growth policies, a Reuters poll showed, reducing the chances for further policy support as inflation picks up. Also supporting metals, the euro held its ground in early Asian trade after slipping from a seven-week high against the dollar in the previous session, as investors awaited a European Central Bank policy meeting. Euro zone GDP data will be released later in the session and the U.S. jobs report for November will be released on Friday.
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Commodities ended the month of October sharply lower, with the drop in the Reuters-Jefferies commodities index being the largest in five months. Energy was hit particularly hard, as were precious and base metals. Ags held up well, although sugar, cocoa, and coffee sold off. The stock market had a poor performance in October, benefiting bonds, while the dollar appreciated against major currencies. The few upside standouts this past month included freight, iron ore, and wheat. Alarmingly for the bulls, November is starting off where October left off, with most markets, particularly equities, continuing to struggle in the aftermath of President’s Obama’s reelection.
Copper prices did nothing but move lower over the course of October and into the first week of November, as the complex continued to roll back its arguably artificially-induced gains that set in on over the course of August and September. Moreover, an expected fourth quarter demand pickup out of China has remained elusive, likely on account of the uncertainty surrounding the policies of the new leaders. On the inventory side, things are somewhat bearish for the metal; LME stockpiles, which were falling sharply for much of the first two weeks of October, have increased by some 32,000 tons since then, while Shanghai holdings are now at six-month highs. Material in Chinese bonded warehouses is now estimated to be around 800,000-900,000 tons, of which roughly 200,000 tons is on-exchange. Down the road, the forecast is for more supply – the International Wrought Copper Council says the copper market is expected to swing into a 281,000 ton surplus in 2013 from a deficit this year.
Copper hit its lowest in more than two months today as a stronger dollar, a looming U.S. fiscal crisis and renewed euro zone worries sapped investor risk appetite and darkened demand prospects. Since the U.S. elections on Tuesday investors have become worried that Washington could struggle to find a compromise to cut the budget deficit before nearly $600 billion worth of spending cuts and tax increases kick in early 2013.
The dollar index was up meanwhile, making headway versus the euro amid uncertainty over aid for Greece and Spain and after European Central Bank president, Mario Draghi, sounded a downbeat note on the economy. A strong dollar makes dollar-priced metals costly for European and other non-U.S. investors. On the positive side, Chinese data showed industrial output and retail sales for October slightly exceeded expectations, while annual October consumer inflation eased to its slowest pace in nearly three years, giving policymakers scope to further looser monetary policy if needed.
Three-month copper on the London Metal Exchange fell 1.23 percent to $7,536 a tonne in official midday rings, having earlier touched $7,506 a tonne, its lowest since late August, and putting it on track for a fifth consecutive week of falls. "A lot of people expected a weaker dollar post-QE III and that hasn't been the case recently, so base metals have done down. (Also) over recent weeks we've seen people become less confident that Chinese government are going to announce lots of new (stimulus) measures," said BNP Paribas ananlsyt Stephen Briggs.
In physical copper markets, Chinese traders are seeing modest improvement in sales, with spot prices rising around 350 yuan to 55,950-56,150 yuan. They said this has helped push physical premiums for copper imports up by around $2 to around $50 a tonne over the past two days, although this does not reflect higher bonded warehouse drawdowns
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Markets spent the summer months hoping for concrete action from policy-makers around the world. For once, they were not disappointed, with the ECB announcing its new outright monetary transactions, China detailing $157bn of new infrastructure projects and the Fed moving to QE3. These measures helped to boost metal prices across the board, with both precious and industrial metals rallying strongly between mid-August and late-September. But will these policy-measures be enough to launch a more sustained rally heading into 2013? The global economy continues to suffer from a number of major economic problems, and 2013 may prove to be another difficult year for commodity markets.
In September meeting, the US Fed boldly embarked on a third round of quantitative easing. In an open-ended experiment, the Fed will purchase $40bn of mortgagebacked securities every month until the US jobs market is deemed to be on a clearly improving trend. On top of this, the Fed will continue to buy US Treasuries under its Operation Twist until the end of the year and has indicated that interest rates are likely to be held low until 2015. With US unemployment currently stagnating above 8%, it would need to be clear that unemployment would move inexorably below 7% for the Fed to terminate its ongoing QE3 purchases.
Supported by a significant market deficit, copper prices have been better supported than other base metals throughout 2012. At their weakest point, copper prices hit a low of $7,251/tonne, but thanks to the concerted efforts of both the Fed and ECB, copper prices rebounded during September to a high of $8,400/tonne. As miners continue to struggle with a range of new copper projects, general expectation is the market to remain in deficit through much of 2013, although prices will struggle to push up to 2011 highs as China shifts from restocking to destocking and anticipates the imminent expansion of new projects.
Copper edged higher today, helped by a stronger euro on expectations Spain would seek a bailout to rescue its economy, although gains were capped by uncertainty about global growth, while trading volumes were low as China remained on holiday.
Benchmark copper on the London Metal Exchange (LME) shook off losses from the previous session to rise to trade at $8,329.50 in official rings, from Wednesday's close of $8,290. The euro rose against the dollar, with investors keeping a close eye on possible financial aid for Spain as the European Central Bank (ECB) left interest rates unchanged at its latest meeting.
A news conference with ECB president Mario Draghi was due to begin at 1230 GMT, with markets awaiting signals from Draghi about when he might pull the trigger on a new bond-buying plan. Following the ECB's plans for a bond-purchase programme for struggling euro states, investors are still waiting for Spain to bite the bullet and request a formal rescue.
Trading volumes were thin as China is still on a public holiday. Investors are likely to look ahead to non farm payrolls data from the United States, due on Friday, for indications of a recovery in the country's labour market. Sentiment surrounding the U.S. labour market was boosted in the previous session after data showed private sector hiring rose by a better-than-expected number in September. Activity in the vast services sector also picked up, suggesting the economy remained on track for modest growth.
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Commodities mostly rose in August, racking up a third straight month of gains. The 19-commodity Thomson Reuters-Jefferies CRB index was up 3%, adding to the 5% advance chalked up in July. Gold, platinum, and silver were among the standouts, pushing higher on account of growing expectations of imminent easing. Base metals had a much more moderate rate of increase, as worries over Chinese growth prospects helped keep a lid on prices. Oil prices rose nearly 10% due to production problems in the North Sea and a resurgence of tensions in the Mid-East and there were corresponding gains in refined product prices as well. The grains complex has been on fire all summer, with soybeans and corn hitting record highs as drought conditions in the US Midwest ravaged yields; both are among the best performing commodities year-to-date. Wheat was not far behind.
In the financial markets, US equities charged ahead, but the action in the 10-year bond market was far more volatile. The dollar continued to lose ground over the course of the month as a greater sense of normalcy in the markets allowed investors to leave the relative safety of the greenback.
Copper has really not done very much over the course of July and August, with prices fluctuating within $7300-$7800 range for much of this time. The downside seems to be supported by a general inelasticity of supply in that producers are having trouble ramping up output despite relatively high prices (and margins). As an example, Codelco is planning to invest a staggering $27 billion from over the next four years just to increase capacity from its aging fields (excluding Los Bronces) by a paltry 300,000 tons. Other producers face the same constraints. Offsetting the supply pinch somewhat, is the fact that demand has kept prices from picking up steam. China’s Antakie group, for example, sees Chinese consumption expanding this year at its slowest rate since 1997, as growth cools. The demand deceleration is also being reflected in declining Chinese refined imports and rising stocks. Although LME holdings are down some 20,000 tons over the past two months, the increase in Shanghai has more than made up for it. In addition there is talk that up to one million tons of copper is being held off-exchange in China.
London copper was steady in this morning, supported by hopes that central banks will announce new plans to lift global growth following a boost to China's railroad spending and ahead of a European Central Bank meeting on Thursday.
A string of worsening factory reports from top metals user China, the United States and Europe this week has darkened the outlook for commodities demand, but has also raised expectations that monetary officials will have to ease policy or boost spending, providing a year-end fillip to prices. China has rolled out a series of plans for infrastructure spending, aiming to lift confidence that the government is committed to keeping economic growth from sagging further, upping its target for railway construction this year to 496 billion yuan ($78.14 billion), from 470 billion yuan.
The ECB is expected to outline rather than detail its strategy at a meeting on Thursday to keep the pressure on politicians to bring their deficits and debts under control.
On Monday copper hit a one-week high of $7,700 but has struggled to find momentum in recent months and has remained below $8,000 since mid-May, down from a 2012 peak of $8,765 per tonne in February. Copper turned positive and hit a session high of $7,750 a tonne on Wednesday, as the euro rose after media reports that the European Central Bank would, unveil an unlimited, sterilised programme of bond purchases.
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Base metals had yet another dull performance during July, with most of the metals down on YTD’12 basis. LME Nickel continues to remain as a laggard amongst the non-ferrous metals complex, losing about 17% on YTD basis. LME Lead and LME Aluminium are down by 7% & 8% respectively. LME Copper is down by 2%, while LME Zinc prices are largely unchanged on YTD’12 basis. On demand front, Chinese economic activity is struggling and monetary easing policies is not been able abate the slowdown in the world’s largest metal consuming nation. In this regard, China’s second quarter GDP has been reported at 7.6%, while June industrial production growth has slowed down to 9.5%.
During the midst of July, base metals somehow garnered some support from the wide speculation that Chinese government is poised to initiate further monetary stimulus. However, we remained skeptical regarding the knee-jerk reaction in base metal prices to the growing expectations of further monetary easing by China. It reminded us of the cliché, wherein one puts the cart ahead of the horses rather than putting horses ahead of the cart. Monetary easing on a standalone basis cannot stimulate economic growth in China, as the country’s biggest export partner (Europe) is mired in a recession. Exports constitute a major component of Chinese economic growth.
In addition, receding economic activity on the both sides of the Atlantic corroborates concerns regarding the demand prospects for the industrial metals. In this regard, Spanish economy has officially entered in to recession, with the nation’s GDP contracting for consecutive two quarters. U.K second-quarter gross domestic product has contracted by 0.7%, the most since 2009. In U.S, economic growth slowed in the second quarter as consumers spent at their slowest pace in a year. The nation’s GDP growth for the second quarter slowed to 1.5%, as compared with the growth number of 2% during the prior month. In addition, U.S Federal Reserve Chairman Bernanke offered a gloomy view of the economy's prospects, but provided few clues on the fresh round of monetary easing measures. Bernanke stated that the pace of the US economic recovery has been unstable, adding that growth is slowing, largely impacted by the European crisis and the prospect of fiscal tightening in the US.
After the explanations of Bernanke and Draghi, copper price began to trade steadier this week. Copper climbed on Thursday and Shanghai prices hit a one-week high, as a mild inflation number from top metals consumer China raised hopes for further policy easing to boost growth in the world's second largest economy. China's annual consumer inflation fell to a 30-month low of 1.8 percent in July, suggesting the central bank has scope to ease monetary policy further to keep the economy on track to meet an official 2012 growth target of 7.5 percent.
“I thought the China inflation numbers were terrible, but many people were hopeful these will lead to more stimulus measures and therefore covered their short positions,” said a Shanghai-based trader with an international firm.
Although three-month copper on the London Metal Exchange inched up 0.3 percent to $7,574.75 per tonne by 0720 GMT, the trader said overall sentiment remained cautious, citing the thinner-than-usual trading volumes as evidence. Investors are expected to take trading cues from U.S. trade and jobs data later in the evening. In Europe, a second fall in German imports in three months gave investors more cause for caution as it fuelled fears that the domestic mood in the euro zone's strongest economy may be weakening under the pressure of the bloc's debt crisis.
In technical side copper reversed. The two-day pattern might be the end of the rally. There should be sell stops at $7485, but so far the market has found willing buyers below $7360. The prospects of a major move down seem remote. If the price rallies above $7615 it will have completed and inverted head and shoulders pattern. The upside projection would be $7840. The price is currently in the middle of a range where it has been since 16 May. It might go either way from a technical perspective.
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The month of June in the markets could be best described as one of “false starts”, as repeated attempts to rally faltered-- until the very end. We first had something of a buildup at the start of the month-- ahead of Federal Reserve Chief Ben Bernanke’s testimony -- with many hoping that the chairman would finally acknowledge growing signs of economic weakness in the US economy and perhaps signal that additional easing was imminent. However, markets fell sharply in the aftermath of his remarks, as no such a green light was given. Next, European finance ministers huddled over the weekend of June 9-10, and announced a greater-than-expected €100 billion loan for wobbly Spanish banks, but the subsequent buying barely lasted a few hours in Asian traded before it fizzled as well. The bulls then thought they would get something going heading into the Greek elections held on June 17th, and when the results showed a relatively solid win for the pro-bailout parties, there was an initial burst of buying, but that barely lasted a day before the selling returned.
Copper ended June near a one-month high, but was down nearly 11% on the quarter, its worst showing since Q3 of 2011. Gold also finished at a one-month high, but was down 4% on the quarter, its biggest decline since September 2008. In the currency markets, the Euro ended the month higher, as did US equities, while US bond prices tumbled.
Last week’s European leadership summit resulted in a number of modest achievements, which surprised investors given the disarray evident in the run-up to the meeting. German Chancellor Angela Merkel was particularly adamant that austerity measures previously negotiated remain in place, but once the meeting started, she could not hold her ground. Her opponents bluntly told her they would withhold their agreement on other issues until they got concessions on lower borrowing costs and help for their banks. Not having French support -- previously provided by ex-President Sarkozy -- also took its toll on the German leader. By the end of the meeting, Merkel accepted a demand that European bailout funds could be used to recapitalize struggling banks, although she made this conditional on an acceptable banking supervisory body being put in place.
Last Friday copper had a stunning move, surging 4% for its biggest one day advance since November, but this was not enough to prevent the second quarter ending down by some 9%. Although we have seen further gains this week, the short-term outlook calls for some caution. For one thing, Chinese growth is slowing, with calculations by Reuters showing implied consumption down a sharp 5.5% in May. The latest Chinese copper import numbers were up from April, while Shanghai premiums have also pushed higher, but we don’t see either uptick as being solely demand-driven, as other variables (like the arbitrage and financing needs) are likely at play. Moreover, LME stocks have stopped declining over the course of June, as Shanghai holdings have moved out to take advantage of favorable differentials. Despite this mildly bearish backdrop, exogenous variables, such as a temporary reprieve in the European debt situation, coupled with increased anticipation about possible global easing, could propel prices higher over the short-term. So we can see a trading range of $7500 – $8000 over the course of July.
Copper dipped on Thursday on a stronger dollar, retreating from gains after a surprise rate cut by China and a similar move by the European Central Bank that had been widely expected. Metals initially climbed after China's second rate cut in a month, with investors hoping it would revive declining growth and metals demand in the world's biggest consumer of raw materials. But a slide in the euro against the dollar to a one-month low pressured metals priced in dollars, making it more expensive for investors in other currencies.
The slide came after the ECB cut interest rates to a record low but steered clear of more dramatic measures such as buying government bonds or flooding banks with fresh liquidity. Three-month copper on the London Metal Exchange fell 0.89 percent to $7,656 a tonne by 1434 GMT after earlier rising as much as 0.8 percent to a session high of $7,790 after the Chinese rate cut. "The market is trying to hunt for direction and using the same data to justify prices going one way or the other. It shows how uncertain the market is," said Standard Bank analyst Leon Westgate. "OK the Chinese cut rates (but) it takes several months to feed through, and the ECB has done what's expected so the focus has switched back to non-farm payrolls tommorrow."
U.S. data out earlier indicated Friday's non-farm payrolls report might beat forecasts. The data showed private employers added a surprise 176,000 jobs in June, while the number of Americans filing new claims for unemployment benefits last week fell by the most in two months. But analysts said a good number might dissuade the Federal Reserve from easing monetary policy further. Copper has rebounded about 4 percent since last Thursday, lifted by a European agreement on a surprise euro zone rescue deal and expectations that weak economic data would lead to fresh stimulus measures by global central banks. Some investors may have been disappointed at a lack of further stimulus measures by the ECB. "Today’s ECB interest rate cut does little to alter the bleak economic outlook and the bank is unlikely to announce any bolder unconventional measures for now," said Jennifer McKeown, senior European economist at Capital Economics. Investors are also keeping an eye on Friday's key monthly U.S. jobs report for clues on whether the Fed will take additional easing steps. Non-farm payrolls were expected to see an addition of 90,000 workers in June, with the unemployment rate holding steady at 8.2 percent.
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MARKET COMMENTARY
The crisis in the Eurozone is causing tremendous uncertainty. Events are not novelty and have largely followed textbook examples of financial crises. A lack of policy response has been a significant part of the problem. Even though Europe has a large share in global metals demand which has been contributing to a slowdown in global industrial production in recent months, is the primary transmission channel of the crisis to commodities. Spain’s banking system and the Greek elections are the most immediate problems hanging over the metals market and policy responses to these issues have different implications for metals. Markets are also waiting for a more comprehensive and strategic solution to the crisis.
Although Europe has not been the main driver of metal markets in the past decade, it has kept a steady share in global metals demand, so the current crisis is relevant for fundamentals. Nevertheless, as metals demand in the periphery has declined visibly, offtake especially in the North has by and large held up. This is one reason copper premia remain supported. Hence, we believe the primary transmission channel of the crisis in the Eurozone on the metals was through global sentiment and not actual European demand. The lack of sentiment has various implications. Global business cycle stages have for instance shortened markedly, which is a reason metal prices have been very choppy in recent quarters.
In May about $4.5 trillion was wiped from the value of global equities and the dollar climbed to the highest level in almost two years versus the euro as the turmoil in Europe spread. The dollar posted its biggest monthly gain since 2011 in May, beating bonds, stocks and commodities for the first time this year as investors sought refuge in U.S. assets while Europe’s sovereign crisis worsened. Global stocks had their biggest monthly losses since September, when Chinese manufacturing and German retail sales bolstered speculation that growth is slowing. Commodities fell the most in two years (copper fell 12 percent in May on the Comex in New York).
Copper started to June more stronger than May prices with the contribution of short covering and edged higher on Wednesday as the euro steadied against the dolar. But concern about contagion from the euro zone debt crisis and upcoming elections in highly indebted Greece kept investors cautious and prevented further gains for metals. Three-month copper on the London Metal Exchange rose to $7,470 a tonne, up 0.5 percent from Tuesday's close.
Base metals were supported by a slightly firmer euro against the U.S. dollar. A weak dollar makes commodities priced in the U.S. unit cheaper for holders of other currencies. A 100 billion euro bank rescue plan for Spain earlier this week failed to calm nerves about debt contagion, and uncertainty remained about whether Greece will remain in the euro zone after its June 17 elections. Spanish 10-year yields, which hit euro-era highs of 6.86 percent on Tuesday, were seen rising further and testing the 7 percent level which is viewed by many as the point at which borrowing from capital markets becomes unaffordable in the long term. "The positive sentiment surrounding Spain's rescue seems to have faded. There is just too much uncertainty ahead of the Greek elections and the euro summit and investors are cautious," said Robin Bhar, analyst at Societe Generale. "Until we get some of these uncertainties resolved it is difficult to see why anybody would want to put risk on. Copper prices are likely to be volatile."
We believe the following events and announcement on the back of them are key during the month of June:
• 17 June: Greek elections,
• 18/19 June: G-20 meeting;
• 28/29 June: EU Leaders Summit
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