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MEIR ON METALS: Metals steadier as markets wait for key Chinese numbers


Analyst Ed Meir looks at what is moving the metal markets on Thursday April 12.

Copper and General Commentary: Metals steadied somewhat on Wednesday after six European countries sold debt without much of a glitch. The closely watched Italian auction was mixed, in that although short-term yields moved higher, (double what they were a month ago), the full allocation was taken out. The German auction, on the other hand, was somewhat sloppier, as investors did not take up their full allotment. Ten-year Spanish bonds did better, with yields declining by 10 basis points to 5.88% and backing away from the critical 6% mark.

The markets continue to show signs of stabilising right now, with most metals higher, led primarily by copper and zinc. Energy is also up slightly and the euro remains steady, now at $1.3140 and at a one-week high. However, European credit markets are somewhat on the defensive, with the Wall Street Journal reporting that Italian short-term yields rose yet again at an auction held earlier, although longer-term 10-year yields dropped a tad to 5.57% from 5.64%.

We suspect the reason why markets are taking these mixed auction results somewhat in stride is that investors seem to be reassured that the ECB will provide a credible backstop should the situation start to deteriorate. In this regard, a second ECB board member said on Wednesday that the bank’s bond-buying program could be reactivated if needed.

We think investors will very much need to see (and feel) a continued ECB presence in the weeks ahead, as the markets are likely not done throwing more sloppy auctions their way. Whether the bank and other influential European policy makers remain “on message” and convince the markets that they are on top of the job remains to be seen.

Out of the US, the Fed’s “Beige Book” report released on Wednesday afternoon was decent, revealing that the economy continued to expand at a modest to moderate pace from mid-February to late March, with good gains noted in the automotive and high-technology sectors.

Manufacturers expressed optimism about near-term growth prospects, although many were concerned about rising energy prices. Mining activity expanded and oil extraction rose, but natural gas drilling slowed. Banking conditions were stable, with some improvement seen in loan demand. Hiring was steady, and although it was reportedly difficult to find highly skilled workers, upward wage pressures remained constrained.

In the last couple of hours, we got US weekly initial claims data coming in at 380,000, the highest rate since January and knocking back some markets slightly. Wholesale prices also rose more than forecast in March, up 0.3% versus the 0.2% rise expected.

Out of Japan, the government stuck to an assessment issued overnight that the economy is slowly recovering, saying overseas shipments are showing signs of stabilising on account of a moderate pickup in demand from both the USA and Asia. It added that the pace of decline in consumer prices has eased, and that Japan remains in mild deflation.

Out of China, we get key GDP and industrial production numbers out on Friday, but new yuan loan data released overnight shows that loans were running at about $160.1 billion in March, well above all 28 estimates compiled in a Bloomberg survey. M2 money supply continued to expand, up some 13.4% from a year ago, while foreign exchange reserves rose to a record $3.31 trillion as of March 31.

In the meantime, the World Bank today lowered its forecast for China’s 2012 growth rate to 8.2% from 8.4%, but raised its 2013 forecast to 8.6% from 8.3%.

One market outside of metals that is catching our eye is natural gas; prices are in a virtual free-fall, and have now broken the $2 mark – a ten-year low. We have given up trying to identify next support on the charts, as there is nothing showing below $1.80, a level last reached at the inception of the contract in the mid-1990s.

Technically, we are now at $8,131 on copper, up $91. The $8,150 support level, which was taken out earlier this week, will now figure as short-term resistance, as prices try to get back into the broken trading range. Above that, we do not see much in terms of resistance at least until $8,350, the point from which prices started their recent plunge.

Aluminium: Ali is now at $2,109, up $10. The complex staged a good bounce higher on Wednesday, perhaps helped by Alcoa’s upbeat outlook on the sector going forward, but we do not seem to be doing much right now.

Zinc: Zinc is at $2,020, up $25, with a $28 trading range in place.

Lead: Lead is at $2,070, up $17 and now at the top end of the short-term trading range; two closes above $2,170 could set the stage for a further move higher.

Nickel: Nickel is at $18,250, up $150. Charts are looking slightly better, although the short-term downtrend remains intact and won’t be taken out unless we break through $18,700.

Tin: Tin is at $22,525, up $100 and about where we were at this time on Wednesday.

Ed Meir

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