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MEIR ON METALS: Spanish 10-year yields cross 6%, markets on edge

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Analyst Ed Meir looks at what is moving the metal markets on Monday April 16.

Copper and General Commentary: Copper prices punched below the $8,000 mark for the first time in three months on Friday, as disappointing GDP data out of China weighed on the metals group and other complexes. For the week as a whole, copper was off some 4%, among the worst performers in the CRB index. In addition, the selling occurred in heavy volume, with Friday's COMEX turnover nearly two-thirds above the 30-day average according to Reuters data.

The question now raging among China-watchers is just how long and how deep will this slowdown go on; we have gone on record as saying we suspect the deceleration will be deeper and last longer than the conventional forecasts have it, meaning that the metal's outlook for the balance of the year will be restrained at best.

Markets opened sharply lower earlier on Monday, but have since recovered. Base metals are mixed right now, while precious metals are lower, but off earlier lows. The euro is trading at $1.3040, although it did take out the $1.30 level at one point earlier, hitting a low of $1.2995.

US equities have opened higher, as the earnings parade continues, with another 86 companies reporting this week. Of the 32 companies reporting so far, Reuters reports that 75% have beaten estimates.

Brent prices are lower for a second straight day after weekend talks with Iran on its nuclear program yielded little, except for an agreement to talk again in May. Nevertheless, the talks were deemed to be "constructive" by Catherine Ashton, the European Union's foreign policy chief, and junior staffers from the various sides will now meet prior to the next summit meeting in an attempt to bridge additional differences.

All eyes will remain on the European debt markets this week, where prices remain under pressure. Spanish 10-year yields are now well above 6%, their highest level since December and credit default swaps have pushed higher as well.

Reuters writes that breaking the 6% level is important, as that was when yields started to move even higher when that level got decisively taken out. At 7%, Greece, Portugal, and Ireland all struggled to raise more debt, and were ultimately forced to seek financial aid. Spain is expected to sell more paper tomorrow in an auction that no doubt will be closely watched.

In the meantime, European officials travel to Washington later this week for the International Monetary Fund's spring meeting in an attempt to possibly secure new funding for the agency. Right now, the IMF has less than $400 billion available to lend.

Out of France, presidential elections will take place over the next few weeks, with first round results due on April 29, followed by a second-round vote scheduled for May 6th. Socialist candidate François Hollande has extended his lead to 56% against 44% for president Nicolas Sarkozy. A defeat for the sitting French president could throw the powerful German-French axis, which was so instrumental in setting European debt policy, off balance for at least months on end.

Out of China, the government announced over the weekend that it will widen the yuan's trading band for the first time since 2007 to 1% from 0.5%. The move seems to be conveniently timed ahead of this week's IMF meeting and was partly put through in order to deflect the inevitable pressure that China will face on its currency.

The Yuan ended last week at 6.30 and is up about 8.3% since June 2010, but so far this year, it has hardly appreciated, trading basically flat. It did not do much of anything in the wake of the recent band announcement, actually weakening at the outset before recovering some of its losses.

On the US macro front, we just got March retail sales out in the last hour, coming in at .8% and substantially better than estimates. However, the Empire Manufacturing Index disappointed, coming in at 6.6 versus the 17.50 expected. Later in the day, we get the April NAHB housing market index (expected at 29).

March housing starts and building permits come out on Tuesday (expected at 700,000 and 710,000, respectively). March industrial production also comes out Tuesday (expected at .2%). On Thursday, we get weekly initial claims data (expected at 375,000), as well as March existing home sales (expected up 4.62 million units annualised), and the April Philadelphia Fed index reading (expected at 10.3). The index of leading economic indicators for March comes out Thursday as well (expected at 0.2%).

Technically, we are now at $8,000 on copper, up $10, and trading roughly in a $100/MT range of between $7,885 and $7,998 so far. Charts, however, look poor, especially after the February lows were taken out last week, while an attempt to rally back into the trading range also faltered. We suspect prices will likely head lower from here, eventually making their way to the mid-$7,000 range. LME stocks were off by 2,700 tonnes today, having rolled back much of last week's gains, but this seems to be having no impact given the stock accumulations in Shanghai and concerns about overall Chinese demand.

Aluminium: Ali is now at $2,075, up $5 and not doing much, with a $20 trading range in place. Charts look poor, suggesting an eventual retreat to $2,000. At that level, the market could encounter support, as many producers will likely announce further production cuts.

Zinc: Zinc is at $1,994, up $10. A brief breakout above the down-channel faltered last week, perhaps an indication that the market will move lower from here. Charts suggest that prices could be making their way to next support at $1,945.

Lead: Lead is at $2,060, down $5, and holding up fairly well, all things considered. We see the market range-bound for the time being, trading between $1,960, the recent low, and $2,120.

Nickel: Nickel is at $18,075, down $235, and still struggling; charts suggest a further probe lower, perhaps down to the low to mid-$17,000 mark.

Tin: Tin is at $21,650, down $555 and faring particularly badly amongst the group, as a breach of $22,000 support has likely set off some stops. We are looking for two days of closes below this point before moving our targets lower.

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