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MEIR ON METALS: Metals lower as sluggish global macro data rein in the bulls


Analyst Ed Meir looks at what is moving the metal markets on Wednesday May 2.

Copper and General Commentary: Copper pushed higher in light trading on Tuesday, buoyed mainly by the April ISM number out of the US, which was a total upside surprise given the spate of weaker regional readings released over the past week.

The number came in at 54.8, about 1.8 points above estimates and clocking in at its fastest pace in almost a year. Stronger auto production was a key factor behind the increase. Last quarter for example, cars sold at their fastest pace in four years, and although the pace moderated somewhat going into April, sales were decent enough to persuade at least General Motors to lift its full-year 2012 car and truck sales outlook to 14-14.5 million, up from its previous range of 13.5-14 million.

Right now, metals are lower across the board, with copper in particular having a substantial decline on account of a noticeable easing of the backwardations, poor data out of Europe, and a just-released US private payroll report that came in on the light side.

More importantly, we suspect the markets are still troubled by what is going on in China. Although Tuesday’s Chinese purchasing managers’ index showed a modest uptick, there were issues within the readings, as discussed in Tuesday’s column.

In addition, the release of the HSBC PMI earlier in the day (which focuses on smaller firms) came in at 49.3 in April, and although it was up from 48.3 in March, the number remains mired in contraction territory. The dichotomy between the two Chinese readings represents the difficulty that smaller firms face in finding financing, something that is much less of an issue for the larger state-owned firms, whose activity is picked up more cleanly in the larger “official” index.

Out of Europe, the eurozone’s manufacturing sector slipped further into the red in April after new orders dipped for an eleventh straight month. In this regard, Markit’s eurozone PMI dropped to 45.9 from 47.7 in March, marking its lowest reading since June 2009.

German manufacturing contracted for a second successive month in April, as did France’s sector. Italy’s manufacturing contracted for a ninth month, while Spanish activity declined at its fastest pace since June 2009. In an article out earlier this week, the Wall Street Journal reports that by its count, nine European countries are now in recession.

In the European debt markets, Portugal sold about $2 billion of Treasury bills at an auction earlier in the day. Although yields pushed higher, the issue was placed in its entirety. The average yield on one-year paper rose to 3.908% from 3.652% in the previous auction. Portugal’s ten-year bond yields are now at 11%, and although they have risen from 10%, they are still down from the all-time high of over 17% hit earlier this year.

The poor news out of Europe is weighing on the euro, which is now trading at $1.3140, well off the recent high of $1.3284 hit on Tuesday. This is another source of pressure on the markets, as in addition to the weaker base metals complex, we are seeing declines in both precious metals and energy. US stocks are expected to open lower.

The ADP private payroll number out of the US came in at 119,000, the smallest gain since September of last year. March factory orders come out later in the day, expected at -1.8% following a 1.3% gain last month.

We don’t have much to add to what we have been writing in recent commentary. With the global growth outlook still very patchy, it is hard to get too excited about upside prospects in most commodities, base metals included.

Technically, we are now at $8,293 on copper, down $143. LME stocks continue to decline, off another 2,600 tonnes overnight, but the spreads are loosening. Cash/May is now at $60 back, with tom/next at $20. May/June and June/July are at $14 and $8 back, respectively, about half the levels quoted on Tuesday. The full cash to three’s spread is around $87, and well off levels seen earlier in the week. Index rolls start next week.

Aluminium: Ali is now at $2,106, down $16.

Zinc: Zinc is at $2,031, down $22.

Lead: Lead is at $2,140, down $40.

Nickel: Nickel is at $17,470, down $235.

Tin: Tin is at $22,100, down $450.

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