Analyst Ed Meir looks at what is moving the metal markets on Thursday May 3.
Copper and General Commentary:
Copper prices fell to their lowest level in a week on Wednesday, as ongoing concerns about slowing EU, Chinese, and to a lesser extent, US growth, weighed on the market.
In fact, for some time now, metals have been trading in lacklustre fashion, unable to get anything meaningful going on the upside given the increasingly dour macro statistics that have been coming our way. However, we are not seeing a price collapse either, as the US economy is still chugging along, and Chinese demand, while reduced, is still a force to be reckoned with.
In coppers case, severe supply constraints and declining inventories are also helping prop up prices, providing ballast for the rest of the metals. The exception seems to be nickel, which although up right now, is looking extremely poor on the charts and close to breaking down to fresh lows.
In terms of US macro items, in addition to the weaker-than-expected ADP number out Wednesday, the governments more important employment report is slated for release on Friday and is projected to show April payrolls increasing by 160,000 following last months tepid 120,000 rise. However, here too, we could be in store for a disappointment given the uptick we have been seeing lately in the weekly initial claims. Although the latest numbers (out in the last hour) came in at 365,000, and were well below last weeks reading, they were about in line with already-reduced market estimates, and so did not constitute much of a surprise.
Outside of the labour data, the Commerce Department reported on Wednesday that factory orders fell by 1.5% after a revised 1.1% gain in February. The decline did not cause as much of a stir since it was relatively in line with estimates and was offset in large part by Tuesdays stronger-than-expected ISM number.
Later in the day, we get April ISM services readings expected at 55.5, almost unchanged from last month.
Service readings were also released from China overnight, showing the sector grew at a slower pace in April than the month prior. In the meantime, Bloomberg quotes a Chinese newspaper as saying that the countrys central bank may cut the reserve ratio again as early as this weekend. China has reduced reserve requirements for its banks twice since November, although it has yet to move on rates. Such moves may boost metals temporarily, but we think the bounces will be short-lived, as easier credit is not going to solve what seems to be a business-cycle type of slowdown that needs to run its course.
In the European debt markets, Spanish bonds gained after the latest auction exceeded targets; the government sold about $3.3 billion of three-year paper at 4.037%, up from 2.617% from early March. This was the first long-term auction since Standard & Poors lowered Spains credit rating last week, but the fact that the issue was well spoken for and that three-yields remain below 5% seems to have comforted investors.
Out of France, bond rates declined ahead of that countrys key election slated for this weekend. Ten-year bond yields came in at an average yield of 2.96%, down from 2.98% on April 5.
Right now, metal prices are off, and we are seeing modest declines in both energy and precious metals as well. US stocks are expected to open higher on account of a steadier tone in Europe and an impressive recovery in the Chinese stock market, which managed to close at a 7-week high partly on hopes of further easing. The euro is steadier, trading at $1.3160 after the ECB left rates unchanged, but ECB head Mario Draghi warned that downside risks are still prevalent in the eurozone.
Technically, we are now at $8,259 on copper, down $45. LME stocks continue to decline, off another 3,750 tonnes overnight. However, the percentage of cancelled warrants seems to be easing (now in the low 30s), suggesting that the pace of withdrawals may be slowing.
Spreads are loosening up quite dramatically as well; cash/May is now at $45 back, with tom/next collapsing, now at $2 contango. May/June and June/July are at $14 and $8 back, respectively, about where they were on Wednesday. The full cash-to-threes spread is around $65, about $20 lower than Wednesdays level.
Ali is now at $2,087, down $11 as we seem to be backing away from the $2,125 resistance level that held earlier this week.
Zinc is at $2,003, down $17.
Lead is at $2,100, down $31.
Nickel is at $17,477, up $192, and about where we were at this time on Wednesday; charts continue to look weak.
Tin is at $22,200, down $200.