Analyst Ed Meir looks at what is moving the metal markets on
Monday May 10.
Copper and General Commentary:
Metals fell on
Friday, with copper losing ground for a second week in a row,
as apart from tight LME copper stock positions and lingering
backwardations, there was little in the way of bullish news
that could justify a sustained advance. Continued unease about
Greece, concern about Spanish long-term yields, and data
showing decelerating macro trends out of China (and elsewhere),
all combined to pressure the complex lower.
We are starting the new week basically where we left off, with
the selling continuing to be rather heavy across the board.
Markets were left unimpressed with weekend news out of China
that the country's central bank lowered reserve requirements by
0.5%, its third cut in the last seven months.
The government also said it will cut taxes for small firms in
order to help them cope with a credit squeeze and weaker
Neither item is doing much for the markets, as investors are
concluding that easier money is not necessarily going to
reverse the slowing trend in the Chinese economy, nor will it
do much to change the fact that the EU - China's biggest export
market - is mired in recession.
In addition to metals being down, we are seeing precious metals
continue to sink, with gold off another $24 per oz, while oil
prices are down by about $2 per barrel. There are some lower
level meetings scheduled over the next two days between the
representatives of the Western alliance and Iranian officials
before a more senior-level conference later this month.
Any signs of progress emanating from these talks should
continue to pressure crude further, despite the declines that
have already taken place. In fact, we would not be surprised to
see Brent join WTI and crack the $100 mark as well in due
Out of Europe, weekend developments out of Greece have
investors very concerned as the talks did not yield much
progress in breaking the post-election political deadlock. All
three parties have now tried and failed to form governments,
prompting Greece's president to take control of the
negotiations. He is not faring much better, after a leftist
party declined to join a coalition government with the two
major parties, which now means that the country will, in all
likelihood, be heading to the polls once again.
Europeans are watching the latest developments with increasing
alarm; the head of the Bundesbank warned the Greeks over the
weekend that they would not receive any more financial aid if
they do not stick to agreed bailout deals, while two other
officials floated the idea that the euro could indeed weather a
Greek exit from the currency. (We would agree, provided it is
In the meantime, the Greek government is scheduled to repay
$563 million on a floating-rate note. Greece could run out of
cash by early July if creditors decide to withhold their next
aid payment scheduled over the next few weeks.
On the currency front, the euro is sinking, now at $1.2820,
while Spanish 10-year yields have climbed to more than 6.2%
today for the first time since December 1, 2011. Italian and
Spanish spreads have also jumped against German 10-year note
bunds by more than 30 basis points.
Out of Germany, results of a local election in North
Rhine-Westphalia, an industrial state in western Germany, could
spell trouble for chancellor Angela Merkel's party. Polls show
that the centre-left Social Democrats (SPD) trounced Merkel's
Christian Democrat rival, who also happens to be Merkel's
In terms of macro news out of the US, nothing comes out on
Monday, but on Tuesday we get April retail sales (expected at
.2%), followed by April CPI data (expected to be unchanged) and
the New York State Empire manufacturing index (expected at
8.4). We also get the NAHB housing market index for May on
Tuesday (expected at 26). Wednesday brings us April housing
starts and building permits (both expected at 680,000 and
730,000 annualised, respectively), while later in the day, we
get April industrial production (expected at 0.55) and the FOMC
minutes. On Thursday, we get weekly initial claims data
(expected at 365,000), the May Philadelphia Fed regional index
(expected at 8.8) and the April index of leading economic
indicators (expected at 0.2%).
Out of Europe, industrial production in the 17 countries
sharing the euro fell 0.3% in March from February, the EU's
statistics office Eurostat said earlier on Monday, with the
number coming in well below the 0.4% increase expected,
providing further evidence that the region may be tipping into
Price-wise, the declines we have been seeing so far in May were
building for some time and are not that surprising. Although we
have further room to go on the downside, we ironically could be
on the cusp of a sizable market rebound, particularly if
markets 1) start to get increasingly comfortable with the idea
of a Greek exit from the euro, and 2) if they also perceive
that the European authorities will provide a strong enough
financial firewall to defend the euro from further contagion.
This second part is a big "if", but not entirely outside of the
realm of possibility. If handled right, Greece leaving the euro
could be the best thing that could happen to the markets, as it
will finally allow a mending process to begin whereby Greece
can finally marshal the competiveness of a weaker drachma to
climb out its economic straightjacket.
Technically, we are now at $7,865 on copper, down $148, but did
get down to $7,813 at one point earlier. LME stocks were off by
almost 3,000 tonnes overnight following a sizable decline in
Shanghai on Friday, but investors seem to be correctly focusing
on the demand side of the balance sheet and apparently not
liking what they see.
In the meantime, the backs seem to crumbling further in, with
tom-next now at a $3 contango, but the tightness is holding
further down the spread; June-July is at $28-31 back, up from
Friday, while cash to June is at $42 back. July to three months
is at $18 back, pretty much unchanged from Friday.
Price-wise on copper, we are watching to see whether key
support around the $7,880 level, which was the mid-April low,
will hold on a two-day closing basis. If it does not, which we
think will be the case, we likely will sell-off further,
perhaps setting up a retest of the 2012 lows at $7,445.
Ali is now at $2,025, down $20 and
coming in for a retest of key psychological support at $2,000,
although more technical support on the charts lies at $1,965.
Zinc is at $1,918, down $29. Another
close below $1,940 on Monday (likely), could mean that we could
next push down to the mid-$1,800s.
Lead is at $2,030, down $41.The lead
charts do not look as bad as some of the others in that the
trading ranges still seem to be intact, at least for now. We
see an eventual drift to $1,960 support.
Nickel is at $16,975, down $220, and
we could see a further retreat to the mid-$16,000 level if
previous support at $17,125 gives way on a two day closing
Tin is at $20,100, down $400, although
there is some psychological support at $20,000, we don't see
anything substantial on the charts at least until the mid