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 exports.
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 course.
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 handled right).
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 environment minister.
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 recession.
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 basis.
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 $18,000 mark.