Positive momentum in base metals on global economic developments

Published February 29th, 2012 - 09:40 GMT
Due to Greece optimism coupled with easing from Chinese bourses metals pack remained bullish
Due to Greece optimism coupled with easing from Chinese bourses metals pack remained bullish

Base metal prices rallied the most in 2012 for the week gone by and prices gained by 2.8 to 7.9 percent. Lead and Aluminum were the top gainers followed by Zinc but Nickel remained weak as supply side constraints continued to limit price gain. Due to Greece optimism coupled with easing from Chinese bourses metals pack remained bullish. In the coming week base metals may closely follow the Global developments related to the Euro area as we saw in the last week.

The long term debt financing operation of ECB may continue to strengthen the Euro as banks may get more liquidity reducing debt yields and boosting economic growth. The G 20 countries may also increase funds commitments from the fiscal healthy countries and this may also support the Euro extending gains to base metals as IMF is planning to raise the current fund to aid crisis from $200 billion to $ 500 billion. Hence we may see bond yields of Italy and Spain may reduce and Euro may gain supporting the bullish trend in metals. The Chinese easing has lifted the demand for metals however the markets are still waiting for the subsidy announcement from the metals gobbler.

The Japanese yen has depreciated boosting car and finished goods exports and may support gains due to better consumption demand. From the economic data front the Euro zone economic releases in the form of Confidence and producer price index are mostly expected to be at a blend. There are host of releases are scheduled from the US most of which are expected to be handy for the economy. Amongst them GDP growth is expected to maintain the same pace with personal income spending and consumption are expected to increase supporting gains in metals pack. Jobless claims fell and the growth in labor market seems to be slowed down and hence claims this time might increase a bit however manufacturing activity is expected of improving as we have seen in the last couple of months and is expected to maintain the momentum extending gains to metals due to increased raw material demand. Overall we recommend going long for the coming week and expect prices to continue to march northward due to better economic releases coupled with optimism over Euro due to debt restructuring.

Market Overview 

Base metals prices posted weekly gain of nearly 3 to 8 percent the most in the year 2012. Gains in metals was witnessed due to Greece optimism coupled with Chinese easing and better economic releases Lead was the top gainer for the week gone by as better Euro zone continued to support price gain along with dwindling inventories Aluminum too gained nearly 7.5 percent due to increased spot demand and better auto figures The trade participation has deteriorated as volumes have declined at LME as well as at MCX however at Shanghai warehouses stocks of Copper has declined after increasing consecutively for ten week indicating better demand from the largest consumer Commodity Futures Trading Commission (CFTC) Report Copper The data released by CFTC on last Thursday tells us that market is occupied with more weights of buyers when compared to sellers the commercial sellers are less and it indicates that the corporate procurement are going for long positions due to unlikely expectations from tensions prevailing in Iran and Syria. Therefore the markets may remain bullish and we may expect metal prices to witness upward pressure in the coming week as economic releases are mostly expected to be handy supporting the Dollar.

Economic Review

The week gone by started with kicking off the much awaited Greek deal but still issues were there to wrangle over namely tighter controls over spending cut to the country s debt freight. The EU chiefs thought of a two step relief among which the first one would be borne by the ECB and the second one by the private creditors through hair cut. Greek government bonds are expected to take losses about 53.5% from the face value of their holdings.

The swap will have investors keep a percentage of the longer term Greek bonds and add short term paper from the European Financial Stability Fund. Despite this cynicism hovered on Greece that they may still not be able to tame the debt crisis. Reports showed US sales of previously owned houses fell below expectation and the European manufacturing shrank.

The Euro weakens after Fitch lowered Greece s credit rating by two notch from CCC to C citing a default is likely in the near term and fueled concern the of a stalling global recovery. The German business confidence rose to the highest level in seven months which sent Euro to the highest level in 10 weeks. Chinese benchmark rate dropped the most to 20.50% in a month as the reduced CRR took effect from last Friday to help ease cash squeeze estimated about an addition of 400billion Yuan to the financial system. From the Euro are German IFO number came in good with GDP growth maintaining the pace as prior. Index of US consumer confidence rose unexpectedly to a one year high and purchase of new homes in January topped forecasts. Jobless claims also held at a four year low. Amid such political wrangle commodities rose capping the longest rally in 10 months on signs of gains in the US economy led by Crude oil.

Aluminum

BHP Billiton and Alcoa has shelved smelting capacity due to increased energy prices for processing bauxite limiting production output supporting price gain Fundamentally the inventories have witnessed drawdown and cancelled warrants are maintaining at 31.73 percent however due to moribund economic activity of Euro zone coupled with appreciating rupee we expect gains may remain limited in the coming week LME Aluminum future prices last week closed higher than the previous week up by more than 7.00% prices have made a high of made a high of $2328 against the low of $2165 and finally settled lower at $2327 levels. Last week we have seen prices have made a low of $2148 levels but in this week prices have shown smart recovery from the lower levels. The principle of Fibonacci retracement states that prices may test the levels of $2354 and $2470 levels which are 23.6% and 0.00% retracement levels of the range of $2476 to $1962 levels. Prices have breached the trend line resistance of $2285 after that we have seen good buying pressure in the Aluminum prices in the last three days. Over all we expect Aluminum prices may trade higher for the coming week it may continue their positive direction. Going by the above analysis we expect for the next week. Aluminum prices may touch the levels of $2380 and $2470 levels.

The Momentum Indicator RSI for 14 days is trading at 64 levels which are supportive for the Aluminum prices and prices have room for the upper aside levels. Traders may use buy at lower levels strategy and may be expect its bullish direction and recommended buy at lower levels for the coming week. COPPER Copper demand witnessed growth as Chinese government reduced cash reserves pumping 400 billion Yuan boosting economic activity Mitsubishi Corp. Japan s biggest commodity supplier and trader has bought stake in Anglo American Plc s copper unit in Peru at $886 million increasing production by 40 k MT as it plans to increase output by 76 percent this year to mitigate domestic demand LME Copper prices last week have seen recovery from the lower levels prices have made a low of $8203 against the high of $8544 and finally closed at higher at $8530.50.

The principle of Fibonacci retracement states that prices have seen resistance at $8655 which is 61.8% of the range of $9905 $6632 levels if breaches this levels prices may touch the trend line resistance$8950 levels which is trend line resistance. Support is seen at $8270 levels which are 50.00% of the range of $9905 $6632. Copper prices have closed the 8 21 and 34 days EMA and it is supportive for the copper prices. The indicator analysis RSI 14 on a daily chart is trade near 57.8 which is above the centre line (50) last week RSI has taken a support from 50 levels and continue their positive direction for these copper prices may continue its positive direction. Going by the above analysis next week copper prices may trade higher and buy lower levels will be the good strategy for short term trader.

Lead Philippines may lift its suspension on the issuance of mining permits in order to attract investor and it may increase mining activity developing the local economies In the coming week the Euro zone may continue to support the bullish trend as longer term refinancing operation along with increased bailout fund may strengthen the Euro currency NICKEL Vale s profits continued to shrink as its Nickel in matte production and sales dropped by 13 percent Metal prices continues to remain on losing spree however slight pullback is expected in the coming week due to better US releases coupled with better Euro zone expectations ZINC Zinc prices also gained though inventories maintained record stockpiling in last two decades followed by weak spot demand Fundamentally Zinc is weakest among base metals due to declining warrants however better US economic releases in the form of existing homes and manufacturing may provide slight pullback in coming week Courtesy: Karvy Commtrade Ltd.


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