Isra-Mart srl: Metals remain under pressure as broad markets run scared

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The downward spiral continued on Monday, Asia followed the weak performance on Friday in the US and Europe followed Asia lower. Base metals dropped by an average of 1.5 percent yesterday, with nickel and aluminium leading the way down, they dropped 2.2 percent and 2 percent respectively. Copper dropped 1.4 percent to $8,960. Although still quite far away, all eyes will now be on whether copper drops back to retest recent lows below $8,500 – if it does then that will be further confirmation that the down trend dominates.

Overnight the weakness has continued, equities are lower and the base metals are down an average of 0.8 percent, nickel leads the decline with a 1.4 percent drop to $20,691, copper is down $73 at $8,886 while aluminium is $14 lower at $2,378. Volumes have been strong with total volume of 8,466 lots, of which copper has traded 3,962 and zinc has traded 2,856 lots. So high volume and still lower prices do not bode well, although we note that zinc is only down 0.2 percent despite the volume.

Equities - the Dow was closed yesterday but the Euro Stoxx 50 was down 5.1 percent and in Asia this morning the tone remains weak, but the momentum has eased with the Nikkei down 2 percent, the Hang Seng down 1.5 percent, the MSCI Asia Apex is down 1.1 percent and China’s CSI 300 is off 0.6 percent. Key will now be whether the US follows suit, or whether the Dow’s likely opening gap lower attracts bargain hunting ahead of Obama’s jobs speech on Thursday, or whether more selling is seen. The Dow closed on Friday at 11,240 - the pre-market level is now indicated around 10,990.

The Shanghai November contracts are down an average of 1.4 percent, zinc is down 1.8 percent at Rmb 16,710, copper is down 1.6 percent at Rmb 66,430, lead is down 1.3 percent at Rmb 16,515 and aluminium is down 0.8 percent at Rmb 17,240.

Spot copper in Changjiang is down 1 percent to Rmb 66,900-67,350, so the lower prices do seem to be attracting some physical buying, which is cushioning the fall in spot prices and is keeping the market backwardated. The LME/Shanghai arb window remains closed, but only by a margin of $31/tonne, so if the LME keeps falling at a faster pace than Shanghai then the window may well re-open and in turn that could start to cushion LME prices.

The dollar remains upbeat with the dollar index at 75.27 – it is gradually eroding overhead resistance that runs up to 75.50. The euro is weak at 1.4068, as is the pound and the aussie at 1.6090 and 1.0520, respectively. The yen is little changed at 76.77 and the yuan is off the highs, last at 6.3950.

The economic diary is relatively quiet, the UK’s BRC retails sales monitor showed sales falling 0.6 percent after a previous gain of 0.6 percent. Later we get revised EU GDP data, German factory orders and in the US, the all important ISM non-manufacturing PMI. However, with bond yields rising in Europe again the market is likely to be focused on sovereign debt and European banks.

Overall the market is running scared, gold has set a new record high around $1,921, silver is strong at $43.11, but beginning to lag behind gold again. The base metals continue to retreat as they give back some of the ground gained in late August – however they are all well above the lows from early August and therefore the pull back could still be seen in terms of consolidation.

On balance we expect the markets to remain very nervous, prices are adjusting lower to the deteriorating economic outlook, but we should expect some response from governments and central banks and that could lead to another bout of short-covering. So medium term we remain bearish and expect the down trends to continue, but short term (ie over the rest of this week) we would not be surprised to see some counter-trend moves and scale-down buying.