METALS MORNING VIEW 26/07: Copper in the driving seat

Copper prices continued to rally this morning, Wednesday July 26, reaching $6,400 per tonne, which was up by 2.3% from Tuesday’s close. The rest of the complex is split with nickel and zinc off around 1%, while the rest are little changed, although they have been choppy.

This is what you would expect given Tuesday’s performance, when copper led a massive rally in the base metals with prices up by 3.7% to $6,258.50 per tonne, with the rest of the complex up by an average of 1.8%. It appears that good buying out of China yesterday morning saw follow-through buying, which then appears to have run into stops once prices overcame the February high in copper.

Precious metals are split between gold, silver and platinum that are off around 0.7% this morning, while palladium prices are up 0.9%. Spot gold was recently quoted at $1,244.21 per oz. This follows a volatile day on Tuesday, but one where prices closed near their opening levels. A rebound in the dollar yesterday, following better US data, seems to be weighing on price now.

Metals prices on the Shanghai Futures Exchange (SHFE) have followed through on the upside with prices up an average of 1.7% as of 08:06 BST. Copper leads the way with a 4.5% gain to 50,390 yuan ($7,455) per tonne. Lead prices are up 2.2%, nickel prices are up 1.7%, zinc prices are up 1.2% and tin and aluminium prices are up 0.4% and 0.2% respectively. Both on the LME and SHFE, aluminium prices have been reluctant followers of copper. Spot copper prices in Changjiang are up 3.8% at 49,610-50,210 yuan per tonne and the LME/Shanghai copper arb ratio has firmed to 8.0.

In other metals in China, September iron ore prices on the Dalian Commodity Exchange are off 0.6% at 518 yuan per tonne and on the SHFE, steel rebar prices are up 0.8%, but gold and silver prices are off 0.8% and 0.7%, respectively.

In international markets, spot Brent crude oil prices are stronger at $50.73 per barrel as Saudi Arabia said it would limit exports. The yield on US ten-year treasuries has jumped to 2.32% following better US data and the German ten-year bund yield has climbed to 0.55%.

Equities were bullish on Tuesday with the Euro Stoxx 50 closing up 0.3% and the Dow closed up 0.5% at 21,613.43. Asian markets are mixed, the Nikkei is up 0.5%, the Hang Seng is up 0.3% and the ASX 200 is up 0.9%, while the CSI 300 is off 0.4% and Kospi is down 0.2%.

The dollar index is rebounding, it was recently quoted at 94.12, after a low on Tuesday of 93.63, the euro is consolidating at 1.1641, sterling is flat at 1.3017, the yen is weaker at 111.81 and the Australian dollar is weaker at 0.7897. The yuan is consolidating at a slightly weaker level of 6.7555, the real, peso and rand are weaker too, while the other emerging currencies we follow are little changed.

On the economic agenda today, Japan’s services PPI rose 0.8%, in line with expectations, later there is UK data on GDP, mortgage approvals and index of services, with US data including new home sales, crude oil inventories and then the US Federal Open Market Committee (FOMC) interest rate decision and statement – with all eyes being on the statement.

Copper is in the driving seat with Tuesday’s and this morning’s powerful price gains. The break above the February high at $6,204 per tonne no doubt triggered stops and short-covering, which has led to some fast price moves. We would now expect consolidation to set in with a possible test of the break up level. There have been rumours for a long time that large short positions were building up and questions about how these positions would be rolled forward or covered. With the buying emerging yesterday morning out of China it does look as though the unwinding of the positions is underway, key now will be how it is managed and how long it lasts. We would now expect volatile trading in copper for a while. The other metals, to varying degrees, have followed copper’s lead, but none of the others have set fresh highs for the year, so we do see this as being copper specific. We have generally been quietly bullish for copper prices, however this run-up is in danger of running ahead of the fundamentals again.

The stronger dollar and better US data may well make the market expect a more hawkish tone from the FOMC statement this evening, which could underpin a rebound in the dollar and that is likely to act as a headwind for gold, silver and platinum, while palladium is likely to trade its own fundamentals.

Metal Bulletin publishes live futures reports throughout the day, covering major metals exchanges news and prices.

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