Metals get some lift as background conditions improve

MORNING REPORT

Metals get some lift as background conditions improve

London, 15 December 2008 – The failure of the US auto bailout on Thursday night pulled the rug from underneath the stronger tone in metals that had gathered steam mid-week, but although Friday was a negative day it did not turn out to be a total wipe out as some had feared. However it was enough to send zinc down to fresh four year lows – but that is not a surprised as in recent days we have turned decidedly bearish on zinc on the technical and fundamental front, thinking it has some catching up to do with copper, aluminium and lead.  However for the base metals complex as a whole although we are not bullish, we do see room for more short covering as traders square up ahead of year end. We feel the underlying mood of the markets is one of book squaring and that means the recent trends seen since September are likely to see some counter trend moves now. Although at face value this might look like the market is taking on more risk again as equities and metals rise and the dollar falls – we think it will be the opposite, it will be buying to cover shorts. The positive close on the Dow on Friday which followed reports that the Bush administration may bailout GM and Chrysler has set the tone for a stronger Asian market this morning which has the Nikkei up 5.2% and the Hang Seng up 3.7%.  In turn it has given the metals a boost with copper up $65 at $3,230 with aluminium up $30 at $1,520, zinc up $27, lead up $12, nickel at $10,715 with tin up $100 at $11,700. Volume however has been light with 632 lots of copper, 483 lots of aluminium and 408 lots of zinc. In Shanghai the February contracts are all up, with copper up 3% at Rmb 25,390, aluminium up 1.5% at Rmb 10,760 and zinc up 2% at Rmb 9,250.  In the broader markets the dollar is under pressure indeed it seems to have broken down with the dollar index down below 84.40 at 83.81 and the euro at 1.3460. Oil is stronger too with Jan crude last at $46.50 and gold at $827. The Dow in the pre-market is also up 80 points so all in all the background for the base metals looks positive. However on the charts the metals look very much in limbo so they are still looking reluctant to join in the stronger mood in other markets, this is surprising considering the dollar weakness, but it does suggest the metals are focused on the gloomy economic outlook. As such much will depend on whether short-covering picks up. On the economic front, Japan’s Tankan manufacturing index fell to -24 from -3 and with the non-manufacturing index falling to -9 from 1, which does not bode well. Further insight into the state of US manufacturing will also come from this afternoon’s US data, see Table on right. Overall we are mildly positive for the metals today

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