At the onset of June, metal market participants had tall expectations in regard with US Federal Reserve’s testimony, with many anticipating that the apex body would finally admit growing signs of weakness in the US economy and effectively convey that additional easing is in the offing. Conversely, markets fell sharply in the result of his remarks, as hopes of quantitative easing were dashed.
In Europe, finance ministers announced a greater-than-expected 100bn euros aid for debt troubled Spanish banks, but the markets barely reacted to this event. On Greek elections, a comprehensive win for the pro-bailout parties effectuated a moderate upside rally for the markets, but the euphoria did not last long. Eventually, a successful European economic summit at the end of June triggered strong broad based buying amongst the commodity complex. Henceforth, most of the metals were able to sustain those gains during the first week of July, as market participants were sensing that various central banks across the globe could initiate another round of monetary easing measures, considering the prevalent macroeconomic backdrop.
In this regard, China has cut interest rates for the second time in two months. Lending rates have been lowered by 31 basis points to 6% and deposit rates will also be reduced by 25 basis points to 3%. In Europe, ECB has cut its interest rate to a record low of .75% and its deposit rate to zero. The Bank of England preferred to stay put on interest rates, but it announced a 50bn pounds increase in the amount of asset purchasing. Conversely, markets reacted in a subdued manner to the recent interest rate cuts announced in China and Europe. It reveals that market participants remain uninspired by rate cuts especially in the West, where the prevalent interest rates are practically close to the floor. In China, although interest rates have much further room to fall, market participants have realized that Chinese economic activity will not be driven by interest rates move, as more significance is accentuated on the recessionary conditions in Europe, which is China’s biggest export market.
On macroeconomic front, recent flow of numbers continues to cast dark shadows regarding the global economic growth prospects. In China, purchasing managers’ index, industrial output, fixed-asset investment and retail sales growth have clearly started showing signs of slowing. Effectively, series of subdued numbers out of China have triggered economic agencies to downgrade growth prospects for the economy, with Q2 GDP projections now as low as 7%. Needless to say, European economic numbers denote manufacturing activity contracting sharply. Manufacturers are cutting back on both staff and raw material procurement. Germany, which is the core of European economy, is also unable to evade the gloomy backdrop, with its manufacturing sector contracting at its fastest pace since June 2009. In US, latest ISM readings showed that manufacturing activity contracted in June.
Base metals have moved sharply higher during the end of June, aided by external factors rather than intrinsic fundamentals. Looking forward for this month, we believe that the complex will be under moderate pressure, as Chinese economic activity seems to be struggling and monetary easing policies cannot abate the slowdown in the world’s largest metal consuming nation, unless China’s biggest export market (Europe) show signs of stabilizing.
Base Metals Snapshot