Base metals crumbled during February, with broad based selling palpable across the commodity complex. Several reasons can be attributed to this weakness. Primarily, markets seem not to be impressed with the fact that recovery in global economy remains erratic. Post Lunar New Year holiday period in China, the economic activity has not been encouraging. There have been doubts regarding any uptick in domestic demand in the short run. Retail sales in China during the week-long Lunar New Year festival rose at their slowest pace during the past four years. In addition, speculation is rife that local Chinese government entities may impose further restrictions on housing markets. It is widely reported that Chinese government is planning to move ahead with plans to increase down payments and loan rates for buyers of second homes in cities where prices are rising too quickly. China’s government has also announced plans to impose a 20% income tax on property gains in an effort to curb speculation.
In US, although housing markets have bottomed out and confidence readings are rising, investor sentiment still remains cautious. This can be explained by the fact the overall growth still remains anemic. Fourth quarter GDP growth of 0.1% is not at all characteristic of a recovery in the world’s largest economy. Concerns regarding an early end to US Federal Reserve bond buying programme also took a toll on the investor sentiment. There have been perplexing signals emanating from the US Federal Reserve stance on the monetary policy. In this respect, some members of the apex body have suggested withdrawing the monetary stimulus before the unemployment target of 6.5% is attained. Some members have also voiced concerns that quantitative easing may generate asset bubbles in the economy. However, US Federal Reserve Chairman Ben Bernanke has mitigated the uncertainty by defending the central bank’s bond-buying program. Bernanke has clearly downplayed the expectations of an end to the stimulus program. Bernanke in his recent testimony elaborated that the central bank does not see the risk of bond buying outweigh the benefits of promoting economic recovery and job creation.
In Europe, there is yet no glimmer of hope. Macroeconomic indicators suggest that that growth remains sluggish. Latest PMI readings reveal that manufacturing activity contracted across various countries. Spain and Italy remain mired in recession and high unemployment rates. Moreover, European Central Bank has forecasted that 2013 Eurozone output will contract for the second consecutive year.
The focus remains accentuated on the developments in China, wherein the physical activity is reported on a subdued note. Demand has witnessed a modest pickup during Q1, which is very uncharacteristic, considering the fact that the first two quarters of the year are traditionally known as a strong demand period in China. In addition, Chinese government's aggressive stance on the housing markets may adversely impact the demand prospects for the non-ferrous metals. We reiterate with our short term bearish view on the complex, unless we witness the Chinese metal markets pulling a rabbit out of the hat, as far as pick up in demand is concerned.
Base Metals Snapshot
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