Base metals moved higher during the first half of September, as monetary stimulus measures across the globe provided a shot in the arm to the bulls. At the onset, European Central Bank decided to initiate unlimited purchases of sovereign debt in order to lower the borrowing costs in Spain and Italy. Then, US Federal Reserve decided to expand their balance sheet aggressively by initiating additional purchase of mortgage based securities worth US$40bn every month. Bank of Japan announced that it would expand its asset-purchase fund by US$126bn and abandon its minimum yield targets on monthly government-bond purchases, while the Bank of England voted unanimously to continue buying bonds as well. In China, the country’s top economic planners have approved another batch of major infrastructure-investment projects worth US$156bn. Speculation is also rife that China would reduce both reserve requirements and interest rates over the next several weeks.
However during the second half of September, the complex scaled back gains, as monetary easing euphoria started to fade and the focus accentuated on the prevalent macroeconomic backdrop. Considering the fact that the flow of macro numbers have been uninspiring, it was no surprise that most of the non-ferrous metals has retreated from the recent highs. Macroeconomic numbers have been dismal across various geographies, barring U.S wherein the recent employment readings have been relatively better. In China, HSBC PMI reveals that activity in Chinese manufacturing sector contracted for the 11th straight month in September. European manufacturing activity as well has been contracting and effectively the PMI readings have been hitting multi-month lows.
On European debt crisis, the ECB has expressed its eagerness to aid the beleaguered member nations by intervening in the sovereign bond markets. However, its assistance has strings attached, wherein the debt troubled country has to first seek aid from the existing bailout fund and only then can resort to ECB for further help. In event of ECB intervention, the member nation also needs to abide by the prescribed budgetary reforms. Such conditions are dissuading countries like Spain from reverting to ECB for assistance in spite of the deteriorating economic conditions.
On growth front, Asian Development Bank has stated that economic growth in Asia (ex-Japan) will come in at 6.1% during 2012, the lowest reading since 2009. Slowdown in China and India has effectuated a downward revision in the growth forecasts for the region. The World Bank expects China’s growth to come in at 7.7% in 2012 (down from 8.2%) and 8.1% in 2013. In the meantime, IMF now sees the world economy growing 3.3% this year, the slowest since 2009.
Prevalence of countervailing forces has made it difficult for the market participants to bet on a one particular direction. In this regard, we have gloomy economic backdrop on one side and the impetus of monetary stimulus on the other. At this juncture, we infer that upside in most of the non-ferrous metals seems to be overdone, considering that elation regarding the monetary stimulus is dissipating.
Base Metals Snapshot
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