FX:LME MORNING - Base metals rally after US debt agreement but cautious mood remains
London 01/08/2011 - Base metals staged a relief rally on the LME on Monday morning, with buying flowing into the complex due to the last-minute US debt ceiling deal reached over the weekend.
Copper sprinted to a fresh three-and-a-half-month high above $9,900 and nickel rose to its highest since early May but gains were then trimmed - the metals complex still has wider macroeconomic hurdles to contend with.
"Everyone was getting a little carried away. But [the US] had to reach a deal so it is no real surprise, after all," a trader said.
The dollar was also stronger at around 1.4410 against the euro and metal prices consequently settled back into a sideways ranging pattern.
"Also, they were powerful closes on Friday and it was the end of the month, so we have seem some buying in anticipation of fresh fund interest, although there has been no evidence of that yet," the trader added.
The initial spurt higher was aided by equity markets, which also gained, while better-than-expected Chinese manufacturing data released in Asia also provided a boost to previously muddy short-term sentiment. There, the July CFLP Manufacturing PMI came in at 50.7 against a forecast of 50.2, although it dropped from 50.9 in June.
In the US, lawmakers will vote later on a White House-backed compromise deal that raises the debt ceiling and will cut about $2.4 trillion from the deficit over the next decade. If passed ahead of Tuesday's deadline, this will avoid a default and downgrading in the US' credit rating.
This has removed one element of the uncertainty that had choked the metals complex recently, although concerns remain over eurozone sovereign debt contagion, while recent US data - last Friday's second-quarter GDP notably - has underwhelmed.
Most metals were unlikely to rise significantly, traders said, given that August is traditionally a slow month for industrial activity and metal offtake in the Northern Hemisphere. The short-term positive will be whether the complex witnesses fresh new-month risk appetite flows.
"The momentum in the metals remains to the upside so the relief rally may well push prices higher but, even with the debt issues now likely to take a back seat for a while, we feel the global growth outlook does not really warrant higher metal prices," William Adams of FastMarkets said.
Copper advanced as high as $9,905, its best since April 11, before tracking back to $9,875 per tonne, still up $55 as supply-side issues rumble in the background.
There was a 24-hour stoppage at Chile's Collahuasi mine over the weekend, while the strike at Escondida, where the mine operator has declared force majeure on concentrate shipments, is in its second week and has yet to be resolved.
"The two mines together account for over 10 percent of global copper output. Consequently, the price should continue to be supported on this front," broker Commerzbank said in a report.
This morning, warehouse stocks fell a net 525 tonnes to 466,025 tonnes but cancelled warrants - the metal booked for removal - dropped 8.3 percent to 13,400 tonnes, the lowest since April 13.
Although there is stern resistance stretching towards the mid-$9,900s, the market's ultimate objective is the $10,190 all-time high hit in February.
Nickel raced to a three-month high of $25,195 and then held at $25,105, up $110. But producer sales are expected above $25,000 while warehouse inventories rose 558 tonnes to 103,098 tonnes, due to 834 tonnes warranted in Rotterdam, with more likely in the short term.
Zinc eased from its highs but at $2,517 was still up $27. Stocks fell 225 tonnes to 889,325 tonnes, while cancelled warrants edged up to 113,900 tonnes, the highest since April 2006.
Elsewhere, aluminium business at $2,650 was up $26 - inventories fell 7,650 tonnes to 4,445,600 tonnes. Lead rose to $2,650, a $37 advance, while stocks declined 775 tonnes to 310,675 tonnes.
Tin was $575 higher at $28,675, while inventories fell 50 tonnes to 20,815 tonnes. Steel billet was indicated at a wide $580/610. In the minors, cobalt was $500 higher at $35,500/37,500, while molybdenum was quoted at a wide $30,750/36,500.
