MARKETS-METALS (UPDATE 2) * Economic outlook improves with encouraging U.S. home sales * Copper overbought, may need correction * Aluminium up on supply worry despite record high stocks By Rujun Shen and Edmund Klamann SHANGHAI, July 24 (Reuters) - London copper fell 0.6 percent on Friday as investors paused after a recent rally pushed prices to nine-month highs, but they remained mostly bullish, encouraged by an improving outlook on demand and economic recovery. Brightening the economic outlook, U.S. home sales rose for the third straight month in June and prices hit their highest level since October, fuelling hopes the housing sector was on its way to recovery. [ID:nN23398724] On the stock market, the Dow pushed above the key 9,000-mark for the first time since January, thanks to strong corporate earnings, besides the rebounding home sales. [.N] "The overall sentiment in the metals market has improved a lot," said Yingxi Yu, an analyst at Barclays Capital. "It has not much to do with the dollar, but follows stock markets closely, as the second quarter's corporate earnings were broadly better than expected, improving the outlook on the economy." Copper for three-month delivery on the London Metal Exchange edged down 0.6 percent, or $35, to $5,495 a tonne by 0701 GMT, but was headed for a 3.6 percent weekly gain. The price of the metal, used in power and construction, has gained 10.7 percent so far this month. Shanghai's benchmark third-month copper futures contract closed up 0.6 percent at 43,700 yuan a tonne, on course for a 4.7 percent gain from a week earlier. The most-active contract for November delivery gained 0.7 percent to 43,700 yuan a tonne. "Copper may go through a brief correction, but prices won't fall sharply, as speculative bulls are still around," said Wang Zhouyi, an analyst with Shanghai CIFCO Futures. Copper supply concerns also underpinned the bullish sentiment. Violence was reported near Freeport-McMoRan's massive Grasberg mine in Indonesia, and a power problem occurred at Anglo American's Chilean Collahuasi copper mine, but so far neither has reported serious production disruptions. Echoing the nervousness on supply, Japan's copper smelters have agreed to a one-third cut in processing fees from miners for the year starting in July, as tight supplies of copper concentrate heated competition among smelters for the raw material. [ID:nT266985] "Despite these supply-side concerns, we find it hard to make the case for anything approaching a runaway bull market in copper (or any of the metals for that matter), given the still sluggish rate of growth noted in most economies," analyst Edward Meir at MF Global said in a research note. London copper's RSI, or Relative Strength Index, was at 72.7 and indicated the contract was overbought. In addition, LME stocks have been inching higher, which might give bulls some pause in the days ahead, Meir added. LME's copper stockpiles rose again on Thursday, up 3,225 tonnes to a one-month high of 271,725 tonnes. The Shanghai Futures Exchange is due to release its weekly stockpiles data later in the day. Expectations on copper stocks varied, but fell roughly in the range of up to 2,000 tonnes on either side. Shanghai aluminium closed up 2 percent at 14,185 yuan a tonne, after hitting 14,230 yuan, its highest since the end of October. London aluminium inched down $2 to $1,775, up 4.5 percent in the past week. "Consumption is expected to pick up, and investors are concerned that available aluminium stocks are very limited, possibly to cause potential supply tightness," said Zeng Chao, an analyst with Everbright Futures. LME aluminium stocks fell 1,825 tonnes on Thursday, but still hovered near the record high above 4.5 million tonnes, unlikely to restrain a price rise in the metal. [ID:nLL175677] Base metals prices at 0701 GMT Metal Last Change Pct Move End 2008 Pct chg 09 LME Cu 5495.00 -35.00 -0.63 3060.00 79.58 SHFE Cu* 43700.00 280.00 +0.64 23840.00 83.31 LME Alum 1775.00 -2.00 -0.11 1535.00 15.64 SHFE Alum* 14185.00 290.00 +2.09 11540.00 22.92 COMEX Cu** 249.00 -2.90 -1.15 139.50 78.49 LME Zinc 1695.00 -4.00 -0.24 1208.00 40.31 SHFE Zinc 14050.00 265.00 +1.92 10120.00 38.83 LME Nickel 16275.00 -125.00 -0.76 11700.00 39.10 LME Lead 1735.00 -10.00 -0.57 999.00 73.67 LME Tin 14300.00 -190.00 -1.31 10700.00 33.64 LME/Shanghai arb^ 219 Dollar/yuan 6.8313 \ 6.8315 ** 1st contract month for COMEX copper * 3rd contact month for SHFE aluminium, copper and zinc ^ LME 3-m copper in yuan, including 17 pct VAT, minus SHFE third month (Editing by Clarence Fernandez)

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