The entire Copper and Base Metals complex can remain under pressure over the next few months. With weaker Chinese economic activity & continued growth fears globally, more specifically in Europe, Copper and Base Metals complex should remain under pressure, grinding lower over the coming months.
Markets generally tend to be slower in anticipating negative than positive developments. The slight bounce up in Copper and Base Metals following Chinese GDP numbers yesterday may have largely been on short covering & may not last longer. The short covering in copper has resulted in some tightening of the nearby spreads. Along with Copper, Base Metals like Aluminum, Nickel, Zinc, Lead and Tin were also stronger.
China’s gross domestic product (GDP) grew 7.6% in the second quarter from a year earlier, in line with estimates. June industrial-production growth of 9.5% was just below forecasts, while a rise in fixed-asset investment of 20.4% was above the consensus. China’s economy is still growing, but is likely expanding at a much slower pace than the official numbers indicate. But the IP (industrial production) component came in below expectations.
Copper prices generally rise on positive Housing Data. But the recent encouraging Housing Data from the US should not be looked upon as a major Economy Booster as it no more plays the important role in the GDP as it did a few years ago & neither are these news any solid indicator of an improvising housing sector in the US. Housing sectors now accounts only for 2.3% of GDP as compared to a 6.3% in the pre 2008 times. Distressed sales also accounts for a larger share of the total housing sales rather than new home sales, which largely indicates the current state of this sluggish sector in the United States.
There definitely are the long-term risks of creeping Inflation in view of the ultra-loose monetary easing policy pursued by central banks all over the world. Quantitative Easing is the only presumed solution seen by Central Banks in most nations. Weaker Economic data is constantly being viewed by Markets as a Potential trigger for further stimulus measures, rather than an alert on impending doom & gloom.
Many commodity markets presently trying to rebound from their lows and showing some strength, to begin to suggest the sector has bottomed out. Remember that markets will start to react to anticipated events before they actually occur. That means the raw Commodity Markets sector could start to rebound even though some more bad economic news may be coming in the near term. What could prove more positive for Copper and Base Metals is the investment-spending component, which if it remains strong could prove a boon for consumption later in the year.
For any substantial investment demand to pick up in the current global scenario, the Commodity Markets need either a sharp increase in real market demand, substantial US dollar weakness or more US Federal Reserve’s (3rd round) quantitative easing. With more Money Printing through quantitative easing, the US dollar would weaken & there would be a demand in the markets for opportunities to hedge against the US Dollar’s decline. Substantial upsides in Copper and Base Metals can be expected only once the US monetary easing – QE3 (or by any other name) is announced.
Downside risks include a Greek exit from the euro-zone, more banking stress or euro-zone disharmony, a hard economic landing in China and further slowing ofU.S.growth. Upside risks include agreements on euro-zone sovereign-debt issues or greater-than-expected stimulus from China & the U.S.
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