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Positive PMI Data Drives Up Base Metals Market
Sep 2,2010 16:25CST
smm insight

SHANGHAI, Sep. 2 (SMM) – China’s Federation of Logistics & Purchasing (CFLP) and HSBC Bank announced on September 1st the better-than-expected Purchasing Managers’ Index (PMI) of China’s manufacturing sector, respectively. Later, the Institute for Supply Management (ISM) also released strong PMI data in the US. Both favorable PMI data helped send financial markets higher.

Rising PMI Indicates No Major Correction Expected in China Economy
The CFLP and HSBC Bank announced China’s PMI data for August, respectively. According to the CFLP, China’s PMI of manufacturing sector rose to 51.7% in August, up 0.5 from July, and the data from HSBC Bank was 51.9%, up 2.5, setting a 3-month high. Favorable PMI data out of China indicates a positive recovery trend of China’s domestic economy. According to the CELP, the purchasing price index increased most in August, up 10.1% from July, which will add pressures on enterprises to manage costs.

Among the 11 sub-indexes, production, new orders, new export orders, outstanding business, purchasing price, and supplier deliveries increased in August. Of those, new orders, new export orders, outstanding business and purchasing price rose at more than 1% in August, and the purchasing price index experienced the largest increase; finished goods inventory, purchasing volume, import, raw material inventory, and employment fell. Among those, the finished goods inventory index dropped by 3.0, and other indexes fell within 1%. Both PMI out of China released by the two indicates that China’s economy will not experience a major correction.

ISM Manufacturing Data Beats Forecast
The US Institute for Supply Management (ISM) announced on September 1st that the ISM's manufacturing index rose from 55.5 in July to 56.3 in August, showing the US manufacturing sector experienced strong recovery, with the employment growing as well. The US manufacturing index have shown expansion trends for 13 consecutive months, with the purchasing activities in manufacturing sector reporting a month-on-month growth for the first time over four months. The previous survey shows that 6 of 8 regional manufacturing indexes in the US fell on a monthly basis in August, and economists generally predicted the ISM's manufacturing index in August would be weaker than July levels, with the index estimated to fall to 53.2.
11 of 18 sub-sectors in manufacturing industry tracked by the ISM experienced growth, with increases led by base metals, clothing, and transport equipment sectors. New order index in August fell from 53.5 in July to 53.1, while production index rose to 59.9 in August from July levels of 57.0. Inventory index increased to 51.4 in August from July levels of 50.2. Factory employment index in August rose to 60.4 from July levels of 58.6, which was in contrary to the employment data previously announced by the ADP Employer Services. Price pressure rose slightly, as price index rose from 57.5 in July to 61.5 in August, but was still lower than a high of 77.5 in May. The US manufacturing data experienced rapid increases in August, an indication of recovery in the US manufacturing sector, and market concerns over a double-dip recession in the US manufacturing sector eased as a result.  

Financial Markets Rally
Better-than-expected manufacturing data from the US and China indicate that market economic outlook is not as gloomy as previous estimation. Upbeat manufacturing data encouraged investors to hold risk assets, and bargain hunting for manufacture-related financial products was popular by investors. In this context, the US equity markets finished with significant gains on September 1. Dow Jones industrial average index ended 254.75 points higher to 10,269.47, up by 2.54%, the largest intraday increase last seen in July 7 and also the fifth largest intraday increase within in this year. Nasdaq composite index finished 62.81 points higher to 2,176.84 points, or up 2.97%. Standard & Poor's 500 index closed up 30.96 points to 1,080.29 points, or up 2.95%. All index closed higher across the board. Industrial and financial equities experienced the largest gains.

In this context, LME base metal prices rallied across the board on September 1st. LME copper for delivery in three months ended USD 215/mt higher to USD 7,625/mt, the largest single day rally since May 21, and LME aluminum prices were up by RMB 58.25/mt to USD 2,103.25/mt and LME zinc prices climbed USD 74/mt higher to USD 2,149/mt. LME lead prices increased by USD 66/mt to USD 2,126/mt, and LME nickel prices advanced by USD 416/mt to USD 21,176/mt and LME tin prices were up by USD 475/mt to USD 21,425/mt, with improved trading sentiment reported. Currently, spot price discount is narrowing, which is lending strong support for base metal prices. It is expected that base metal prices will hover around high level for the foreseeable future. 


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