Oct. 26 (MF Global) -- This market comment was written at 8:00 a.m. on October 25th, US east coast time...
We had another stunning surge in metals yesterday, with copper exploding by nearly 7% to its highest level in nearly a month; in the past two full trading sessions alone, the complex has tacked on roughly $1000/ton. We were not surprised to see a stronger tone set in over most markets, as we expected to see a degree of strengthening heading into the European debt negotiations. However, metals stumbled along the way, as was the case last Thursday when they inexplicably fell apart, but the fact that they regrouped underscored the upward pull the European debt talks have on the markets. Of course, yesterday's rally was also encouraged in large part by the favorable Chinese PMI readings, discussed in Monday’s commentary.
Right now, we are seeing modest declines in most metals. Earlier gains after a second limit-up session for copper in Shanghai have receded, as investors wait for some kind of European announcement tomorrow. The topic that seems to be receiving the most debate right now is a proposal to boost Europe’s bailout fund. Here, German Chancellor Angela Merkel said she will support expansion of the fund, but will ask German lawmakers to go on record and vote for its approval as well. There are two leveraging models under consideration that could be used to boost the fund’s firepower, estimated to reach about €1 trillion; the first would be to increase capacity by insuring a fraction of countries’ funding requirements, while the second combines capital from European and non-European investors. The two are said not to be “mutually exclusive,” and so we likely will see a hybrid proposal emerge. The head of Merkel’s Free Democratic coalition partner indicated support for the fund when it comes up for a vote later in the week, explaining that: “Two conditions of the deliberations are vital for us: the upper limit of Germany’s 211 billion Euros in guarantees can’t be increased, and the EFSF mustn’t get a bank license. These conditions have been retained” the FDP leader told reporters. In addition, German lawmakers said that they will insist on a full parliamentary vote on any measures negotiated, a move that will likely extend the formal ratification process beyond Wednesday.
In other markets, oil prices are mixed, with WTI sharply higher, while Brent is down, as the spread between the two contracts continues to erode. The Euro is steady, trading at around $1.3930, and finally moving higher late in the day yesterday after a fairly restrained start to the week US stocks are expected to open modestly lower after a good showing yesterday; Dow futures are pointing to a 20-point decline.
We suspect that we could push higher still in metals very short-term, but the bulk of the move is likely behind us, as the markets will have more or less have discounted the European debt stabilization by tomorrow, allowing investors to focus more on ongoing macro developments. Here, things to be very mixed -- US macro readings are recovering rather impressively from September’s more somber tone, but European data is showing greater deterioration. China remains an enigma in that growth readings are still fairly robust, but there are pockets of concern that confront the authorities.
Later today out of the US, we get the Case-Shiller 20-city price index for August (expected at -3.5%), as well as October consumer confidence readings (expected at 46).
In other news, money manager BlackRock sees "massive opportunity" in oversold mining stocks, the firm's resources investment division chief Evy Hambro told reporters on Tuesday. Investments in mining by the company account for roughly $36 billion, making the holdings one of the world’s largest single exposures to the sector.
COPPER SUPPORT: $6635 / RESISTANCE: $7700
We are now at $7665, up $30, but did get to an intraday high of $7820 earlier in the day. We are looking for two closes above $7700 to set the stage for a further advance, but our feeling is now that we have done too much too quickly, and could be in for a pause here. LME stocks were down sharply again today, bringing the three-day cumulative decline to some 12,000 tons.
* Russia will tack its export tariff for copper to metal prices on the LME. The tariff, currently fixed at 10% of the customs value of the metal, will likely be applied sometime next year and will be set on a quarterly basis. It will be raised from the current level if prices exceed $8,000 per ton, but will not apply if prices drop below $6,000 a ton.
* The strike by unionized workers at Freeport McMoRan’s Cerro Verde mine in Peru is now in its fourth week, Metal Bulletin reports, with little sign of any solution. Workers abandoned negotiations with the company after a meeting mediated by labor authorities earlier this month failed to result in a deal. A group of 12 workers began a hunger strike late last week in a bid to force the company to accept the union’s demands and perhaps prompt the government to get involved. In the meantime, the company says that production of copper and molybdenum concentrates “has not been significantly affected”, although the union is disputing that assertion, claiming that output has fallen by some 40%.
ALUMINUM SUPPORT: $2077 / RESISTANCE: $2270
Ali is at $2215, down $3. Channel resistance at $2230 was breached earlier in the day after prices got to $2254, but we have moved back below the line since then.
ZINC SUPPORT: $1718 / RESISTANCE: $1970
Zinc is at $1858, down $18, and seem to be settling into a trading range for the time being.
LEAD SUPPORT: $1800 / RESISTANCE: $2065
Lead is at $1982, down $36, as prices continued to trade within a trading range.
NICKEL SUPPORT: $19,500 / RESISTANCE: $21,500
Nickel is at $19,900, down $95, and quiet after a very good run on Monday. We did breach $19,500 yesterday, a fairly significant resistance point on the charts, and another close above this level today (likely) will send prices towards the mid $21,000 mark.
* Russia's Norilsk Nickel said output of nickel and palladium declined during the first nine months of this year from the same period a year ago, but did not provide an explanation. Specifically, nickel output was 215,481 ton in January-September, down 2.2%, while palladium output declined by 5.1% to 2.1 million ounces. Meanwhile, the company’s copper output in the first nine months of 2011 was 279,505 tons, down 5.3% year-on-year, while platinum output remained unchanged at 531,000 ounces.
TIN SUPPORT: $19,500 / RESISTANCE: $23,100
Tin is at $22,100, down $445, and steady; charts show resistance at $23,100.
* Tin smelters in Indonesia will convene this week to discuss their self-imposed shipping stoppage that began on Oct. 1 in an attempt to push prices above $25,000 a ton, the Indonesian Tin Industry Association said. Early talk is that the companies slash shipments by about 40%, Metal Bulletin reports.
LME billet prices are at $525-$540, and holding steady.
* Iron ore prices plunged 8% last week, the seventh consecutive week of losses, and the sharpest drop since July 2010, as demand from China waned. Meanwhile, miner Vale has told Chinese steel producers it will give them options to buy the raw material cheaper, as spot prices for iron ore have dropped below the quarterly contract system created last year. Iron ore with 62% iron content fell 0.7% to $144 a ton on Friday, its lowest level since Oct. 6, 2010, according to Platts.