SHANGHAI, May 24 (SMM) – Shanghai base metals have recently trended lower, down to a fresh low since earlier 2012. While significantly slowing manufacturing activity further confirmed weakness in industrial base metals demand, market expectations over easier monetary policy can provide limited support for copper prices.

HSBC Holdings PLC announced on May 24 that the preliminary HSBC China Manufacturing Purchasing Managers' Index (PMI) fell to 48.7 in May, below the boom-or-bust level for the seventh consecutive month, negatively affected by worsening exports. The final PMI reading was 49.3 in April, compared with last November's low of 47.7. From detailed data, the new export orders sub-index dropped to 47.8 in May from the previous month's 50.2, and new orders and employment data also experienced contractions. Manufacturing activity weakened further in May and reflected deterioration in exports, which requires more loose measures. 

In the face of sluggish economy, China's central bank announced to cut banks' reserve requirement ratio (RRR) by 0.5%. Chinese Premier Wen Jiabao recently said that more priority should be given to maintaining growth and that China should strengthen and improve macro controls, and carry out timely and appropriate anticipatory adjustments and fine-tuning, propelling investors to expect the government will adopt more stimulative measures. However, as March's CPI rose noticeably, future inflationary pressures cannot be neglected. Hence, there is limited room for the central bank to loosen monetary measures, which will have a marginal impact on base metals, since the stable fiscal policy prevails. 

As there was no progress in the informal meeting of European leaders overnight, risk aversion grew and led financial market to fall across the board. The euro slid blow 1.2600, a 22-month low, while the US dollar stood high at 82. The meeting failed to ease market worries about Greece quitting the euro zone. The European Central Bank has established working groups to make preparations for a possible Greek exit. If European leaders still fail to reach an agreement at next month's EU summit, Greece may leave the euro zone finally, which will plague the financial market. Drops in the global financial market triggered by the European debt crisis are far from over, turning investors to the US dollar as safe-havens. Risky assets including base metals suffered sell-offs as a result.  

SMM holds the view markets are more focused on China's economic growth prospects and progress in the US and European debt problems. Commodity demand will definitely slow given sluggish Chinese economic growth for the time being, and wait-and-see sentiments compel participants in spot base metals markets to only buy as needed. As such, SMM anticipates Shanghai base metals will continue to fluctuate feebly in the near future.