Base Metals Slip Further on Fed's Modest Stimulus Measures

SHANGHAI, Jun. 21 (SMM) – Shanghai base metals have generally trended lower in recent days. The Federal Reserve (Fed) policy meeting held Wednesday suggested a decreasing likelihood of the implementation of QE3 measures, while the preliminary HSBC manufacturing data showed China's manufacturing activity continued to slow during June and confirmed further weakness in industrial metals demand. Against this backdrop, base metals continued to come under pressure.

The HSBC Holdings PLC announced June 21 that the preliminary HSBC China Manufacturing Purchasing Managers' Index (PMI) fell to 48.1 in June, below the boom-bust line for an eighth consecutive month. This means that the contraction in China's manufacturing sector has not improved since earlier 2012, and a more complicated external investment environment also spells that recovery in China's manufacturing industry will take considerable time. In this context, future demand for base metals is likely to slow. 

The closely watched Fed policy meeting Wednesday failed to introduce a new round of quantitative easing. The Federal Open Market Committee (FOMC) announced June 20 to keep interest rates unchanged between 0-0.25% following the meeting, and the Fed decided to extend the current “Operation Twist” program through the end of 2012. The central bank will buy USD 267 billion of long-term bonds of 6 to 30 years and sell the same amount of short-term bonds of 3 and even less than 3 years. The US dollar index gained support since the Fed did not implement aggressive monetary measures, reversing earlier losses, so investors betted the US dollar again. Hence, the US dollar may experience a wave of increases for the near future. Affected by the rising bond yields in Spain, base metals and crude oil began retreating after initially rebounding. At present, investors are pessimistic over progress in economic recovery. As such, SMM anticipates base metals will remain weak for the foreseeable future.