SMM Copper Market Morning Review (2013-7-30)

SHANGHAI, Jul. 30 (SMM) – The Chinese government said it will audit government debt and assess debt risks of local governments this week, compounding worries over demand from the world’s second largest economy. Latest data showed the Chinese economy has slowed down. However, anticipation that the US Federal Reserve will keep QE3 in place offset worries over demand in China. As a result, commodity prices bounced back from lows. However, sales of second-hand home in the US continued to drop in June, constraining the upside space of base metals prices. Base metals had little upward momentum after US shares fell back. LME copper rose but met resistance at USD 6,891/mt, and closed at USD 6,875/mt, up USD 20/mt.     

The market was cautious before the US Federal Reserve announces its interest rate decision. Annualized US pending home sales in June was 10.9%, lower than both expectations and May, while monthly rate dropped by 0.4%, compared to a growth of 6.7% in May. That is because mortgage interest rates began to rise since May, which affected home sales in June, while contracts signed also decreased due to low inventories. Dallas Fed's manufacturing index for July recorded 11.4, much lower than 17.1 expected, and this weighed down US stocks.

The Shanghai Composite Index opened low and dropped below 2,000 as audit of local government debt was started, which triggered investor concerns that local debt problem will cause financial risks. China's tax income from January through June 2013 totaled RMB 5.926 trillion, up 7.9% YoY, but the growth is much slower than the 29.6% and 9.8% in 2011 and 2012, reflecting China' s sluggish economy in 1H this year. Declines in coal and non-ferrous metals industries were the largest. Due to tight liquidity at the end of the month, 7-day government bond repurchasing was quoted at 5%, with small banks aggressively receiving capital and large banks suspending loans, which weighed on domestic financial markets.

European and US stocks markets were mixed; LME base metals prices rebounded.

Selloff in LME copper market will diminish, but technical resistance remains strong, with LME copper prices expected between USD 6,800-6,880/mt during Tuesday’s Asian session. China’s A-shares will fall back, and SHFE 1311 copper contract will remain low at RMB 48,800-49,500/mt. In spot market, cargo holders will be eager to sell against tight liquidity at the month’s end, narrowing the price gap among different brands of copper. Spot premium of RMB 150-300/mt is expected over SHFE 1308 copper contract prices.