Base metals rise on dovish Fed talk

Analysts hope next hike possible in September on weak job data, supportive for industrial metals

Base metals consolidated recent moves, albeit marginally, in early Tuesday trade after a sharp rally on Monday on the US Federal Reserve's dovish stance on interest rate increases. Analysts are now expecting the next round of rate rises from the Fed only in September. This helped improve sentiment for commodities, including base metals and crude oil. The former moved rose up to 2.3 per cent on Monday. Tin led the rise with the highest gain, to settle at $16,900 a tonne, followed by nickel at 1.6 per cent and zinc at 1.5 per cent. Copper floated at around a four-week high, before profit booking erased part of the gains in early Tuesday trade.

“Base metals were firming up on expectations of interest rate hikes by the Fed. Since the decision was deferred, they are on correction mode. The trend is likely to continue for a marginal downside before recovering in positive mode in a couple of days,” said Navneet Damani, associate vice-president at Anand Rathi Commodities.

In fact, weak sentiment prevailed in the metals market due to weak Chinese foreign exchange data on Tuesday, after disappointing US jobs data on Friday. China’s central bank released data on Tuesday which showed the country’s forex reserves at $3.19 trillion, the lowest since December 2011. The central bank is to issue more data in a couple of days and this could pull base metals back for now.

“London copper floated near four-week highs on Tuesday as the dollar stayed weak. Sentiment in the euro zone rose to its highest level this year in June, a survey showed on Monday, suggesting investors have shaken off concerns about the global economy that clouded expectations at the start of the year,” went a report from SMC Research. In fact, a rally started in base metals late last month and has continued so far this month.

In June, industrial metals rose up to five per cent, led by zinc which found support from user industries and a deficit forecast by the International Lead and Zinc Study Group (ILZSG). Chinese smelters that meet around 40 per cent of global supply might announce a production cut for the first time in four years.

ILZSG forecast the zinc market to remain in a deficit of 352,000 tonnes, with a 3.5 per cent rise in usage to 14.3 million tonnes in 2016. Similarly, the International Copper Study Group forecast a global supply deficit at 170,000 tonnes in 2016 on consumption at 23.3 mt.

Global hedge funds have reduced their exposure in the precious metals markets for both long and short bets, showed data compiled by the Commodity Futures Trading Commission.

For the week ending May 31, the disaggregated Commitments of Trader report showed money managers reduced their speculative gross long positions in comex gold futures by 13,020 contracts to 192,160. At the same time, short bets fell 5,170 contracts to 43,549. The bigger reduction in gross longs caused the market’s net length to shrink to 148,611 contracts, a decline of almost five per cent from the previous week.

Following base metals’ rally, gold and silver prices declined in London by nearly one per cent to $1,235.6 an oz and $16.260, respectively. Standard gold at Zaveri Bazaar in Mumbai declined by a marginal Rs 80 to close on Tuesday at Rs 29,035 per 10g. Silver followed and closed at Rs 39,155 a kg, a decline of Rs 385 or one per cent from the previous day.