US recovery sets positive tone for base metals

Most recover from recent lows, trend likely to continue

The US Federal Reserve’s positive economic signals indicate the recovery in metals will continue in the near future, as the recent upsurge in the labour market could prompt the withdrawal of the quantitative easing earlier than expected. Fed Chair Janet Yellen’s latest speech at a Jackson Hole summit hinted it would raise interest rates soon.

Aluminium and zinc jumped 14.6 per cent and 14 per cent on Tuesday from their recent lows on June 6, to trade at $2,082 a tonne and $2,359 a tonne, respectively. Copper and lead moved up 6.5 per cent and 9.4 per cent from the levels of June 6 to $7,096 a tonne and $2,257 a tonne respectively on the London Metal Exchange. But Nickel remained resilient, recording a marginal gain of two per cent to $18,805 a tonne from the level of June 6.

Industrial commodities move in line with the economic growth, as gains tend to increase the investment in infrastructure. Investors are known to withdraw money from commodities to invest in the US treasuries in a rising interest rate regime.

"Consistent positive data flows from the US, with the expectation the European Central Bank will come out with stimulus measures, may continue supporting base metals. Base metals, including aluminium, may trade higher, driven by the growing demand and supply cuts outside China," said Sugandha Sachdeva, AVP and incharge (metals, energy and currency research), Religare Securities.

The housing sector in the US has surprised the market with its strength and the Markit Flash US Manufacturing Purchasing Managers’ Index for August jumped to its highest since April 2010. Also, US consumer confidence improved in August to its highest since October 2007.

"Base metals are likely to trade higher owing to the optimism in the US economy. Also, the increased money supply in the case of monetary easing by the European Central Bank and China will add to the gains," said Prathamesh Mallya, senior research analyst (non-agro commodities), Angel Commodities Broking.

But a strengthening dollar might play spoilsport. Dollar has touched a 13-month high against the basket of currencies on improved pace of the US economic recovery. This might cap prices of metals and dent the demand.

Yellen's statement at the summit might hamper gold prices in the near term. However, geopolitical tensions and expected demand from India as its festive and wedding season is approaching, may underpin gold prices at lower levels of around Rs 26800 /10gm at Multi Commodity Exchange (MCX) and $1240/oz at COMEX, Sugandha forecast.

Also, crude oil prices may trade on a weaker note in near term, amid surging supply from Libya and Iraq and weak demand from China and Europe, the major consumers of oil. U.S. crude oil production in July has hit the highest level since April 1987 as per the Energy Information Administration. Along with this, OPEC has trimmed its 2014 global oil demand growth forecast for a second consecutive month. Meanwhile, the geopolitical tensions in Ukraine, Iraq and Libya are not near to ending which may provide support to crude oil prices going forward as the market has reached technically oversold zone and Rs 5550/bbl may offer strong base to the counter.