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Base metals test the downside again as copper leads the sell-off

16/02/06

The metals still look undecided, although Wednesday's action favours the downside as prices were pushed lower on further liquidation and short selling. After testing, and in aluminium’s case smashing through, Monday’s lows the market bounced into the close, but this was probably more to do with shorts squaring up ahead of the close,with the idea of taking a fresh look on Thursday, rather than risking it overnight. As mentioned yesterday, the rallies have to date been half-hearted and the fact that the lows are being extended and not the highs, for a change, suggests that there may be still more room on the downside. Gold also extended to the downside as did oil, which has now broken the $60/barrel level.

All in all, it looks like there may be some fund profit-taking in the days ahead, which could see increased volatility. Overall the long term bullish sentiment is probably still in tact, but with the over exuberance during December, January and early February - perhaps as some producers had to buy-back hedges, the excessive gains may now lead to some exaggerated downside moves – even if they only constitute a period of consolidation as was seen in May and June 2005 when copper prices fell 12%. This is especially so as since July, LME stocks have risen some 80,000 tonnes at the same time as prices have risen 70%.

Even though you have to be aware that fresh fund buying could take prices back up to the highs in double quick time, the fact that this has not happened, suggests something has changed. As such we would advise caution. Thursday’s US economic data includes Housing starts (expected 2 mln). Import and export prices with import prices expected to rise 1%, jobless claims expected to read 285,000 after 277,000 last week and the Philadelphia Fed business conditions that are expected to read 10, after 3.3 in January.

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