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Metals consolidate, but keep an eye on the external issues

26/05/06

The metals put in a relatively quiet day consolidating on Thursday as the market awaits fresh direction. Overall there still seems to be a certain resignation that metal prices will rise further, but likewise there is more than enough talk of a correction and if people are gearing themselves up for the latter then we suspect the market will probably do the opposite, which runs the risk of another short-covering rally. Certainly we feel a correction is overdue, but as always in these market conditions there is no point trying to anticipate it, as so far the bulls remain dominant. Indeed with the supply disruptions spreading at Grupo Mexico we feel the balance of things may have swung to the upside again for the moment at least. In addition, LME cancelled warrants on copper have risen 6,525mt so far this week which suggests draw downs are likely to pick-up again. This maybe the result of a pick-up in consumer buying into the weaker prices of late.

However with few bearish developments in the metals perhaps the market is not ready to correct yet after all it has had ample opportunity. That said, we would remain wary of events outside the world of metals. But even here equities in Europe, the US and Asia seem to be stabilising after their bouts of weakness, which suggests our recent concern that things were deteriorating in the broader financial markets may have run their course for the moment. Given the still high metal prices, it will be interesting to see if the LCH.Clearnet hike margin rates again and if they do, whether this will encourage more funds and speculators to leave the arena.

Overall the recent pick-up in volatility suggests strong two-way opinion, but it is too early to say which way prices will break in the near term.

- ends -

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William Adams
Metals analyst, BaseMetals.com
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