Base metals extend sell-off on China concerns

Wednesday, August 19, 2015

Copper prices extended losses to fresh lows yesterday as the wider rout in commodities markets continued. Three month LME copper contracts closed lower for the fourth straight session yesterday as intraday moves briefly dipped below $5,000/tonne for the first time since mid-July 2009 as concerns that central bank may pare back support in China spooked investors. The apprehensive mood among market participants wasn’t solely confined to copper as price pressure saw the entire LME base metals complex close lower. The compounding effects of production cost deflation owing to lower crude oil prices as well as a stronger dollar have presented the base metals with significant headwinds in recent months and with the situation in China deteriorating further investors are pulling out of commodities for fear of further near term losses.  

UK inflation posted a surprise rise in July as headline CPI rose 0.1% y/y from zero the previous month. The core CPI reading also exceeded expectations, rising to a five month high to 1.2% y/y in July against expectations of a 0.9% y/y increase. While inflationary pressures are starting to show signs of life the persistently low crude oil prices have acted as a drag on prices throughout 2015, distorting the picture as policymakers continue to assess whether an interest rates rise is due in the near term. Policymakers from the Bank of England have expressed their concerns in recent weeks that the deflationary pressures from lower crude prices may be transitory and with core CPI, which excludes volatile crude and food costs, increasing from 0.8% the previous month to 1.2%, MPC hawks may increasingly vocalise calls for higher rates. A strong labour market for the year so far has started to generate upward wage pressure with last week’s labour market data indicating weekly earnings for the three months up until June increased 2.8% y/y. Accordingly, any further tightness in the labour market throughout the remainder of the year could press central bankers to act soon as inflationary pressures rise.

Gold prices built on support around yesterday's close as activity overnight put the yellow metal on track to extend gains for a third straight session. Capital flight from emerging markets has seen investors seek safety in the precious metal with prices having risen 3.5% month-to-date. However, gold prices are still trading over five percent lower since the start of the year as investor confidence in western markets sees significant flows back into the US and increasingly the eurozone. Gold prices traded modestly higher overnight and were stabilising around $1,112/oz as we approached the European open.

LME 3-M copper prices revisit 2009 territory

LMCADS03 Comdty LME COPPER 3 2015 08 19 07 48 55 

UK inflation posts surprise rise but still well below target

UKRPCJYR Index UK CPI EU Harmon 2015 08 19 07 51 34

Events for today

0050

JP

Jul

Trade Balance

0900

EZ

Jun

Current Account

1000

EZ

Jun

Construction Output

1330

US

Jul

CPI Core

1530

US

w/e

EIA Energy Stocks

1900

US

Jul

FOMC Meeting Minutes

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