Weekly Commodities Wrap: China Downgrade Weighs On Metals

 

Copper: China Downgrade Weighs On Red Metal, But Losses Recovered Mid-Week

The red metal came under pressure initially this week, tracking movement in the broader commodities markets as traders reacted to Moody’s downgrading of China’s credit rating from A1 to Aa3. The downgrade, which marks the first lowering of China’s credit rating since 1989, was received sharply by commodities traders who began offloading the metal. The downgrade came as China’s debt to GDP topped 300%. With China being the world’s largest producer of Copper the news provoked fears of liquidity problems for producers, leading to the sell-off.

Alongside this, the latest FOMC minutes release further raised markets expectations of a June rate hike as the minutes revealed that members feel a rate hike will be “appropriate soon.”Rate hike expectations for June are now over 80% and are adding to downside pressure on the metals complex.

Despite these headwinds, however, copper managed to recover earlier losses as the US Consumer Confidence reading came in well below expectations on Tuesday causing some Dollar weakness. Traders now await the US jobs report on Friday which is likely to be the key catalyst for Copper’s direction over the short term.

The congestion in copper continues as markets await a proper directional catalyst. A lack of momentum in Trump’s policy campaign has been the main source of stagnation in the market while in the near term a potential Fed rate hike is likely to be the key driver. Main resistance still sits at a retest of the 2015 high along with bearish trend line resistance from the 2011 highs. Below market local support sits at the December 2016 low and below that the mid-2016 highs.

Iron: Down 40% Over the Last 3 Months

Ahead of a long weekend in China, the metal, which has now plummeted around 40% over the last 3 months, sustained further losses. Reduced trading volumes ahead of the long weekend created a difficult environment for those in searches of buyers and exacerbated the losses seen. Meanwhile, the latest data shows that iron ore inventories at Chinese ports continue to grow, rising by a further 600,000 tonnes to hit a record high of 136 million tonnes.

Since record low port inventory levels of 79.3% million were reported in June 2015, inventory levels have now exploded more than 2%. Chinese markets will be shut on Monday and Tuesday for the Dragon Boat festival so traders will need to wait until Wednesday to see if the cascade will resume or reverse.

After sustaining a small recovery, it seems that price was unable to rise above the recent $63 low, which acted as resistance and has since turned lower to print fresh lows below the $60 mark. The next support level on the watch is the September 2016 low around $56 which should see some profit taking kick in on speculative short positions.

Palladium: Precious Metal Stays Firm as Markets Recoil on China Credit Downgrade

Palladium prices rose higher this week tracking Gold as precious metals saw a safe-haven bid kick in on the back of the news of Moody’s downgrading China’s credit rating for the first time since 1989. The forecast for the precious metal is clouded however as the material, which is largely reliant on the diesel car sector, could see diminished demand as electric vehicles start to gain market share.

For now, the price is still stalled at the right shoulder level of a potential head and shoulder pattern with the left shoulder forming at the 2011 highs and the head marking the 2014 highs. While Price initially sold off from a test of this level, the market has since recovered and is moving back up to challenge the level. A break of the level will open the way for a run up to test the 2014 highs ahead of the 920 level.