Fear of double-dip recession weighs on base metals

After being more attracted by the FIFA World Cup the previous two weekends, it is now time again that a new post in this blog is in the foreground. The focus this time is on base metals, which partially have suffered strong losses since the beginning of the year. Even copper, which in the first quarter was trading above 8,000$/t fell from high again by about a quarter and is compared to the beginning of the year in the red. We consider, however, the current concern is exaggerated. The quarter that has just begun is frequently the weakest seasonal phase. It should provide a good opportunity for consumers of base metals to hedge against the risks of rising prices and secure benefit from low prices longer term.

At this point, we have repeatedly stressed the importance of international stock markets as an indicator for base metals. So it should not surprise that some metals, particularly copper could recover from its low of 6,037$/ t on 7 June, as the stock market turned upward. However, as after the announcement of austerity measures in countries of the euro zone, the fear of a renewed slide of the main economies of the West in a new recession is again a drag on the stock and thus also the markets for base metals.

But also in China, easing the peg of the yuan to the U.S. dollar has been able to stimulate in the short run only. Latest with the publication of the indices of the purchasing managers in the previous week, the official index in June fell to 52.1 after 53.2 the previous month, the markets are worried again about the growth in China, which is currently the global economic locomotive. With a growth rate of 11.9% over the previous quarter, however, GDP grew in the first quarter very strongly and the acceleration of the growth rate is of concern. In China, a stabilization of the growth rate is most welcome to prevent overheating of the economy. This is also helped the credit policy, which aims to curb the boom in housing investment. China has learnt its lesson out of the housing crisis in the U.S., which was the starting point for the financial crisis. But a reduction of the expansion rate does not mean that this will lead to lower demand for raw materials. However, the demand for commodities is expected to increase at a lower rate than would be the case without restrictive measures.

The fear of a double-dip recession dominates in the US after the data on the housing market were worse than the economists predicted. It should be noted, however, that government programs have expired. But also in the US, the indices of purchasing managers in the manufacturing industry disappointed expectations. In the Chicago area, the index has fallen from 59.7 to 59.1 and the national ISM index dropped from 59.7 to 56.2. Both indexes are well above the mark of 50 and therefore still signal an expansion in manufacturing in the US. Looking at the history of the ISM index, is also striking that the index does not stay long above the 60 mark. This represents the extreme of a growing economy and that there is normalization without the economy falling into a recession. It should also be noted that economists are initially too cautious with their forecasts at the start of a recovery. their, After the released data exceeds the consensus expectations for several months, then economists generally get too optimistic and adjust their forecasts upwards. However, then they overshoot the target. In this phase, we might find ourselves today. In Europe, the research institutes adjusted upwards forecasts for GDP growth in Germany, the largest economy in the euro zone, for this year and 2011, although the federal government has decided on austerity measures. The weak euro here provides a positive impulse.

Overall, we expect that there will be no double-dip recession. The pessimism in the markets should then decrease, and both shares as well as industrial metals are expected to rise significantly. The current quarter should be used by consumers of base metals to secure the low price level for the longer term.