LME MORNING - Market to remain choppy, nervous and volatile in run-up to EU summit

By: Kathleen Retourne

London 25/10/2011 - Base metals started higher on Tuesday morning but have since returned to levels around or below yesterday's close, with traders nervous ahead of the outcome of tomorrow's EU summit.

The EU will announce details of its plan to ease the EU debt crisis on Wednesday. Increasing confidence that the region's leaders will come up with a workable plan has given rise to a more bullish outlook in recent sessions, leading to a recovery in risky assets. The euro remains strong at 1.3914 against the dollar.

Officials in Europe were reportedly close to a deal on bank recapitalisation and EU officials said Germany and France have made significant progress in talks on how to use the EU bailout fund to stabilise European bond markets.

Yet the contentious issue of how much losses private holders of Greek bonds would have to absorb still needs to be resolved - sentiment could quickly sour if negotiations fall apart

"It's been an extraordinary market the last few days," a trader said. "Copper has moved up on Chinese short covering and slightly better [data] from China. Chinese smelters are struggling to find feed reportedly and, of course, there's the 'euro-phoria' and a steadier dollar driving prices."

But this could already be priced in ahead of the euro announcement, he warned, and there is danger of a correction should the EU announcement fail to impress.

"The market is nervous with everyone trying to second-guess each other" he added. "There are some that believe that the market is now more stable but I am not convinced. My view is it has run too much on the upside on misplaced euphoria but I would like to be proved wrong."

"I no longer think it is about Greece, which is beyond help, but attention is now on Italy. Should Italy fail, it could be devastating to the market," he added. "Until the announcement, expect a choppy, highly volatile, very nervous market, gapping up and down."

The current optimism is exaggerated, Commerzbank also said, with potential for disappointment.

"The mood is euphoric on commodity and especially metal markets; it is almost as if the crisis is being blended out completely," the broker said.

US data releases scheduled for Tuesday include the October CB Consumer Confidence index and Richmond Manufacturing Index and the August S&P/CS Composite-20 HPI and OFHEO HPI.

Despite the positive gains in commodities and equities yesterday, the Libor-OIS rate hit a two-year high on Monday. The dollar Libor-OIS spread was 34.13 basis points at 14:10 London time.

The spread widened to 34.53 basis points, according to data from the British Bankers' Association - the most since July 6, 2009, based on closing-market rates.


Copper at $7,623 per tonne was down $12 on Monday's close after failing to maintain its intraday and monthly high of $7,820.

Still, should a concrete solution emerge from the crisis meetings in Europe, the market will probably continue yesterday's short-covering rally over the coming days and the red metal will target $7,970, RBC said.

Warehouse stocks remain at six-month lows of 439,150 tonnes, dropping a net 5,125 tonnes, according to today's data. Cancelled warrants meanwhile jumped 6,450 tonnes to 64,875 tonnes, the highest level since May 14, 2009.

"Stocks should continue to shrink," Commerzbank said. "Cancelled warrants show how much material is being requested for delivery from the warehouses and is seen as an indicator of demand. The picture therefore appears to be brightening somewhat."

Tin inventories are now the lowest since January 7, losing 460 tonnes to total 16,525 tonnes. Cancelled warrants dropped 240 tonnes to 2,655 tonnes. The metal recently traded at $22,001, down $499.

Nickel stocks have started to increase, rising 102 tonnes to 87,828 tonnes after hitting a 32-month low on Friday. Cancelled warrants increased 1,446 tonnes to 6,444 tonnes. The metal hit a one-month high today of $20,300 but it is now at $19,840, down $155 on Monday's close.

Aluminium was up slightly on yesterday's close, gaining $6.75 to $2,224.75. Inventories fell 2,525 tonnes to 4,588,850 tonnes but cancelled warrants also dropped, down 2,200 tonnes to 221,300 tonnes.

Zinc at $1,870 was down $6. Stocks remain at their lowest since April 19, dropping a further 300 tonnes to 787,725 tonnes, while cancelled warrants were up 850 tonnes to 80,000.

Lead inventories slipped 125 tonnes to 388,150 tonnes and cancelled warrants hit 20,375 tonnes, up 2,125 tonnes. Business at $1,988 dropped $31.

Steel at $525/540 was down $20, cobalt was quoted at a very wide $29,000/45,500 and molybdenum was bid at $26,250.

(Editing by Mark Shaw)