LME MORNING - Base metals continue to drift, volatility expected towards latter half of week

By: Kathleen Retourne

London 07/12/2011 - Base metals gained ground on Wednesday morning trading before seeming content to drift on improved financial market sentiment, which saw equities and the euro rise.

The euro is currently trading at 1.3416 against the dollar, much improved from Tuesday’s low of $1.3330. But all markets, including the metals complex, will be highly sensitive this week to external news flow ahead of the Friday full member EU summit.

On Tuesday, US Treasury secretary Timothy Geithner voiced support for making changes to the EU constitution to restore the trust of markets.

In the metals, technical buying is providing a cushion on the downside, helping offset some of the recent negativity.

"The complex recovered [on Tuesday] from the initial shock of S&P putting 15 eurozone nations on review for potential credit rating downgrades, but remains capped by such uncertainty," broker RBC noted.

The week is expected to be volatile, with several key announcements potentially driving the markets.

“Today’s focus will be on economic data and German industrial production in particular. After strong factory orders earlier this week, hopes are for a robust figure. This could help industrial metals to defend the recently achieved rebound,” Credit Suisse said.

Tomorrow ECB will announce interest rates, while on Friday the European summit will be the catalyst, with all markets awaiting developments.


Today's trade is likely to be influenced by December traded option expiries at late-morning, with $8,000 copper strikes in focus. Business so far has been low-key, with volumes running at low levels.

“We’d expect some fireworks around option expiry and given the heavy open interest in the $8,000 strike for copper a morning rally is likely on the cards. Spreads are also likely to be volatile as the longs and shorts battle it out,” RBC said.

In copper, the big open interest is at $8,000 per tonne. The 3,158 calls are out-of-the-money and will be abandoned but 5,029 puts will be exercised. Open interest at the at-the-money strike at $7,925 is light at 300 calls and 102 puts, however. Business is currently at $7,915 per tonne, up $80 on Wednesday close.

After four consecutive days of warehouse inventory gains, copper stocks dropped back today, falling 650 tonnes to 389,450 tonnes. Cancelled warrants at 24,425 tonnes were down 1,375 tonnes.

Aluminium is expected to be the main option focus, given the large open interest at in-the-money and out-of-the-money strikes. The at-the-money strike is $2,125; partial declarations of the 1,073 puts are likely. At $2,100 there are 1,921 calls comfortably in the money but a massive 5,059 puts that will be abandoned at current underlying price levels. Prices are currently at $2,129.75, a rise of $16.75.

Aluminium gave up its recent tightness in the Feb/March spread, moving from a $9.00 backwardation yesterday to a backwardation of $3.00 today. Warehouse stocks are at their lowest since November 14 after dropping a further 800 tonnes to 4,549,000 tonnes. Cancelled warrants dropped 2,700 tonnes to 160,225 tonnes

Lead fell 825 tonnes to 364,400 tonnes, the lowest since September 20, while cancelled warrants slipped 1,525 tonnes to 44,975 tonnes. Recent business at $2,136.25 was up $10.25.

Zinc at $2,050.50 was $5.50 higher. Stocks increased 1,825 to 737,975 tonnes, while cancelled warrants dropped 1,900 tonnes to 29,625 tonnes.

Nickel prices were up $75 at $18,500. Stocks fell 546 tonnes to 90,510 tonnes but cancelled warrants increased 204 tonnes to 3,306 tonnes.

Tin prices, which had dropped below $20,000 at the start of the week, are now at $20,507.50, a rise of $157.50. Stocks were down 470 tonnes at 11,925 tonnes, while cancelled warrants declined 310 tonnes to 1,090 tonnes.

(Editing by Mark Shaw)