LME MORNING - Base metals inch up on cautious market optimism, technical strength

London, 26 July 2010 - Base metals rose slightly during LME premarket trading on Monday, extending last week's stellar rally on further short-covering and cautious optimism about the health of the global economy and financial system.

Bellwether copper's tightening fundamentals at a time when demand tends to fall also continued to provide support to the complex, with the red metal holding firm around its highest for over two months above $7,050 per tonne today.

Lead earlier broke above the key $2,000 per tonne mark for the first time in ten weeks, while nickel printed a new eight-week peak.

"The traditional perception is that commodity prices fall in the seasonally weak northern hemisphere third quarter. Instead, there has been a strong rally in July in many prices," noted Macquarie in a report.

"These markets are forward looking - arguably, the bad news has already been priced-in months ago. Also arguably, the worst fears regarding a 'collapse' in European growth as a result of banking collapses are receding rapidly," it added.

Trends in wider financial markets were mixed today. European shares turned slightly negative after a firm start, failing to track Asian shares higher, while the euro pared gains against the dollar - it was last up at $1.2905 having been as high as $1.2957.

Investors were encouraged by the solid US corporate earnings and strong eurozone data of late and also relieved that the vast majority of EU banks passed the stress tests - results published late on Friday showed that just seven of 91 banks failed the tests, including six in Spain and Greece, for an overall capital shortfall of 3.5 billion euros.

But investors were concerned that the tests were not tough enough - not considering sovereign debt default, for example.

Today a team from the European Commission, European Central Bank and International Monetary Fund will start a check of Greece's progress with implementing its austerity plan to avert a sovereign default.

Datawise, today will see US new home sales for June released at 1500 BST, with around 310,000 sales expected, while attention will continue to focus on second-quarter earnings reports with results from First Capital due.

As for base metals, they will have to show resilience to possible profit-taking pressure today as technical strength is being met with overbought conditions following last week's sharp and rapid rally.

"While we would still argue that the sector is in the midst of a bottoming process, this rally is raising some concerns about the sustainability of the current price strength," said broker Credit Suisse.

"In the absence of new impetus from the fundamental side, we think there is a risk that some market participants could take profit following last week's gains. In our view, the sector is at
least likely to lose some momentum," it added.

COPPER STOCKS RESUME DOWNTREND

Copper got close to new peaks before stabilising at $7,050 per tonne, up $20 and close to Friday's ten-week high of $7,090. Technically, it needs to make a sustained break above its 100-day moving average (DMA) of around $7,070 to extend advances.

"We are now in the midst of an up-leg," one LME trader said. "If we can breach $7,080 convincingly, copper should push on to the $7,200 area before meeting heavy resistance."

"But it is starting to look overbought so it could settle back towards $6,700 before finding its feet again to confirm the uptrend," he added.

Copper stocks resumed their downtrend after a rare increase on Friday, which was attributed to a technical move - a delivery against a short LME position or/and a pre-agreed financing deal. Stocks fell a net 3,375 tonnes today to 416,275 tonnes, a fresh low since November 2009, although cancelled warrants - the metal earmarked for removal - dropped 11 percent or more than 4,000 tonnes.

"Copper prices are rising as LME stock levels fall and as implied Chinese demand outstrips expectations," John Meyer of Fairfax said.

Elsewhere, lead was up $6 at $1,985 after touching $2,004.50 earlier, its best since May, with resilience now needed to hold above its 100-day moving average of around $1,984. Stocks fell 425 tonnes to 182,800 tonnes, their lowest since May 6, although this was offset by a 6-percent drop in cancelled warrants.

Nickel touched $20,810 per tonne, its most expensive since June 1, before settling at $20,660, still up $310,as stocks fell for the 34th session in a row - down a net 552 tonnes to 116,262 tonnes, their worst since earlier September 2009.

Aluminium climbed $24 to $2,054, close to Friday's two-month high of $2,070 with strong resistance levels ahead - both the 100 DMA and the 200 DMA are located in the $2,110-2,120 region. Here, stocks fell a net 5,325 tonnes to 4.4 million tonnes, but cancelled warrants dropped even more, by 2.3 percent or 5,875 tonnes.

Zinc was $26 stronger at $1,936, also near its pre-weekend two-month peak of $1,962, while tin eased slightly to $19,450, down $25, on a lack of momentum after surging to its best level since September 2008 on Friday at $19,750.

Med steel billet was unchanged at $460/470 per tonne after trading at a ten-week high of $470 on Friday, with attention focussed on the imminent merger between the LME's Far East and Mediterranean contracts on Wednesday.

LME-listed billet inventories rose a net 4,940 tonnes or almost 10 percent today to a fresh record high of 54,795 tonnes amid rumours of continuing warranting against delivery of a forthcoming short position.

A fresh inflow of 4,940 tonnes into Terkidag brought total arrivals in Turkey to 24,765 tonnes in less than a week. Market talk attributes this large increase to a broker warranting metal against a large short position of some 20,000 tonnes taken back in March-April when LME prices were above $600 per tonne and which is now becoming prompt.

The minors were neglected again today - cobalt was quoted at $37,000/38,500, down $50, while molybdenum was slightly down at $29,000/33,000.

(Editing by Mark Shaw)

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