LME MORNING - Metals rally on uptick in economic optimism

By: Barbara Davis

London 06/10/2011 - Base metals rallied well on the LME on Thursday morning, following in the footsteps of equity markets, as risk appetite improved on signals that European policymakers are inching closer to a solution to the region's debt crisis.

Market observers will watch today's European Central Bank policy meeting for signs that outgoing president Jean-Claude Trichet may lay the groundwork for his successor to cut interest rates before the end of the year at as well as shoring up banks against the sovereign debt crisis.

Investors also gained confidence in the solvency of European banks after German Chancellor Angela Merkel said on Wednesday that she supports the recapitalisation of European lenders and would be open to using a bailout fund to strengthen the region's banking system.

Meanwhile, the IMF said on Thursday that European Union officials are working on plans to boost bank capital to contain the debt crisis.

“The metals are edging higher and there may well be some eagerness to take advantage of these lower prices to do some near term pricing,” FastMarkets' William Adams said.

“However, overall we have heard little so far in LME Week that makes us change our view that prices are likely to head lower over the medium term and therefore we expect rallies to be capped by selling,” he added.

Opinion is divided over whether the corrections have been deep enough or whether metals still have further to fall.

"Our view remains unchanged - we still feel the downward trends will dominate in the medium term but there will be bouts of buying along the way,” Adams said.

In the US, Federal Reserve chairman Ben Bernanke hinted at a looser monetary policy earlier this week.

Traders will be watching tomorrow’s non-farm payrolls report for an indication of the strength of the US economic recovery. Consensus is for the addition of 59,000 jobs last month.


FUNDAMENTALS ON BACK BURNER

While many analysts see a supply deficit in copper next year, which could deliver a boost to prices, others believe that the fundamentals will be overshadowed by wider political and economic events.

“Metal fundamentals will continue to take a back seat and prices should continue to take direction from broader macro dynamics,” broker Credit Suisse said.

Copper outperformed, rising around five percent or $340 to $7,140. Inventories fell 3,200 tonnes to 471,725 tonnes and cancelled warrants rose 1,050 tonnes to 60,000 tonnes.

Aluminium traded at $2,200 per tonne, up $30 after stocks fell 4,850 tonnes to 4,551,750 tonnes. Cancelled warrants also fell, declining by 4,350 tonnes to 239,300 tonnes.

Demand for aluminium is slowing but not dramatically, with Asia holding up well, North America flat and Europe faring worst, a Rio Tinto Alcan executive said, according to broker RBC.

Nickel traded at $18,775 per tonne, up $375 from the previous session.

Zinc was recently $38 higher at $1,883 - it had briefly peaked above $1,900 earlier. Inventories fell 3,800 tonnes to 810,725 tonnes and cancelled warrants declined by 4,600 tonnes to 79,525 tonnes.

Lead stepped back from its intraday high of $1,950 to trade $41 higher at $1,933 despite inventories rising a net 1,175 tonnes to an all-time record high of 380,875 tonnes. Cancelled warrants fell 150 tonnes.

Tin traded at $21,655, up $555, while stocks rose 180 tonnes to 20,705 tonnes.

Steel billet was last indicated at $540/555, cobalt at $27,000/34,000 and molybdenum at $29,900/31,300.

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