Metal prices were easier this week because the markets were unsure how much stimulus the US Government would provide to its economy. The US economy created 80,000 non-farm jobs (more or less permanent jobs) in June, fewer than the 90,000 hoped for but perhaps enough to put off the next round of quantitative easing.
The markets see injections of liquidity into the world economy as a potential boost for commodities. The extra liquidity tends to depress interest rates, which makes non-interest bearing investments more attractive, and the extra liquidity may also be invested in commodities, boosting their price.
The £50bn increase in the Asset Purchase Programme announced by the Bank of England was not really enough to boost the commodity/metal markets, while the 0.25% cut in the European Central Bank’s interest rates for refinancing operations (lending to banks) was expected, and so was already priced in, even as it was welcome.
Meanwhile, the markets were wondering whether the eurozone’s latest agreement reached last week was as good as initially thought.
The benchmark interest rate cuts by the People’s Bank of China, the second cut within two months, left the lending rate down to 6% from 6.31%, and deposit rate down to 3% from 3.25%. This suggested the Chinese economy was slowing down faster than the authorities hoped.
One sign of this was that the HSBC composite output index for China eased to 50.6 in June from 51.9 in May; it was also the lowest level seen by this indicator in three months. Slowing economic activity in China is clearly a bad sign for base metals, and this seemed to be confirmed by the 17.5% month-on-month drop in Chinese copper imports in June.
The purchasing managers’ index measuring composite output for the eurozone improved slightly to 46.4 in June from 46.0 in May, but was still well below 50 and suggested a further decline in economic activity. But factory orders in Germany rose unexpectedly by 0.6% between April and May, against a decline of 1.4% a month earlier.
Meanwhile, Japanese machinery orders provided an unpleasant surprise when they fell by 14.8% in May, a sharp turnaround from the 5.7% rise seen in April, and a much steeper fall than the 2.6% or so that had been expected by the market.