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FOCUS: Copper Rises 6% On Short Covering, Data, Inventory Draw, Central-Bank Comments

By Allen Sykora of Kitco News
Friday May 3rd, 2013 11:31 AM

(Kitco News) - Copper is the strongest-performing metal Friday, screaming ahead by more than 6% on a short-covering rally that was encouraged by improved economic data, expectations for further loose monetary policy and a large drawdown in London Metal Exchange warehouse stocks.

Around 11 a.m. EDT, three-months copper on the London Metal Exchange was up $424, or 6.2%, to $7,272 per metric ton. The most-active July contract on the Comex division of the New York Mercantile Exchange was 19.10 cents, or 6.1%, higher at $3.2955 a pound.

“You’ve got some short covering and bargain hunting,” said one New York-based metals trader. Technically oriented buying accelerated the move when the market broke above chart resistance, he said.

The bounce came after three-months metal fell as far as $6,780 early Thursday, taking it within striking distance but holding support at the $6,762.25 low from April 23 that in turn was the weakest level since October 2011.

“It started yesterday,” said Dave Meger, director of metals trading at Vision Financial Markets, of the rally. Market participants in some Asian nations came back from holidays of up to three days. “They saw some relatively low pricing and stepped in with buying.”

Asian traders overnight “latched onto” some of the stronger data reported on Thursday, said William Adams, head of research with Fastmarkets.com. Weekly U.S. jobless fell 18,000 to a five-year low of 324,000.

“The market had become oversold,” Adams said. The metal was approaching the April lows and many participants may have been anticipating another leg lower before copper recovered instead. “Because the market had been oversold suggests quite a few shorts developed in the market,” Adams said. “So it’s a combination of bargain hunting and short covering.”

Meger and Commerzbank also cited recent declines in LME warehouse copper stocks.  A research note from Commerzbank said the 7,425-metric-ton drawdown on Friday was only topped one other time in the last four years, when 100 more tons were withdrawn on a single day last May. LME inventories, currently at 608,700 tons, have shown some signs of easing after previously running up for weeks.

“Although ‘one swallow does not make a summer’ and LME copper stocks had previously climbed to 621,600 tons, their highest level since August 2003, we nonetheless believe that the inventory trend reversal could also support a shift in sentiment among market players who are currently assuming a massive copper production surplus of over 400,000 tons,” Commerzbank said in a research note.

The metal drew further support at the start of the New York morning Friday from a stronger-than-expected U.S. jobs report and equity market, Meger said. Strong data and equities can lead to hopes for improved economic prospects and thus demand for industrial commodities such as copper. U.S. April non-farm payrolls rose 165,000, more than forecast, and the February and March figures were revised upward by a combined 114,000 jobs. The Dow Jones Industrial Average was up by roughly 174 points late in the New York morning.

On top of all this, support is coming from central-bank commentary construed as dovish this week, market watchers said.

A trader cited remarks from European Central Bank President Mario Draghi Thursday suggesting policymakers might have an “open mind” on lowering the deposit rate below zero for the first time. The ECB also cut its benchmark interest rate by 25 basis points to a record low of 0.5%.

Meger cited wording in the Federal Open Market Committee’s Wednesday post-meeting statement saying that U.S. policymakers stand ready to increase or reduce accommodation depending upon the labor market and inflation. The mention of a possible increase caught traders’ attention since previously the focus of financial markets was on when policymakers might scale back the bond-buying program known as quantitative easing.

“So right now, you’ve got a situation where they’re backstopping any type of weak data,” Meger said. “So positive data is going to be viewed positively and on weak data, you know that the Fed could stand at the ready…to increase stimulus. It’s kind of a Goldilocks scenario for copper at the moment.”

Adams said he looks for further gains in copper to perhaps the $7,400 area on the LME, before sideways consolidation.

Meanwhile, RBC Capital Markets and Barclays both said in early-Friday research notes that they see a downward trend continuing and favor selling into rallies. In recent months, a number of analysts have said expected increases in copper production coupled with a still-soft global economy could hold the metal back.

“Whilst we agree that the demand environment remains soft, there are signs that it is improving,” Barclays said. “All the usual copper demand indicators for China have been turning positive. High frequency end-demand indicators have started to pick up, the SHFE (Shanghai Futures ExchangeA)/LME import price arb has opened, SHFE stocks and bonded stocks have been falling, physical import premiums have been rising, and time spreads on the SHFE have gone into backwardation.

“In our view, the sell-off may look overdone, but any price recovery is likely to be mild and difficult to sustain.”

By Allen Sykora of Kitco News; asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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