VINACHEM

LONDON (Commodity Online): A weakening outlook for Europe and concerns about whether China will continue to engineer a soft landing are denting market sentiment, said Barclays Capital in a research note.

“We view the potential for contagion to spread from Europe as the biggest downside risk to base metals prices at this point. The markets are already discounting a bearish European scenario and would not be surprised to see a contraction in European metals demand,” Barclays added.

However, China has been a bright spot, so any downside surprises in either the economic or base metal specific data would have bearish consequences for metals prices, in our view.

It will therefore be essential to monitor key high frequency Chinese data points for any early warning signs, since any indication of contagion would likely Lead to renewed short selling in the base metals. Even if the growth outlook worsens, we think it is unlikely that prices and fundamentals will follow a similar pattern to the 2008-09 collapse because there are important differences between then and now.

Supply responses are emerging at much higher price levels than in 2008, and working inventories are now much leaner, so market dislocations from destocking should be less pronounced. However, just how tight Europe’s credit markets get and how much this constrains the real economy and finance for industrial firms will have consequences for the base metals.

”We favour non-directional defensive positioning within the base metals and reduced flat price exposure to those metals, such as copper, which would suffer from further bouts of macroeconomic pessimism,” Barclays concluded.