Macroeconomic fears and political uncertainty are back to haunt the world market. With heightened uncertainty in Europe, apprehensions of contagion and sovereign debt default are back to the fore. As if this was not enough, concerns over slowdown in China have revived. No wonder market sentiment has turned negative and there has been a huge sell-off in risky assets so much so that even precious metals – the usual safe haven asset like gold – faced the heat of falling prices.

On the other hand, based on the latest data (March 2012) the OECD composite leading indicators – designed to anticipate turning points in economic activity relative to trend – point to regained momentum in the OECD area but with diverging patterns in economic activity between countries. Experts assert, the data suggest that the numbers are still satisfactory ex-Europe and that European weakness has not undermined the global momentum.

Chinese April trade data pointed to an across-the-board decline in commodity imports month-on-month. Copper imports fell 16 per cent in March because lower domestic prices made imports unprofitable, while iron ore imports declined due to supply availability. Chinese economic data including power output triggered concerns about the rate of growth.

As for steel, April data suggest global production at all-time high helped by strong Chinese numbers. However, experts believe, production momentum seems to be fading in China, Europe and the US while in Japan, Korea and other emerging markets seem to be improving. Given the ongoing concerns, demand is seen less-aggressive and availability comfortable.

In this backdrop, no wonder, last week saw sharp price declines across-the-board in the global commodities market. All metals and crude were down week-on-week. Precious metals lost their sheen with silver prices sliding 4.4 per cent and gold 3.7 per cent. The worst hit was palladium (-8.7 per cent) followed by platinum (-4.2 per cent). Investor liquidation driven by Eurozone jitters and Chinese growth concerns did it in. Base metals were no better. Losses ranged between 4.4 per cent for tin and 1.2 per cent for aluminium on the LME. Copper was down 1.8 per cent. Iron ore prices continued their slide with 4.5 per cent decline week-on-week amid poor appetite for high-grade ores, experts remarked.

The sense of uncertainty and loss of confidence is likely to continue for some more time. Developments in Europe in addition to Chinese economic activity will be key drivers. How soon clarity will be reached or confidence return remains a mere conjecture at this point of time. Flow of macro data needs to be watched closely for early signals. Obviously, caution is the watchword. While prices may not look up anytime soon, it is not the time to short the market either.

Gold: Price of the precious metal fell well below the psychological $1,600 an ounce last week. On Friday in London, gold PM Fix was at $1,583/oz, down from the previous day's $1,599/oz. Silver fared poorly with Friday AM Fix at $28.58/oz versus previous day's $29.25/oz. Platinum ended the week at $1,466/oz and palladium at $605/oz.

Most interestingly, despite being a known safe haven asset and macro conditions gold supportive, market sentiment for the yellow metal has turned negative. A stronger dollar and bouts of risk reduction continue as headwinds. ETPs have remained somewhat resilient for now. If ETPs begin to experience outflows, then gold will be exposed to further downside risks. No wonder, most analysts are revising their price forecast down.

According to technical analysts, the break below 1580 in gold means that near-term bullish view takes a backseat as the risk is for a move toward range lows near 1520. A decisive break below 28.50 in silver means bearish move towards 26. The medium term outlook is neutral.

Base metals: On Friday, copper closed at $8,103 a tonne and aluminium at $2,005 on LME. The China factor was the main driver of the base metals complex last week with trade data not-so-encouraging. A further slowing of Chinese growth momentum in Q2 cannot be ruled which creates near-term headwinds for base metals prices and caps the upside.

Clearly, in the coming weeks and months, the base metals complex will be driven essentially by emerging macro picture. If global growth strengthens in the second half of the year, prices are sure to look, especially copper which is facing supply side issues. So, price dips will provide buying opportunities.

Technical picture suggests a sell at any uptick from current levels as copper looks for a move below 8,000. For aluminium, closing the week below 2,050 would encourage a bearish view towards 1,950. Medium-term outlook is range trading.

>gchandra@thehindu.co.in

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