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Recent data has supported the view that China is engineering a soft landing. But uncertainty over Europe and a weakening picture for Chinese export demand are denting the confidence of local consumers and the potentia..

20 Nov 2011

LONDON (Commodity Online): Recent data has supported the view that China is engineering a soft landing. But uncertainty over Europe and a weakening picture for Chinese export demand are denting the confidence of local consumers and the potential for contagion to spread from Europe is the biggest downside risk to base metals prices, said Barclays Capital in a briefing.

The markets are already discounting a bearish European scenario and bank would not be surprised to see a contraction in European metals demand. But China has been a bright spot so any downside surprises in either the economic or base metal-specific data would, Barclays believes, have bearish consequences for metals prices. 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. In the month following the 2008 crisis, there was a drastic deterioration in indicators, such as the SHFE/LME copper spread, which more than halved in the month following the Lehman’s bankruptcy.

“With the macro picture getting ever gloomier, we think that further upside in base metals prices looks limited for now. Even if China data does not disappoint, we think it would be difficult for a recovery in base metals prices to be sustained for long until there is evidence that the situation in Europe has begun to stablise,” Barclay added.

As such, Barclays favours 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.


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