Bull run in commodities nearing end; base metals likely to lead fall

By Aasif Hirani

Global commodity market started its bull run in October 2016 and the momentum shifted in top gear after election of the US President Trump, who had promised to stimulate the economy by spending more on infrastructure.

But now uncertainty is coming to the market, as there are no signs of the promised stimulus coming into infrastructure spending.

We all know the contributions of China in consuming commodities. Any slowdown in China’s market will directly affect the prices of commodities. Weak numbers from China and increasing worries that we have turned the corner on the economic cycle are making investors worried.

Recently China was downgraded by Moody’s one notch to ‘A1’ from ‘Aa3’. Last year China’s economy was also shaping well, which was positive for the commodity prices.

Now the ongoing turmoil over Trump has also increased investors worried over political stability in the US.

There is growing concern that the Trump administration will struggle to implement pro-growth initiatives.

The weakness is now spreading to industrial metals.

Nickel has been the worst performer among all the industrial metals this year down by around 10 per cent since January.

In fact, nickel was the first metal that signaled a shift of market sentiment.

Global demand of zinc is expected to be greater than supply this year, and yet despite being a deficit the prices have corrected which indicates trouble brewing despite strong fundamental signals.

Lead had hit four-month low in May. Copper is trading in a range, but prices could break down further if a slowdown in Chinese demand continues to mount. Copper was holding its fort because of increasing cancelled warrant in LME (London Metal Exchange) but now it too is showing fatigue.

Zinc is showing signs of market top and other metals are also showing similar patterns. Copper and Nickel are struggling to rise this year. Commodity markets are showing significant weakness for the first time since the beginning of year 2016.

We feel copper may again retest the recent lows of Rs 355 and any upside may only come above Rs 375.

Retracement and down trendline in technical chart both points resistance at Rs 375. Breakdown below rs 350, copper may tumble to levels of Rs 335 where we anticipate it to trade sideways for the rest of the year. In zinc, investors might still profit from buying on dips but the opportunity to make big money might have passed.

(Aasif Hirani is the Director of Tradebulls Group. He has 12 years of experience in the finance industry. Views expressed in this article are author's own and do not represent those of ETMarkets.com. Readers are advised to consult their financial advisers before taking any position based on these observations)