Chinese HSBC manufacturing contracted to the lowest level in the last seven months. Base metals surrendering part of its 4-percent gain, after data at the weekend showed a factory slump in Asia’s two biggest exporters, China and Japan, had deepened in June. The decline in purchasing managers index fanned concerns over demand for base metals and took some shine away from last week’s policy breakthrough in the Euro-zone, where leaders agreed to expand the use of rescue funds in ways that would ease market pressures on indebted countries. The rally in riskier assets may take a breather today as investors look for fresh reasons to extend their shorts ahead of rising unemployment and deteriorating consumer confidence. From the economic data front, the Japanese Vehicles sales may remain weak owing to higher Yen and lower demand for durables.
Further, the German and Euro-zone PMI’s are likely to remain weak and may continue to weaken base metals. However, the UK PMI may increase slightly after increased easing from the Bank of England, may spur growth in the British economy providing slight respite to metals pack. The US ISM manufacturing may further contract with slower pace of construction spending and may continue to pressurize gains in base metals. However, base metals have already bottomed out, technically pullback is also expected in today’s session as increased hopes of easing, and positive equities may provide gains in base metals. Overall, we recommend initiating long at lower levels expecting metals to rebound in the long run.
Gold futures prices have taken a back seat once again although markets got some relief on the back of Europe plans intended to ease the contagion of the region’s financial stress. Euro as well fell amid doubt of whether the EFSF or ESM will have enough capital to shore up the struggling members. That said, will the ECB help the situation by reducing interest rate is now a million dollar question.
Anticipation of the same and affordability of the aid funds might have pressurized the Euro. Reports today are expected to show the Euro zone un-employment may increase while the PMI numbers are also likely to remain weak. The Euro therefore may remain weak and thereby would have pressurized gold. However, the deals made at the Summit helped the peripheral bond yields to fall, with Italian cost fell below 6% and Spanish yield fell nearly half percent to 6.44%. All these and the anticipation of ECB reducing interest rate would be supportive for the Euro and gold. In evening also, the US manufacturing data could turn down once again which will be lending support to the metal.
Silver futures prices have also drifted lower followed from the weak Chinese manufacturing releases in early morning and probably the falling Euro has also pressurized the metal. Although the US manufacturing data may again weaken, the anticipation regarding the ECB rate and US poor nonfarm payroll, we expect silver to gain momentum.