After an eventful week, where are base metals headed?

The Fed hiked rates by 75 bps and offered hawkish future guidance. The sentiment was also hit by Moscow’s new mobilization campaign in its invasion of Ukraine.

Earlier in the week, the outlook for a potential European recession, in combination with the recent China weakness, resulted in a decline in speculative positions and weighed on prices.

However, the market confidence gradually restored after the US rate resolution announced this week which many expected to be in line with market expectations.

That said, a policy-aided demand recovery in China, amid low inventories lent some support to metals prices.

Not only LME, registered inventory with both the CME and Shanghai Futures Exchange (ShFE) is also super low, and between them, the three exchanges hold just 200,000 tonnes of metal.

But, the major reason the base metal markets recovered and gave confidence to investors was optimism about stimulus measures in China. Shanghai announced a 1.8 trillion-yuan investment worth of infrastructure projects, following national policymaker’s calls to revive sluggish economic growth.

Moreover, physical markets also registered increased demand as producers looked to replenish stocks ahead of China’s National Day holiday from October 1-7 was also bullish for prices.

Looking ahead, the complex is likely to face headwinds in the months ahead with expectations of only a further tightening in monetary policy, with slowing global growth, rising interest rates, and an escalating war in Ukraine.

The main worry is that central banks will allow the economy to slip into recession to bring inflation under control.

Investors will also weigh the prospects of the demand situation from China which eased Covid restrictions, but economic uncertainties will persist in top metals consumer China well into next year due to its strict zero-Covid strategy.

Persistent supply issues in Latin America will prevent prices from falling much further. Moreover, a stronger dollar has also capped demand for the metals and a further spike in the dollar will keep prices under pressure.

Technically, copper support is at 590, resistance is at 645, and the overall trend remains bearish for the red metal. Aluminium support is at 185, and resistance is at 200, while the overall trend remains bearish for the white metal.

(Sriram Iyer is Senior Research Analyst-Commodities & Currencies at Securities)