Copper futures charged up more than 3 percent in early New York trade on Friday, reversing a day-earlier rout to a 4-1/2-month low, after the US Federal Reserve eased jittery investors by cutting the discount rate by a half percentage point, traders said.
Some analysts said the Fed's unusual move to clip the discount rate, instead of the target on the overnight federal funds rate, was a measure designed to restore liquidity in financial markets while continuing to remain vigilant on the threat of inflation and not change policy. The surprise move calmed rattled financial and commodity markets and rallies ensued in US and European markets.
"Just after 8 o'clock (1200 GMT), it traded down to $3.0915 (a lb), and then at 8:15 am, it leaped higher and it's continued higher. I would say the entire world is dancing to the same tune - copper, gold, nickel, the euro. You name it," said one New York broker referring to copper's reaction to the lower discount rate.
At the COMEX division of the New York Mercantile Exchange, copper for September delivery moved 8.50 cents or 2.75 percent higher at $3.1750 a lb. The contract slipped in early hours to $3.07 and rallied up to $3.2075 a lb following the Fed's interest rate cut.
In Thursday's massive sell-off, copper slid to its cheapest level since March 29 at $3.0410 per lb. as investors worried about the onset of a credit crunch, in some cases selling-off liquid assets like copper to shore up other investments. Traders said copper's gains on Friday were partly bolstered by short covering after the recent slide and by bargain seekers by players who sold out too quickly in the slide.
"This is just a knee jerk reaction and a reversal of everything you saw yesterday. We were down almost 30 cents at one point yesterday and we're up 8-1/2 now," said one dealer. He added that the Friday effect also prompted buying as some traders did not want to go home short and risk having to buy after rallies in overseas markets over the weekend.
Traders said the communiqué also soothed global markets. "I think it brought confidence in a rather startling way. As soon as the announcement came out the S&P futures, gold, copper, all of them went up," said one metals trader. AT 10:00 am, COMEX estimated copper volume at 13,976 lots.
Overnight inventory data showed London Metal Exchange copper warehouse stocks rose 1,200 tonnes to 120,550 tonnes on Friday, while COMEX copper stocks stood at 21,244 short tons. In other news, Mexican copper miner Grupo Mexico said it will begin talks on Monday with the union representing striking workers at its Cananea copper mine. In Peru, Milpo said on Friday operations had resumed at its Cerro Lindo copper, zinc and lead mine after Wednesday's earthquake cut power supplies to it.
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