Copper dipped on Tuesday as investors were unconvinced that a bank bailout for Spain could contain financial contagion in the euro zone and remained cautious ahead of a critical election in debt-burdened Greece. Spanish bond yields hit euro-era highs as rising scepticism over a 100 billion euro bailout for the country's banks, although the European Central Bank said the bailout will help stabilise the country.
Spain's financial turmoil and the possibility of Greece leaving the single currency area have thrust fears of euro zone debt contagion back into prominence. A shaky European economy would erode demand for industrial metals used in construction and manufacturing. Three-month copper on the London Metal Exchange closed at $7,395 a tonne, 0.3 percent down from $7,420 at the close on Monday, when it rose 1.7 percent.
Not even brisk imports of key commodities into China, the world's largest buyer of copper, and a surprise recent interest rate cut by Beijing, could enthuse the metals market. "It's not so much the fundamentals that are driving the prices but the concerns, the fears and the psychological factors," Commerzbank analyst Eugen Weinberg said.
"It doesn't mean that the current situation is as bad as the market suggests, but it may deteriorate further on sentiment." Investors were cautious ahead of the June 17 Greek election which might determine the future of the country and of the whole euro zone. "Copper will not make much progress, it will stall ahead of the Greek election," said Andrey Kryuchenkov, an analyst at VTB. "People will take it easy until then."
Concerns that the Greek election return parties opposed to its current bailout plan and force a disorderly exit from the euro zone were rekindled by a report that EU officials were considering ways to manage the fallout. In the meantime, the euro fell slightly against the US dollar and extended losses against the yen in choppy trade as investors shunned risk, wary awaiting the outcome of Sunday's Greek election.
A stronger dollar makes commodities priced in the unit more expensive for holders of other currencies. "Due to the lack of technical momentum, we think sideways trading will be the most likely outcome ahead of the Greek elections," Credit Suisse said in a research note. In other metals, tin finished at $19,700 per tonne, up from $19,500 at Monday's close, and zinc at $1,880 from $1,890. Lead closed at $1,895.50 from $1,914 and aluminium at $1,968 from $1972.5. Nickel ended at $17,175 from $17,325.