Copper fell on Friday due to investors' doubts about the likelihood of strong stimulus measures from the US Federal Reserve and to signs that Spain may need sovereign aid, heightening concerns about the euro zone debt crisis. Three-month copper on the London Metal Exchange closed at $7,640 a tonne, down from a close of $7,684.50 on Thursday, when it hit a one-month high for a third day.
The metal used in power and construction briefly pared its losses as the euro recovered against the dollar on news that the European Central Bank is considering setting yield band targets under a new bond-buying programme. But copper soon retreated again as the dollar regained strength against a basket of currencies. A stronger dollar makes commodities priced in the US unit weaker for holders of other currencies.
On Thursday Fed officials gave mixed messages, with one playing down the odds of imminent bond buying and another seeing a lot of reasons for more easing, and investors scaled back their expectations for economic stimulus. "After the initial thoughts from the Fed statement yesterday, we saw some short-covering (in metals markets) and that has run its course now," Gayle Berry, an analyst at Barclays Capital, said.
"We're not at the point yet where the market's views have changed to add fresh longs as there are still negative headlines out there." US data on Friday also sent mixed messages. New orders for long-lasting US manufactured goods surged in July, but a second straight month of declines in a gauge of planned business spending pointed to a slowing growth trend in the factory sector. Trading volumes were light due to summer holidays in the northern hemisphere, when many plants shut for annual maintenance.
Reflecting a lack of conviction about copper's short-term price direction, the open interest in the LME copper contract dropped to a 5-1/2 year low. "It'll take a lot of conviction to get fresh longs to come in at this point, so we will be facing pressure from the shorts today," said an analyst with an international trading firm, who declined to be identified as he was not authorised to speak to the media.
Concerns about the euro zone debt crisis also kept sentiment cautious following news that Spain was in talks with euro zone partners over sovereign aid, although it has not made a final request for a bailout, three sources with knowledge of the matter told Reuters. The euro zone's fourth-largest economy is the latest hot spot in the 2-1/2-year crisis as concerns remain about its ailing banking sector, which sought a 100 billion euro European lifeline in June, and its highly indebted regions.
Benchmark tin closed at its highest since mid-May at $20,900 a tonne, supported by concerns about a supply shortfall from Indonesian producers. It closed at $19,950 on Thursday. A stoppage by tin miners in Indonesia because of weak global prices has increased to encompass over 90 percent of smelters, leading shipments to decline by more than half from the world's top exporter of the metal.
Looking further ahead to the outlook for copper, investors are keen to see signs of further stimulus action from China to help spur a pick-up in copper demand in the country that consumes around 40 percent of global refined copper. The latest figures showed copper inventories in warehouses monitored by the Shanghai Futures Exchange rose 1.8 percent from last Friday.
Although the manufacturing sector in the world's second-largest economy contracted at its sharpest pace in nine months in August, market watchers are ruling out a previously expected cut in banks' required reserve ratio after the Chinese central bank injected a seven-month high amount of funds into the financial system. Benchmark zinc closed at $1,879 from $1,862 and nickel at $16,475 a tonne from Thursday's close of $16,475. Lead closed at $1,971 from Thursday's close of $1,952 a tonne. Aluminium closed at $1,919 a tonne from Thursday's close of $1,904.