Copper rally halted

Copper capped its strongest weekly performance in six weeks with a whimper on Friday, dropping back after setting a fresh 2-month high as investors dumped risk amid talk of imminent credit downgrades of euro zone countries. It was another day of heavier-than-normal volume in the red metal, as investors pared some long positions that were set earlier this week on upbeat reports from China and a bullish trend in London Metal Exchange (LME) inventories.
Those items spurred a sense of optimism about demand prospects this year from the world's top metals consumer. That optimism quickly faded on Friday after a senior euro-zone source said S&P would downgrade several European nations' credit ratings later in the day, which it had warned in December. It added that Germany and the Netherlands were not on the list. S&P declined to comment on the report.
"As concerns re-emerge regarding European sovereign debt, it's going to take away some of the rosier prospect for increased demand down the road, and we are going to see a sell-off in industrial commodities," said David Meger, vice president and director of metals trading with Vision Financial Markets in Chicago. LME three-month copper peaked at $8,117 per tonne, its priciest since October 31, before going untraded at the close, and bid at $8,000 a tonne. It closed Thursday at $8,005.
In New York, the key March COMEX contract dipped 1.20 cents to settle at $3.5370 per lb, after dealing from $3.5790 to its own two-month peak at $3.6890. Trading volumes continued to gather steam, tipping 61,000 lots in late New York business - up more than 40 percent from the 30-day norm, according to preliminary Thomson Reuters data.
Losses in the metal mounted as the S&P downgrade fears swept through to the broader market, prompting a sell-off in European and US equities and dragging the euro to a fresh 16-month low versus the dollar. "The downgrade (speculation) is feeding through into currency markets and we've got a strong negative correlation between the dollar and commodities on days when there's a perception of elevated risks, said Nic Brown head of commodity research at Natixis."
The S&P news overshadowed copper's stronger fundamental picture. LME copper inventories shed another 1,425 tonnes on Thursday, bringing the total to a more than one-year low of 356,825 tonnes. Furthermore, cancelled copper warrants, or material tagged for future delivery, jumped to almost 19 percent of total inventories - their highest since May 2009.
"Today's rise again in cancelled warrants also points to further inventory draws in the weeks ahead," Barclays Capital said in a note. "The increase was mainly in New Orleans and we believe that this is going to end-user demand with US economic data pointing to a pick up in the momentum of economic activity."