Base Metals Surge As Manufcaturing Sector In China May Have Bottomed

Apart from crude oil, base metals also surge today with copper and zinc rallied to the highest levels in 5 months. In addition to speculating that recession will end soon, signs of expansion in China's manufacturing sector also boosted prices.

Last week, the Federation of Logistics and Purchasing in China reported that the nation's PMI improved to 52.4 in March, the first time in 6 months that the gauge is above 50, from 49 in February. Bottoming in manufacturing sector increases the likelihood for China to achieve target GDP growth of 8%. However, in another PMI survey done by CLSA, March reading dropped to 44.8 from 45.1 in February as new business markedly declined during the month. Also, input costs and output charges plunged substantially.

Moreover, China's potential buying of base metals to increase its strategic reserve has support prices recently. Nonetheless, real fundamentals remain weak as reflected in decline in Baltic Dry Freight Index. Therefore, investors may take profit now as correction is likely after China's strategic purchase has completed.

Crude oil price pulled back slightly in European morning but as long as market sentiment remains bullish, near-term strength should resume. Stock markets are mixed. In Asia, Japan's Nikkei Stock Average gained 1.24% to close at 8857.9 despite poor corporate earning reports as the yen dived to 5 months' low. As Japanese economy relies heavily on exports, depreciation in Japanese yen benefits exporters. However, banking stocks dropped after the news that Sumitomo Mitsui Financial will make provision on its Barclays stake and may report a yearly loss. In Europe, UK's FTSE 100 Index is largely flat in the morning while Germany's DAX Index gained 0.38%.

Gold's downside bias is expected to continue to for sometime as investors' risk appetite has been increased and they prefer seeking for higher-yield investments such as in the equity markets. Inflation expectation has turned dimmer recently as no pronounced money-injection plans announced. In fact, economic data showed that inflation is still on the downtrend. In the Eurozone, PPI contracted -1.8% yoy in February, worse than market expectation of -1.5%. January's reading was also revised down to -0.7% (initial: -0.5%).

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