Metals Prices Under Pressure as Risk Appetite Unravels

Commodity prices are inching lower ahead of the opening bell on Wall Street as risk-averse return amid anxiety ahead of the conclusion of the European Union leaders’ summit in Brussels. Although policymakers have already signed the much talked-about “fiscal compact” designed to institutionalize budget discipline in the region and even floated clues that the timetable to fully capitalize the permanent European Stability Mechanism bailout fund will be pushed up by a year, Greece-linked jitters remain.

The debt-strapped country had today as the deadline to deliver on a long checklist of requirements to secure the first tranche of funding through the €130bn second bailout announced two weeks ago, a goal it looks likely to miss. While the EU has allowed Greece to miss many deadlines before, the downgrade in credit market risk following the second three-year European Central Bank Long Term Refinancing Operation this week means their tolerance has likely been diminished. This could make for a disappointing final outcome.

A likely International Swaps and Derivatives Association ruling on collective action clauses (CACs) written into the terms of the Greek Private Sector Involvement bond swap may pose another problem. Although the credit default swap-regulating group said yesterday the absence of the ECB from the exchange doesn’t amount to a swap-triggering “credit event”, just such an outcome may happen if PSI participation falls short of the required 75% and CACs are invoked to compel rebellious debt holders. That would mean the bond swap was no longer “voluntary,” making it hard to say a default has not happened.

While that’s hardly as ominous a prospect as it was before ECB LTRO efforts built a firm firewall around EU banks, reflexive downward pressure on risk appetite the prospect of the worst-case scenario is emerging all the same. S&P 500 stock index futures are trading lower and weighing on sentiment-linked copper and crude oil prices. The move is also stoking safe-haven demand for the US dollar, amounting to de-facto downward pressure on gold and silver. Corrective flows are probably compounding the move lower on profit-taking after US stocks took out their 2011 high yesterday. With nothing of note on the US economic calendar, the current trajectory appears likely to carry forward into the week-end, with traders paring back on directional exposure to digest the past week’s heavy dose of fundamental news-flow.

Comex E-Mini Copper (NY Close): $3.932 // +0.052 // +1.34%

Prices took out resistance at $3.917, the 38.2% Fibonacci expansion, overturning a Bearish Engulfing candlestick pattern identified yesterday and opening the door for a challenge of the 50% level at $3.985. This level lays closely with the Feb. 9 high at $3.988, with a daily close above the latter boundary overturning an earlier Engulfing pattern and negating the bearish tone of overall positioning. Alternatively, a break back below $3.917 targets the 23.6% expansion at $3.831.


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