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Morning markets: China loans move fails to reassure markets

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Often, when a country makes lending easier, the move is seen as bullish for commodities, in enhancing the ability of consumers to afford raw materials.

Not this time. China on Saturday revealed it was lowering reserve requirements of banks, for a second time this year, reversing some of the increases it made into last year when inflation was on the rise, and economic growth prospects not attracting so much concern.

But instead of applauding the move, investors sold, for fear of the economic weakness that China's move betrayed.

Sentiment was hardly helped by continuing clouds over the eurozone, where Greece has yet to form an interim government.

"The future of the eurozone and the common currency is again being called into question," Luke Mathews at Commonwealth Bank of Australia said.

'Escalating fears'

The selling was evident in China itself, where Shanghai

shares

stood 0.6% lower in late deals, and Shanghai

copper

lost 1.3%, injecting weakness into the London copper market too.

Among agricultural commodities,

cotton

slumped 3.1% on the Zhengzhou exchange, for the best-traded September lot, to 19,320 yuan a tonne. The May contract dropped 3.1% to 18,655 yuan a tonne, earlier hitting the lowest level for a spot lot since November 2010.

Weakness in China, the world's top cotton consumer, producer and importer, was hardly helpful to bulls in New York, where the fibre has also been losing ground to estimates last week from the US Department of Agriculture of record world stocks at the close of 2012-13.

"Values above 100 cents appear a distant memory, let alone the 220 cent record posted just 14 months ago," Mr Mathews said.

"In addition to the escalating fears about the state of the global economy, cotton prices continue to be pressured lowered by the USDA's forecast that world cotton stocks will rise 10% to a record."

New York cotton for July fell 0.9% to 78.29 cents a pound as of 08:30 UK time (02:30 Chicago time, 03:30 New York Time), if remaining above the last session's intraday low of 77.16 cents a pound.

'Weak physical demand'

And in Tokyo, prices of

rubber

- another industrial ag commodity, typically more sensitive than foods to macroeconomic concerns – fell 1.4% to 279.50 yen a kilogramme, the weakest for a benchmark contract for nearly four months.

At Phillip Futures in Singapore, Kerr Chung Yang also noted concerns over "Thai government purchases, weak physical demand and expectations that supply will gather momentum by the end of the month as Thailand nears the end of the low-production season.

"Ample supply from Indonesia, large inventories in Japan and lower imports by China" have also been weighing on prices.

Chinese imports to rise

Another major Chinese import,

soybeans

, were weaker too, both on the Dalian, where the September lot dropped 2.6% to 4,317 yuan a tonne, and in Chicago.

And this despite an estimate from China's ministry of commerce that the country's soybean imports would rise to 5.63m tonnes this month from 4.88m tonnes in April.

Furthermore, the drop comes against a backdrop too of, apparently, tight supplies of the oilseed, with the USDA forecasting last week that stocks in the US, the top producer and exporters, will fall to 145m bushels at the end of 2012-13, the smallest on a stocks-to-use basis in 47 years.

Still, the news on the oilseed isn't all bullish, with China selling down some of its reserves to ease the pressure on the domestic market, a downbeat influence, at least in the short term.

'Charts look a tad scary'

And technically, the appeal of Chicago soybeans has weakened considerably too. The benchmark July lot in the last session closed below its 50-day moving average for the first time since Christmas.

"The charts look a tad scary," Mike Mawdsley at Market 1 said, noting that the oilseed had now broken firmly below its uptrend line too, leaving $13.50-13.56 a bushel as the next key resistance level to movement lower.

And the July lot certainly dropped through the $14-a-bushel mark easily enough on Monday to stand 1.2% lower at $13.89 ¼ a bushel.

November soybeans were 1.1% down at $13.07 ¼ a bushel.

Mr Mawdsley said: "The news isn't horrible for soybeans." But concerns over China, JP Morgan's $2bn trading loss, the eurozone and so on have "funds selling big time".

Speculators were already selling even a week ago, regulatory data revealed, with their net long position falling 23,500 lots from a record high to 230,328 contracts in the week to May 8.

'Looking to round out a bottom'

They were selling in

wheat

as well, increasing their net short position by 21,000 contracts to more than 46,000 lots, approaching record high territory again.

Sentiment over the grain has been weakened by improved ideas for US production, stoked by an upbeat Kansas wheat tour, although some modest results from the early harvest, besides Friday's forecast of a bigger-than-expected drop in world stocks in 2012-13, have offered some support to prices.

Furthermore, the risk of frost in the US has been a persistent menace, although fears have of late been confined to more northerly areas.

Wheat for July gained 0.1% to $5.97 ¾ a bushel in Chicago.

"The wheat market may be looking to round out a bottom near these levels, but this going to be a tall order as the winter wheat harvest advances," Brian Henry at Benson Quinn Commodities.

Corn purchases

The grain may also be gaining some uplift from the unwinding of "sell grain-buy soybean" spreads, a factor which could be supporting

corn

too, which for July delivery added 0.25 cents to $5.81 ¼ a bushel.

The new crop December lot gained 0.3% to $5.06 ½ a bushel.

Corn has continued to gain support from a strong US cash market, which have stoked ideas that supplies of 2011 crop may be even tighter than US farm officials appreciate, and some signs of demand even at these levels, including from China, a high profile buyer given its huge potential for purchases.

On Monday, South Korea's Korea Corn Processing Industry Association was reported to have bought 110,000 tonnes, with the country's largest feedmaker, Nonghyup Feed, tendering for 210,000 tonnes of corn and 70,000 tonnes of wheat.

By Agrimoney.com

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