Copper futures fell as concerns about the outlook for the Chinese economy continued to dent demand expectations.
Moody's Investors Service has cut its outlook on China's sovereign bond rating to negative, highlighting growing global concerns about debt levels in the world's largest consumer of commodities. These concerns more than offset optimism that the US Federal Reserve could cut interest rates next year. A rate cut could boost demand and enable businesses to hold on to more inventory for longer. The last time it downgraded China's credit rating was in 2017.
Michael Widmer, head of metals research at Bank of America Merrill Lynch, said: "The biggest issue we have is the sentiment issue and it is affecting demand." "People don't want to spend in China."
Before this week, gold had rebounded 7.2 per cent from its November low on expectations that the Fed's aggressive tightening cycle was coming to an end and concerns about tightening global supply as the Cobre Panama copper mine entered a care and maintenance phase. Gold reversed course on Monday as traders began to see opportunities to take profits, and continued to fall into Tuesday after the announcement of the downgrade.
However, while Moody's lowered its outlook on China's sovereign debt, it maintained its long-term A1 rating on Chinese sovereign bonds. If deepening pessimism about the economy, particularly the housing market, finally prompts government support, it could boost commodity demand again.
"What you really need is for the government to step up and spend money," Widmer said.
Copper futures on the London Metal Exchange fell 1.2% to $8,337.50 a ton as of 12:49 p.m. in New York. Other major metals on the London Metal Exchange also fell.
