COMMODITIES-Metals, oil swoon on China PMI, Fed fears

Thu May 23, 2013 4:37am EDT

Related Topics

* Copper falls as much as 3 pct, oil down for third day

* China PMI shrinks for first time in 7 months-HSBC

* Bernanke comments suggest U.S. stimulus may be cut soon

By Manolo Serapio Jr

SINGAPORE, May 23 (Reuters) - Copper fell 3 percent and oil dropped for a third day on Thursday after a factory survey suggested China's economic recovery has stalled and Federal Reserve Chairman Ben Bernanke hinted at possible cutbacks in the U.S. stimulus plan.

Base metals were among the hardest hit after China's manufacturing activity shrank for the first time in seven months in May. The sell-off also hit equities.

Rubber futures in Shanghai and Tokyo slid more than 5 percent after Japan's Nikkei stock index slumped 7.3 percent in its steepest drop in two years on the heels of the China data.

The slide in Asian stocks sent some investors back to gold, helping bullion rise nearly 1 percent while agricultural markets were mostly unscathed.

"The PMI data reinforces that the outlook for China's economy is on the softer side of expectations to put it mildly," said Vishnu Varathan, market economist at Mizuho Corporate Bank.

"As such, commodity demand remains questionable."

China is the biggest user of many commodities from copper to iron ore and rubber, and it is the second-largest buyer of crude oil and gold.

The latest flash PMI reading on China fell to 49.6 for May, according to a survey by HSBC, suggesting it may be tough for the economy to meet the government's 7.5 percent growth target this year, analysts say.

That fanned a sell-off in commodities and equities already reeling from Wednesday's comments from Bernanke that the U.S. central bank may consider slowing down its $85 billion in monthly bond purchases if the world's top economy gains more momentum.

Three-month copper on the London Metal Exchange hit a session low of $7,250 a tonne, erasing gains made on Wednesday, when it hit a six-week high of $7,533.75.

Other base metals also fell, with nickel, zinc , aluminium and lead all down more than 1 percent.

NO MORE FREE MONEY

"For so long people have taken for granted that money will be free. But as soon as it's not free, then that's when we are going to see big ruction in metals markets," said Matt Fusarelli, analyst at consultancy AME Group in Sydney, referring to signals that the Fed may soon scale back on its bond purchases.

Brent crude lost more than a dollar to hit a low of $101.06 a barrel, its weakest since May 2. U.S. crude also fell more than a dollar to $92.67, its lowest in a week.

Both Brent and West Texas Intermediate crude fell by the most in three weeks on Wednesday, hurt by a surprise increase in U.S. gasoline stockpiles which pointed to slow demand during the peak driving season.

Spot gold gained 0.9 percent to $1,380 an ounce, recovering from an intraday low of $1,356.24 as funds flowed back from equities.

But gold, down nearly 20 percent this year, could come under more selling pressure if the Fed moves to turn off the stimulus tap.

"It does not matter if the tapering off (of the bond buying) is in this quarter or next or delayed by six months," said Dominic Schnider, an analyst at UBS Wealth Management.

"If you know it's tapering off anyhow in the next 12 months, people do not want to be in (gold) anymore." (Reporting by Manolo Serapio Jr.; Editing by Tom Hogue)

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