Base metals closed lower on the London Metal Exchange Wednesday, dragged into negative territory as fears mounted over the deteriorating economic situation in Italy.

LME three-month copper was 2.2% lower at $7,625 a metric ton at the close of open outcry trading, having earlier hit a two-week low at $7,580/ton. Zinc fell the most, closing at $1,933/ton, down 3.4% on the day.

Italian bond yields soared to euro-era highs Wednesday after clearing house LCH.Clearnet raised the margin required to trade Italy's government bonds. The yield on the benchmark 10-year bond rose above 7%, a level previously associated with Greek, Irish, and Portuguese requests for external assistance.

As global equities slumped, so did the euro, which fell to a one-month low against the dollar at $1.35529.

Industrial metals, which are used widely in construction and manufacturing, aren't only sensitive to economic data and news, but are also priced in dollars, and therefore appear more expensive when the greenback gains.

"The base metals continue to track the ups and downs in Italian politics and the euro," Standard Bank analyst Leon Westgate said in a note.

Events in Europe eclipsed more positive fundamental news Wednesday, which included falling LME inventories across the majority of the complex and continued strike action at Freeport-McMoRan Copper & Gold Inc. 's large Grasberg mine in eastern Indonesia.

"Assuming no improvement in production at the facility, the strike action will effectively wipe out a quarter's worth of copper production from the mine," said Westgate.

Workers at Grasberg, the world's third-largest open pit copper mine, have been on strike since Sept. 15.

Base metal trading is expected to remain volatile and macro-driven in the coming days, with prices closely tracking euro and equity moves.

 
   Prices in dollar a metric ton. 
3 Months Metal             Bid-Ask        Change from 
                                          Tuesday PM kerb 
Copper                 7625.0-7626.0      Dn 175 
Lead                   1978.0-1979.0      Dn 42 
Zinc                   1933.0-1934.0      Dn 67 
Aluminum               2124.0-2125.0      Dn 15 
Nickel               18050.0-18075.0      Dn 300 
Tin                  22000.0-22050.0      Dn 200 
Aluminum Alloy         2050.0-2060.0      Dn 5 
Aluminum Alloy-NASAAC  2190.0-2195.0      Unchanged

-By Francesca Freeman, Dow Jones Newswires; +44 (0)20 7842 9412; francesca.freeman@dowjones.com

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