London - Copper edged up on Monday, extending a recovery from 1-1/2 year lows hit last week, supported by hopes for more US and European central bank monetary easing, and as signs of life continued to emerge in the physical markets.

Also helping copper, European shares rose after a coalition government was named over the weekend in Italy, putting an end to two months of political impasse.

The dollar fell versus the euro meanwhile, making dollar-priced metals cheaper for non-US investors.

Benchmark three-month copper on the London Metal Exchange rose 1.11 percent to $7,108.25 a tonne by 11:16 SA time, extending losses from the previous session when it closed down 2 percent.

China's markets will be closed until Thursday for Labour Day holidays.

Copper recorded its biggest weekly gain last week since early February, as investors piled in after the red metal plumbed a year-and-a-half low of $6,762.25 a tonne.

Prices are still down some 11 percent this year, however.

“The market is a little bit too pessimistic on base metals. OK inflation is decelerating, leading economic indicators are edging lower again, but in copper something is starting to improve,” said Credit Suisse analyst Tobias Merath.

“Inventories in China (are) starting to come off, LME cancelled warrants have spiked, spot premiums are rising, especially in China and the arbitrage (import) window is open,” he added.

Daily data out earlier showed LME stocks fell by 1,950 tonnes to 617,650 tonnes, though they remain near their highest in nearly a decade.

In Shanghai, however, data last week showed SHFE copper stocks fell by 2.9 percent week-on-week to 217,180 tonnes, their lowest since early March.

Elsewhere, speculation is rife that the European Central Bank (ECB) will have to cut interest rates at its policy meeting on Thursday given the dreary run of economic news from the region.

The US Federal Reserve also meets this week and is widely expected to keep its current pace of bond buying at $85 billion a month. The policy-setting Federal Open Market Committee will announce its decision at 20:15 SA time on Wednesday.

The rate cut and bond buying hopes come amid a string of poor economic data.

China's economic recovery unexpectedly stumbled in the first three months of 2013 with slowing factory output and investment spending.

Meanwhile, US first-quarter economic growth expanded at a 2.5 percent annual rate but missed forecasts for growth of 3 percent.

Other US data releases this week include readings on manufacturing and the always-influential payrolls survey.

“We do expect to see more downside,” said Helen Lau, senior mining analyst at UOB-Kay Hian in Hong Kong.

“Our conversation with industrial players is that there is no obvious improvement from the first quarter. On the inventory side, even though bonded stocks have dropped, traders are exporting metal to LME warehouses in Korea and Malaysia,” she said. “You can see China does not need that much copper.”

Hong Kong brokerage UOB-Kay Hian sees copper prices averaging $7,000 a tonne in the second quarter.

LESS BEARISH

Signalling some investors at least have become less bearish on the metal's prospects by contrast, hedge funds and money managers decreased their net shorts in copper futures and options for a third week, the CFTC's Commitments of Traders report showed,

In industry news meanwhile, India's largest copper smelter will remain shut for now as a local environmental court transferred a case over complaints about emissions to New Delhi, extending a month-long closure.

The smelter, run by Sterlite Industries was closed on March 30, sending waves through the copper market by pushing about 3,000 tonnes per day of concentrates onto the market and sending fees to process to a five-month high in Asia.

In other metals traded, soldering metal tin edged up 0.12 percent to $20,800 a tonne, while zinc, used in galvanising, dipped 0.05 percent to $1,896 a tonne.

Battery material lead edged up 0.05 percent to $2,038, aluminium rose 0.45 percent to $,1886.50, while stainless-steel ingredient nickel rose 0.82 percent to $15,325 a tonne.

Gains in nickel, the worst performing LME metal this year, were capped by news that Indonesia expects the first stage of a $1-billion nickel pig iron smelter in Central Sulawesi to start operations by the end of 2014. - Reuters