Two pieces of advice I received from my mentor and first employer:
- If you don’t adapt you’ll die. Trading in any market has seen landscape and technological shifts. We are amidst such an event. We have a trading community too comfortable with a mean reversion, low volatility range type trading engendered by a low interest rate environment and a world less beset by decoupling geopolitical risks and sectarianism. For now, we have all the latter and commodity markets attracting longer term sticky money.
- Price is king. Regardless of any fears around a paucity of demand in the here and now we are a futures market. And that is facing a supply deficit. Human beings have a tendency to get belligerent (encouraged by the polarized world we live in: “I’m right. It makes no sense.”) and fight something they don’t understand. We have markets with a higher cost. Financing and transactional costs. And this is only magnified in the likes of copper as we are already at such an elevated price. It is pretty telling that the majority of interaction we continue to have is that a correction is due and that the moves don’t make sense. Too stretched? We are amidst a bull run. Fighting a trend is foolhardy. They are tough to reverse.
This writer equates current market conditions to the bull run of 2004-2009 pre global financial crisis when China was going through its great industrialization and urbanization move whilst commodities saw such vast inflows. On that note bear in mind we saw 18 months of outflows post that first 75bps FED rate hike in June 2022. We have only seen inflows commence this year and say 4-5 months or so. This also a key shift in our space.
Whether or not demand is the here and now, I don’t see many question its appearance on the skyline:
- AI and the substantial strains it is placing on an aging grid world wide as power is so used in its data storage collection. Data from the Electric Reliability Council of Texas showed spot prices in its Northern Hub which includes Dallas rose from $32 on Tuesday evening to $3000 MW / hour only 24 hours later. Old infrastructure which cannot cope with this surge in demand.
- The world’s need to electrify and decarbonize. Inevitable. See link to good Guardian article below.
- War and rearmaments involve greater usage of base metals. Might be depressing but true.
The market is wrapped up in the lack of demand yet as we can see from events in the copper and ali markets this week, cost of finance is so crucial to levels of participation, term structure etc that it leaves a synthetic trade short in our market as all live on a hand to mouth basis. As to that wide term structure the financial buyer is establishing length and its so far along the curve that their natural lending has immediate impact then continues to weigh.
This weekend we have FED Reserve Governor Bowen saying persistent inflation over the first few months of the year means she doesn’t expect it will be appropriate to cut at all in 2024. So regardless of any fears around the US consumer and ahead of a week during which President Biden’s administration is expected to unveil Chinese tariffs (China EVS expected to quadruple from current 25% levels), we believe the sticky inflationary hold hard assets argument driving those commodity inflows remains. Most nights during last week’s official commodity index roll window our base metals saw a MOC bid suggestive of that real money buying.
This week we use a Bloomberg chart of the European Stoxx Resource INDEX. See how it has held the break out area on the recent dip and that 1st May low. Its RSI also illustrative since early April of a trending market. It looks overbought but then essentially moves sideways as the price makes further gains.
So, NO structural shift in our bullish outlook. We can digress and talk about the potential for a pullback but again reiterate that avoids looking at the change in our world. And yes, we recognize the potential for a correction but whilst short term vicious it will end up likely a lot shallower than people expect.
The market is clearly going through a digestion, consolidation phase. The next short term move unclear. One of the signals for that pause has been Marex Global Macro Risk Index which peaked on 23rd April and has been coming off since. But we note its psychology input in blue which was the first input to come under pressure has begun to turn back up. Its liquidity index in red softer but only minimally. The growth input in green the last to have turned south.
A Bloomberg chart of the Citi surprise index also shows data out of USA, China and Europe has been disappointing to the downside since mid April. Of course the rally one could argue has been around the synchronized recovery in world economic growth albeit on a sequential basis.
BUT for all those whom point to the woes of the Chinese property space I ask them why the Shanghai Property Index rallied to levels not seen since late February on Friday. Country Garden reneges on debt. However, tier 2 cities start lifting ALL home buying curbs. Shanghai tier 1 city that is expected to follow recent easing measures led by Beijing. This all sign of NO panacea rather it is supportive. All in keeping with our Chinese demand isn’t going to fall out of bed.
Macro this week:
USA
- 14/5 PMI
- 15/5 MBA Mortgage App. CPI. Retail Sales
- 16/5 Initial Jobless Claims. Import export prices. IP.
China
- China yesterday released aggregate financing, new loans and money supply data. Bloomberg reports that aggregate financing decreased by approx. 200 billion yuan in April m/m its first decline since at least 2017. Loan expansion worse than expected. Weak demand. M1 money supply dropped for the first time in 2 years.
- 15/5 1 year lending rate set
- 17/5 New and used home prices. IP. Retail Sales. FAI. Property investment. Jobless data.
So again, if we going to correct, this China financing data is an input which could be a driver.
Month to date the BCOM metals sub index is down with the Precious metals index having re-established its clear 2024 year to date this past week.
A Bloomberg chart of the various subcomponents.
Metals pausing and going through this recent bout of consolidation has seen vol come under pressure although Friday’s moves resulted in bids emerging on the copper and ali. Arb stop outs and big stock deliveries. Below a Bloomberg chart of the rolling 2nd month at the monies.
Metals having paused energies initially were able to claw back some of its relative losses before the metals gains saw that BCOM sub index ratio pause (metals vs energies). We believe structurally metals should continue to outperform.
So, correct we might and prove ALL those concentrating on it right. But the trend is higher so that’s what we have to concentrate on. The bull run has paused and been diverted. But they’re still in town.
Tomorrow the LME prices cash for 3rd Wednesday. Its also the last day of the official 5 day roll window. Post those 2 events we often see natural business on the LME start to subside and this is a long month.
Ali
- All the reports will be focussed on Friday’s substantial stock build in Port Klang Malaysia which should actually come as little surprise to the market given it has been sitting there in a non LME warehouse and listed in the relatively new LME off warrant warehousing data.
- Looking at the shapes of the delivery our desk’s conclusion (90% ingots and the rest sows) that it was largely Indian material with a smattering of Russian metal being put on to the official exchange in a rent share agreement.
- LME on warrant stock back to levels last seen in December 2021. CME stocks at 33kt down from 45.9kt early March. Shanghai weekly drop slightly to 212kt from 19th April peak of 229kt.
- Some evidence that traders already considering cancelling and taking a look at some of the warrants.
- LME cash to 3s tightens post the delivery and into $45.67c from $48.29c on the 8th May.
- But the ali market is long and there will be systematic traders with stock signals.
- Ali does not have the supply issue facing copper albeit it still has an EV bull story.
- Marex nano data analysis much more uncertain since the Russian sanctions triggered peak above $2700.
- A heavy producer offer has capped any challenge of the $2600 area.
- Price yet to fill the $2512/17 gap around those Russian sanctions. Support into $2490 area basis that being the 38.2% retrace taking move from Dec $2109 low to April $2728 peak.
- 8 week ma also comes in at $2483 with price above that ma since early March.
- Below that could argue $2419 and the 50% retrace.
- But aside from the potential for a consumer bid to engage. See also how there sits some heavy open interest into the $2500 area particularly in June, Sep and Dec. Indeed there are some big open interest to downside. June $2400s x 9.6k lots. Raises potential for gamma to engage on dips.
- Onshore arb also recovered of late having collapsed post sanction news. Back to those prior levels albeit nowhere near being open!
- Also worth our monitoring the emissions markets – back in the public eye – having decoupled post March June 2022 but which have seen a closer relationship these past 2 months.
- Ali has also already achieved 119% of its 12 month average trading range.
Copper
- Consolidation gave way to an arb stop out on Friday. But that involved CME shorts / long London traders having to unwind but also Shfe longs / short LME also have to unwind.
- We had thought May’s arb spike had stopped out that community which first sold May at a $50 comex premium scale up before heading for the exits when that spiked to $200 comex premium.
- But Friday saw July comex premium over 3s London spike to $350 over London which everyone jumped on as an all time record,
- See a Bloomberg chart daily to se how that arb has been building a stronger comex premium.
- First comment we would make is this. Maybe it’s a record all time BUT we have seen periods during the great 2004-2008 bull run when the comex arb has spiked. Perhaps spot but can show Dec 2005 trading out to a $250 premium.
- The market sees spreads trading as low risk but there are colleagues whom can remember Dec Dec copper trading out to $800b during Sumitomo and Hamanaka activity in the 90s.
- Interest rates and higher base cost of copper is going to make these spikes sharper.
- As for that comparison I know this can be shot down but see a comparison of how copper behave between 2003/2008 and how we have been trading since 2022.
- People can talk about the physical presenting an arb trading opportunity (certainly there is more an argument of real money length held on CME to switch to London although this is futures settled market).
- But we would make the point that you then lay yourselves open to the threat of disruptions to shipments. Whether that is low water levels in the Panama canal. Or just South American shortages. See this week’s news that Panama’s business friendly new president saying First Quantum needs to renegotiate and drop its legal challenges first. No quick fix.
- The recent decline in comex stocks from the mid March peak of 31.1kt to 21.5kt.
- LME on warrant stocks down to 89.5kt from 113kt on 10th April.
- Shanghai weekly yet to draw meaningful since making the 300kt 19th April peak. Last at 290kt.
- The market getting so comfortable with the comex length that it gets caught out with July Sep comex copper trading out to a $2.65b on Friday from a low of $1.69 contango on the 8th May.
- An hourly chart of the comex July at the monies to show how that spike almost 5% in 24 hour amid those moves.
- But as we headed into tomorrow’s pricing for 3rd Wednesday we also noted a Shanghai arb borrow of May June LME. Short London / long Shanghai.
- LME cash to 3s tightening to $106.48c from $136.65c on 8th May.
- Price has been largely rangebound since 19th April. Attach an hourly to show wedge pattern we find ourselves in.
- Resis $10,100-10,200 .
- Support into $9800/25.
- The $10k strike such a big options stage post. Can make an argument amid the calls from the likes of Mr Duquesne that this is a mere pause? Building for bigger and better things?
- June and July $10ks x 3.7k and 2.3k. The Seps x 1.9k. But the Decs x 6.3k. See above the $11k the next really big level.
- Monitor gold given its importance apropos those money flows.
Nickel
- The stand out is this rally has been driven by short covering. It is the ONLY metal not to have seen length establish.
- See a chart of Marex position estimates.
- Stocks continue to build on both exchanges. Albeit those inflows slowing of late.
- Onshore renewable names weighing on the price into the end of the week.
- Although noticeably the onshore price and its stainless price counterpart were steadier than the London price action.
- LME cash to 3s tightening to $171.6 at Friday’s close from $192.26c on 7th May and the start of the roll.
- An hourly nickel chart to show how price has become range bound $18,500-$19,500 since 19th April.
- In June the $18ks x 2.2k lots and the $20ks x 1.4k the most significant.
Zinc
- Has been steady even amid the recent price pull back seen in the ferrous and steel.
- And also given the recent announcements around production restarts.
- That perhaps down to the recent money moc bid.
- LME stocks have started to draw on warrant back to 209kt from 224kt on the 25th April.
- Shanghai weekly deliverable continuing to build however and at 131kt the highest since June 2022.
- LME cash to 3s soft at $33.99c easing from $9.83c at close 29th April.
- That theme of tight concentrate supplies continues onshore. Those back to the April lows and well below 5 year averages.
- In June the $2900s show 1.7k lots.
- There still lies so little open interest to the topside.
- The market having encountered evidence of a producer offer into last week’s gains. Price having made a divergent high by $1 on the weekly at $2975.
- It has encountered the 200 week ma at $2932.
- Support into 21 day ma at $2857. Then the $2800 area.
- Break of $3000/25 and target $3200.
Lead
- LME has seen evidence of some producer selling this past week (that said most metals have in some form or other).
- Lead’s options activity also of a more bearish nature with downsides in the cross hairs.
- But it has been the strength onshore which has caused much head scratching. We therefore wonder if its VAT related. But are unclear as to the reasons.
- Indeed whilst LME has seen length establish it is Shanghai where the spec length has built to 37.4k lots at 31.9% of open interest. The largest spec long in percentage terms since October 2023.
- See how Shanghai May June spread reared to 300b at Thursday’s close before giving it all back Friday to settle at level.
- Shanghai weekly deliverable rising to 62.2kt this week from 48.3kt on 26th April.
- LME on warrant beginning to draw again back to 156kt from 167kt on 1st May.
- LME cash to 3s easing to $48.4c from $37.39c on 3rd May.
- Price stalling into $2250 resistance this week. More above into $2300.
- Support into 21 day ma at $2196. Break below that and the $2150 area.
