It was never demand in the here and now which had driven the recent price gains across our commodity landscape. And a grid of the monthly ranges compared with their 12 month averages really lays out how our complex has exploded to life since the end of March early April when we really saw those substantial commodity inflows commence. Those also worth considering as we approach month end.
Rather we have been pricing as a futures market should with last week’s retracements removing some of that rich “sentiment premium”. An apt description but one which ignores the fact it was also shorts being forced to close out positions in the spreads and outright arenas which drove those last legs of the recent price gains and particularly on the likes of copper.
That we have seen risk reduction as being such a key driver into those extended peaks also has further reduced the pool of participation already impacted by higher transactional and other business costs as well as elevated volatility on a higher base price. At times last week on the likes of copper the widening bid / offer spread illustrative of that HFT involvement with all the liquidity trap / discussions their participation might engender.
Price performance at close of business 24th May 2024:
Once that stop out event was completed and with copper having made all times peaks, it was the macro which took us lower. Better than anticipated US data, a higher for longer rates narrative coupled with a stronger dollar and when you consider the scale of length now established in our space, we were due a fall. Gold also putting in its worst weekly performance of the year. Ags the only sub index in the Bloomberg Commodity basket able to close the week in the black.
This writer subscribes to the bull thesis which is why our commentary has attempted to avoid concentrating on corrections. We have had a shallow correction into the end of April early May which has now been superseded by a vicious down draft. But the manner in which volatility went offered into the end of last week, confirms our desk thinking that unlike 2023, volatility is going to more likely perform to the topside. We are in bull markets. See a chart of the rolling 2nd month at the monies and how July comex copper vol, which saw short CME arb traders tail their pain with vol bids, gave up 12% on the sell off.
Forget Nvidia stellar earnings, with Apple also helpng fuel Wall Street gains, Chinese industrial profits come in strong for April with government’s push for equipment upgrade lifting demand whilst exports returned to growth. PCE deflator later this week from the US with personal spending and income levels monitored for those signs of stickier inflation but data tells us the world’s economies are sequentially improving. See a chart of the various CITI surprise economic indices. US and Europe beating expectations in the past week.
Two stories on Bloomberg also a timely reminder of the bull demand story to come:
- The US power grid is set to see total generating capacity jump 80% through 2035 driven predominantly by around 1TW of new solar and wind generation. Solar to contribute 737GW of that which is around 4 times the total installed capacity from the end of last year. New wind power of 200GW set to double the nations turbine capacity. This Bloomberg analysis. And 29th May sees start of the Financial Times inaugural US Decarbonization and Industrial Transition Summit.
- China’s State Grid Corp says 2024 electricity consumption will rise 6.5% y/y. Rising demand to keep pressure on the nation’s power sector. Additional demand coming from data centres, 5G infrastructure and battery powered vehicles. Jan-April 2024 saw demand rise 9% y/y to 3.08 trillion KW/Hrs according to their National Energy Administration.
China’s property space beset by uncertainty and concerns. The PBOC’s recent unveiling of $42 billion of funding for local governments to buy excess inventory yet to have any meaningful effect amid low pick up from those local govts worried about more debt, as well as developers and homeowners unwilling to sell at a discount. But ahead of July’s 3rd plenum we can expect more supportive measures to feed through especially as only this past week President Xi raised the importance of property as well as unemployment and childcare as sectors which required reform.
Moreover, today there are reports that Shanghai has relaxed some home purchase rules including lowering downpayment ratios and mortgage floors. It was that news which no doubt spurred the Shanghai Property Index to hold and bounce.
We maintain our view that commodities will continue to see inflows from the wider financial space whose impact has thus far confounded metals traders. A Bloomberg weekly chart of a ratio of the Bloomberg Commodity Index with the Dow Jones.
Anecdotally also see the FT article discussing Abu Dhabi’s conglomerate HIS embarking on a flurry of mining deals in Africa. Old power looking to divest into new power. Follow the money!
The key tomorrow will be whether Friday’s poor technical closes in some cases is enough to trigger some CTA systematic sell progs although the manner in which copper has held today may suggest otherwise.
The dollar’s rally having stalled on Friday also supportive.
Marex Global Risk Index which peaked on 22nd April and has been mobbing lower since but whose downside momentum is pausing. It psychology input in blue turned north on 2nd May. It liquidity measure in red having picked up slightly this week we just need its growth indicator in green to improve.
Ali
- The outperformer last week benefitting from a spec and systematic bid.
- We had commented on the strong technical end to the prior week when price had filled that Russian sanctions $2512-18 gap. If anything ali was also about RV type prior underperformance buying.
- Producer selling has been relied on to cap gains above $2600 although the bigger surprise has to have been that the desk saw a consumer bid on moves back into the $2600 area on the dip this past week.
- Weekly price looking like it might be establishing a new higher range.
- The biggest volume bars looking at a profile of last week going through into the $2610/40 area.
- June options open interest and with $2600s x 5.1k lots and $2700s x 5.9k lots there is an argument to say we trade in between those two levels.
- On a 3 x ali : 1 x copper basis that switch had moved from $1783.50 on 16th April to $2999 on 20th May when copper made its new record. At Friday’s settle this had retraced to $2338.
- The less said about LME on warrant stocks the better. Needless to say metal has been warranted on exchange recently which saw those build from 132kt at end of April to 926kt on 14th May. Now back to 653kt. The metal was previously held off exchange. No doubt warehousing rent deals involved. Then other financier involvement.
- CME and Shanghai unchanged essentially this week.
- Do think its important for us to monitor aluminium’s correlation to the emissions market.
- That having been in recovery mode since late February 2024.
- LME cash to 3s bid into $45.42 contango from $56.1c at close 22nd May and that the widest cash to 3s settle in years.
- 8 week ma comes in $2567 although will be interesting to see if price can continue to hold above $2600.
- Resistance into $2750/75 then $2841 which is the 38.2% retrace taking move from $4073.50 all time peak to the 2022 trough of $2080.50.
- See how the longer term LME term structure has shifted. LME 3s has eased so much but a rolling 1st to 3rd Dec (currently Dec 24/Dec26) shows you how that has gone bid. Settling Friday at $51c out from $10.75 contango on 21st May.
- But overall the bid theme plain to see.
Copper
- What’s an 8% 3 day correction between friends. In retrospect Monday, Tuesday’s price peaks and the record they attained the result of stops rather than fresh length amid a market which has clearly already built up a sizeable position. Although we would make the point that given the scale of money coming into our space and with the S&P 500 having tripled to quadrupled in value over the past 15-20 years that those maximum estimates need to be recalibrated.
- But at last Tuesday’s close the CME commitment of traders disaggregated managed futures net long of 75.3k lots was the highest since it peaked at 92.1kt in Oct 2020 although note in Sep 2017 it got as high as 125k lots.
- It was the dollar rally from the 16th May which put paid to our price gains (remember Monday’s all time peak made the result of shorts stopping out) and fuelled the down draft.
- Interesting then to see the Bloomberg dollar index in green and inverted peak overnight on Friday and no doubt aiding this afternoon’s comex recovery.
- Aside from the stop outs on the move to record highs we also have noticed evidence of a producer offer.
- We have commented on some risk reversal interest seen in the market previously but this week saw some heavy exchanges on Dec 24/25 copper a volume profile attached for the week and which saw that trade beyond $100 back at one point.
- That exchange also evident from the week’s volume profile and the exchange between $10,850-11,000.
- Then see how it has picked up on move back below $10,400.
- Plenty of stories about downstream taking a step back. The abundance of scrap with Bloomberg reporting that its discount to refined prices growing to 4,615 yuan or $637 last week per SMM.
- Smelters continuing to produce. Which probably explains the recent LME builds. 89.6kt on 13th May to 99.1kt last. Those flows into Asian LME locations.
- CME stocks continue to draw. Shanghai weekly deliverable up again.
- Those builds keeping LME cash to 3s pressured at $119.41c out from $99.09c on 23rd May.
- Although onshore premiums have been rising albeit still in discounts.
- We did note a Chinese outright bid at various points of last week’s sell off.
- Our options desk also noting a put offer.
- The $10ks showing the most significant open interest across the balance of the year and with 6.5k lots in June alone. At current levels the market closer to the $10,400s with 1.9k lots.
- LME support into rising trend and last week’s $10,210 low below which the 21 day ma at $10,185.
- Resistance into 8 day ma and $10,500/25 area. Break above that opens up potential for retest of $10,825 area.
- Comex has rallied around $9 in our absence or in the order of around $175. At current levels shows around $10,450.
Nickel
- Unlike all the other metals the major driver of the recent price gains on LME nickel has been a covering bid with the metal having only gone small long in the past few weeks which you can see when you look at the official LME commitment of traders.
- As with our copper about that short covering having been the final driver of price, isn’t it interesting to see that it has been the reduction in the size of the outright short which has driven that net spec position to actually now go long.
- The stand out has been the steady sulphate and nickel pig iron ore prices.
- But also supportive has been the onshore stainless steel price in purple which is rallying again today. Testing the 22nd April 2024 peak and taking the onshore nickel price higher with it.
- LME nickel was $21,300 last time Shanghai was up here.
- The theme of stock builds on both exchanges shows little signs of abating.
- LME cash to 3s into $231.54c at Friday’s close from $279.23c on 21st May.
- $20ks show 1.2k lots and 1.8k lots respectively across June and July. But to the topside in June the $21,500s and $22ks x 1.6k and 1.7k respectively.
- The largest 3 months exchange last week having transacted between $21,400-600.
- Price seems to be in rising trend channel.
- Support into $20k area and then the rising tend line and 21 day ma around $19,600/50.
- Resistance into 8 day ma around $20,500 then the $21,300/350 area.
Zinc
- As with copper, the zinc story has really related to a tight concentrate supply situation onshore with inventory at ports still declining and down to record lows.
- SMM reported that recently TCs in June have entered a concentrated negotiation period, and domestic and imported zinc concentrate TCs may continue to decline. Tight ore supply continues to support zinc prices.
- Recent property supportive measures and resultant moves in the ferrous but particularly the steel space supportive. Those rallying today.
- Also see the nice correlation with US Nymex nat gas whose rally paused on 22nd May.
- Stocks largely unchanged this week but inflows at least having paused.
- LME cash to 3s though settling out at $57.35c on Friday and the widest weekly settle since 2006.
- The heavier outright exchange occurring last week on move back into $3050/100 area.
- A rolling 1st Dec to 3rd Dec (Dec24/26 currently) easing from $350b on 21st May to end week at $285b.
- That bid across the forwards evidence of some producer selling scale up.
- But again the front end in contango but the forwards have been bid.
- So little in the way of options open interest when it comes to zinc. To the downside in June the $2900s the most significant strike with 1.9k lots of oi.
- Support into $3k then the 21 day ma at $2969.
- Resistance into $3100 then $3200.
Lead
- The strength onshore has continued to confound many a trader in the west.
- Albeit Shanghai aggregate open interest has retreated from a peak of 146.3k lots on 11th May to 124.6k lots last.
- According to SMM, primary lead smelting enterprises in Henan, Yunnan and Hunan are in maintenance status, while recycling lead enterprises in Anhui, Jiangxi and other regions have not changed their reduction and shutdown situation, leading to tight regional supply of lead ingots. This probably explaining the sharp Shanghai weekly deliverable stock draw to 55.2kt from 72.9kt on 17th May.
- LME on warrant largely unchanged this week.
- The net spec long by Marex pos ests approaching the peak back in November 2023.
- LME cash to 3s settling $46.84c and in from $53.02c on 15th May albeit out from $45.72c at Thursday’s close.
- This past week having seen the heaviest exchange into the $2330/50 area.
- Support into 21 day ma at $2253. Then $2220 and the 38.2% retrace of the year’s range.
- Resistance into the 8 dayer at $2305 and then the $2350 area.
In summary we have seen an old fashioned shake down. Room for more IF (and it’s a big if) the systematic length starts to exit.
Rather telling though that China is a bid as is comex copper in our absence. See also the recovery on precious.
Deep breaths. We are in a bull market.
