It’s been a bad 2 weeks for the commodity complex, the BCOM and its metals sub index having peaked on 17th May and having been retracing since.
It has been the broad macro coupled with substantial length amid price gains which had demonstrably deterred downstream industrial metals demand and particularly onshore, which has triggered the recent correction. Sticky inflation – Euro area accelerating more than anticipated, Chinese PMIs soft. The higher for longer rates theme and the threat to economic growth presented at a time when the 1Q24 surprising economic growth story seems to be dissipating.
Bloomberg chart : Citi surprise economic indicators.
Nvidia’s results and the subsequent gains sees the BCOM outperformance vs Dow Jones ratio retrace – that having troughed on the 23rd February and then 27th March.
That exuberance around China’s supportive measures for its property sector having also ebbed with the Shanghai property index having peaked on the 22nd May and now approaching the 50% retrace of the gains it had made since the mid-April trough.
Shanghai is closed for its Dragon Boat Festival on Monday 10th June. There will be no evening session this Friday 7th June 2024 or on the Monday. The Shanghai exchange will reopen on Tuesday 11th June.
Lest we forget the 3rd July is the date scheduled for the key NPC meeting.
Certainly, the manner in which prices drifted into month end close and given the length that still resides in the space, marks a real potential for further losses. Indeed, at Friday’s close LME copper was still up 17.3% ytd. That the onshore steel sector showed no signs of any bounce after the PMI release showed little appetite to bet on hope currently. Previously we have seen onshore react more positively with the anticipation of government support and stimulus.
So it will be fascinating to see:
- How the systematic flows emerge early on next week given how inactive they have been of late. It has really been discretionary flows in the likes of copper which has driven losses.
- Will the start of a new month bring commodity inflows as we approach the official 5th-9th working days index roll window and which has seen buying these past couple of months. All evidence above might suggest otherwise. But the proof as they say….
- How does the complex behave once we get Wednesday’s June options expiry in the rear-view mirror. Will the usual prog vol granting materialise and if so will that focus be on downsides given the pull backs?
Overall if anyone is unmoved in the case of sales or chastened in the case of traders, by the scale of recent moves or the lack of liquidity at points, then I would ask what planet they are on. See a grid of monthly ranges and how they compare to their 12 month averages. April and May has seen every metal break its 12 month average trading range 2 months in a row.
But you look at a Bloomberg rolling chart of the 2nd month at the monies, volatility was coming under pressure into the close of the week. Copper likely to see downside granting as price moves lower. Ali having seen previous call buy interest. That waning as prices came off into end of the week.
Has the overall picture changed? One reads around 50 degree heat in India currently. Peak electricity demand there setting a new record. 246GW on 29th May would be greater than the 243.3GW set last September. Our bull thesis remains intact. This is a retracement. Now to look for the heavy exchange and signs of downstream demand to emerge. Of course, it has been there being no signs of any real draws in onshore inventory as well as fat contangos in the front end of curves which has driven the bear’s outlook. A Bloomberg chart of the Shanghai weekly deliverable stocks….
In terms of the macro in the week ahead from the USA we have:
- Monday : PMI and ISMs. Also Wards Total Vehicle Sales.
- Tuesday : Factory and Durable Goods Orders
- Wednesday : MBA Mortgage applications, Service PMIs and ISMs.
- Thursday : Trade Balance, Initial Jobless Claims.
- Friday : Non Farm payrolls.
From China:
- Monday : we arrive to Caixin unofficial PMI manufacturing.
- Wednesday : Caixin services PMI
- Friday : import, export and trade balance data.
A chart of Marex Global Risk Index which peaked on 22nd April. This on Guy Wolf’s channel and worth monitoring for signs there. Its growth input in green having been particularly weak of late.
Ali
- On Thursday the news that China’s State Council had pledged to strengthen capacity limits in industries such as steel and alumina. Any new ali smelter to be offset by the closure of an older model.
- But prior to Thursday/Friday’s correction ali had really been playing catch up having previously been the complex underperformer. One theme around CTA flows over the past fortnight in the market has been sell copper / buy ali.
- That ratio having seen copper underperform ali between 20th and 30th May. Friday seeing ali sold off harder.
- On a 3 x ali : 1 x copper that move equivalent to $2999 down to $2024.50 at Thursday’s close.
- Likewise on a 1:1 spread to the zinc price ali’s discount reducing from $484 at close 20th May to $317 at Friday’s settle.
- Its 25 delta risk reversal in the 3rd rolling month having seen calls peak at 2.89% over puts on the 29th May before easing to 2.6% at Friday’s settle. See how that peak stalled ahead of the December 2022 high.
- This Wednesday sees options expiry and worth reminding ourselves of the heavy open interest that sits in June.
- Current price closest to the 4.3k lots of the $2600s which sit open.
- Marex nanolytics data having become more choppy of late but Friday having seen the heaviest combined supply bar since the 14th May.
- Harbour’s ali summit runs 4th-6th June in Chicago. Do not expect that to have a positive outlook.
- CME stocks having risen last few days from 32.8kt on 28th May to 36.8kt last.
- LME on warrant at 594kt up from 556kt on 21st May but down from 926kt on 14th May.
- Shanghai weekly deliverable largely static.
- LME cash to 3s has tightened – into $45.36c at Friday’s settle from $56.1c on 22nd May.
- Seasonally June is a down month for ali 1.13% on average over the past 10 years with 2023 and 2022 having seen declines of 4.2% and 12.3% respectively. Although so was June supposed to be.
- A volume profile for May showing the biggest trading bars having gone through in the $2550 area.
- Ali’s 8 week ma comes in at $2592.
- But attach daily to show the 21 day ma support at $2614 into which you have one rising trend line.
- But the major area into $2550/75 area – the up trender and the 38.2% retrace of move taking low of $2177 on 28th February to the $2799 peak.
- Resistance back into $2700 then then the $2750 area.
Copper
- US rates in white, Bloomberg dollar index in blue rallying, gold in yellow, silver orange and copper green all selling. The macro took us higher. So, it brings us back off the highs.
- The copper 25 delta call skew premium in a rolling 3rd month having peaked on 21st May at 4.22% and closing Friday at 3.65% but the point here being that it peaked 8 days before the ali. Copper having been under that RV pressure per above.
- June settled $95ish under 3s on Friday. So we sit just below the $10k strike which shows 6.4k lots of open interest in June.
- News that Indonesia is to delay its ban on copper concentrate export ban until the end of the year.
- Chinese smelter deliveries previously mooted no doubt behind the recent build in LME on warrant stocks – those up to 109kt from 89.6kt on 13th May. These inflows into Asian LME warehouses.
- Shanghai weekly deliverable also up to a new high. No signs of draws onshore yet.
- Comex stocks down to 16.6kt from 31kt on 26th March. No signs of those arb related deliveries for July prompt yet.
- And that will be why the comex remains in a premium to London even if it has eased considerably from its peak. At one point 3s to July reaching >$1000 comex premium. Back into around $105 over last.
- Although July Sep comex copper spread trading into a contango again at settling Friday at $0.85c from its peak of $29.25 back on the 14/15th May.
- LME cash to 3s into $126.62c from $130.23c on the 29th May.
- Market remains long – of that there is little doubt.
- Comex aggregate open interest peaked at 316k lots on 14th May. That last at 291kt.
- Marex LME position estimates showing some liquidation with Friday’s combined supply bar the most negative since the 2nd May.
- We ended the month with a vwap of $10,285 although the largest bars in May went through in the $9900 area and below here.
- Onshore premiums off their lows but still could argue unexciting. Yangshan still a discount of -10 but off the -20 low on 22nd May. Likewise the national 99.5% spot premium up to a -120 discount from -340 on 21st May.
- And a SMM chart of that onshore arb (spot attached) shows that whilst still closed how that has improved considerably and explains some of this week’s arb buy LME / sell Shanghai and which has along with spec long liq resulted in Shanghai aggregate open interest declining from 633.6k lots on the 17th May to 588k lots last.
- A poor close to the week settling only just above its 8 week ma at $10,030.
- Support on daily chart into $9967 which is 38.2% retrace of this year’s low to high.
- But the really bearish will target the 50% retrace and the rising trend line from that $8127 low which comes in around $9615/50.
- Resistance now into 21 dayer at $10,241.
- Key now will be arbs and how scrappies behave on price dip.
- June seasonals tell us nothing if you take the 10 year averages – down 0.05%!
Nickel
- If you thought Indonesia controlling 75% of the world’s nickel supplies wasn’t enough this past Thursday saw the government approve a new economic zone called KEK in Morowali, Central Sulawesi for … wait for it… “green industry-based nickel downstreaming”.
- Wait for the inevitable sanctions that are going to be implemented by western countries.
- Nickel’s price having been supported onshore by steady sulphate and nickel pig iron ore prices. The former having been in a 32-33k yuan range.
- But the small long that had established itself on the LME has been exiting per Marex position estimates. Back to flat essentially as we see it.
- Onshore stainless steel in purple also coming under pressure into the end of the week.
- As has weighed some of those renewable onshore energy and solar names.
- Stocks may not be drawing meaningfully – Shanghai only down small. But the inflows have at least ceased.
- LME cash to 3s into $254.43c from $275.02c on 29th May.
- For Wednesday expiry the $20ks above show 1.1k lots of oi. To the downside the June $18ks x 2.2k.
- 3rd rolling month 25 delta skew into 4.45% calls over from 5.88% on 20th May.
- May’s largest volume bars having transacted sub $19,500.
- Friday’s price action breaching the rising trend channel.
- Next support into $19,465 low from 16th May then $19,150 area and the 50% retrace taking move from $16,540 low on 28th March to $21,750 peak.
- Resistance into $20k then the 8 day ma at $20,340.
- As with copper June seasonals on nickel very unclear. The outlier the 20% decline in 2022 but on average over past 10 years only a 0.2% decline.
Zinc
- Friday’s 3.3% market o market price drop saw zinc give up its weeks gains and end up as the underperformer on the week.
- The market is long with the Marex nanolytics data throw up 2 consecutive bearish supply bars on Thursday/Friday.
- Onshore zinc concentrate supply has been tight but signs of builds there lately (orange line) although still well below historical average.
- It having been the onshore steel and ferrous sector (and its negative reaction to Chinese PMIs on Friday) which has put paid to the zinc rally.
- Although unlike the above 3 metals zinc has never seen a really big skew to calls. In the rolling 3rd month that call skew having peaked at 1.44% back in February but which has been flatlining at around only 1% over since 10th May.
- Zinc one market also where there has been only light options open interest.
- The major oi for Wednesday’s June expiry the $2900s to the downside with 1.8k lots.
- US nat gas having also peaked around same time as zinc on 21st/22nd May. We note that sell off pausing and seeing a bounce Friday.
- Shanghai weekly deliverable largely unmoved since mid April but at 129kt only 3kt off that peak.
- LME on warrant at 229kt off the recent mid Feb peak of 240kt.
- LME cash to 3s into $54.97c from $61.86c on 29th May.
- Friday’s close below its 21 day ma at $3001 which now provides resistance. Then the dayer and into $3075.
- Support into $2940 and the 16th May low then $2888 and the 38.2% retrace taking the move from the $2409 low on the 27th March to the $3185 peak.
- June seasonals.
- Interesting to see on a SMM arb chart to see how the onshore arb has recovered to end of March levels. Paper traders (arb not physically open) could be encouraged to buy LME / sell Shanghai).
Lead
- Is the one market where the skew is for puts over calls. The 25 delta risk reversal in the rolling 3rd month settling at 0.67% puts over on Friday.
- Downsides having garnered the most buy interest amid the recent rally.
- For Wednesday’s June expiry the $2300s and $2250s each x 0.8k lots and the $2200s x 1k.
- Lead having built a decent long on London and approaching the November 2023 peak before seeing liquidation last week with 2 consecutive nanolytic supply bars to see it out.
- The highest volume bars for the month having gone through between $2280-2300 and then into $2340-2350 area.
- Shanghai weekly deliverable stocks reverted to builds this week up to 59.8kt from 55.2kt on 24th May.
- LME on warrant at 148kt down from167kt on 1st May.
- LME cash to 3s into $57.11c from $60.72c on 29th May.
- June 10 year seasonal average sees a 1.38% gain albeit 2022 saw that 12.6% plunge.
- The onshore arb as with so many of the other metals still closed but having recovered substantially on this sell off.
- Support into $2250 then $2220 and the 38.2% retrace taking move from the $1995 low on the 28th March to the $2359 peak.
- Resistance into $2300/10 and the 8 day ma.
In summary can see strong argument for lower prices short term after price performance into end of past week. Macro was a big reason for our having rallied. And they clearly been hitting exit button. But Chinese bid was evident at points into sell off and I’m not convinced this is a terminal decline for our space.
