Its now been a bad 3 weeks commodities with the magnitude of Friday’s moves summed up by a performance grid:
But also by a grid showing you the scale of retracements in dollar and percentage terms from their recent peaks:
We have clearly been on the bull side of the fence so am happy to admit this writer has been taken aback by the scale of the retracements. Whilst being well aware of the paucity in real demand and the continuing stock builds onshore the reasons for my misunderstanding as to the power in this move has been underestimations:
- The end of the recent rallies seen across the metals as they made their peaks was not the result of length building but rather than by shorts being forced to cover. Copper the best example of a move which was aided in the end by a squeeze and exit rather than position building. Blow off tops comes to mind?
- For all the talk about longer term supply crunch, the recent highs attracted a good deal of producer selling. One can always anticipate on ali and nickel nowadays but zinc and even copper too.
- The absence of China’s buy interest and the continuing build in onshore stock has been relentless.
- We were of the opinion too that the long was of a stickier persuasion than that seen.
- So the macro having been the real driver of the price gains since mid February and it has been that which has driven these sharp reversals.
Marex Global Risk Index peaked on the 19th April with its psychology input in blue having made its high as early as 19th March. That bouncing since 3rd May but now coming back under pressure. Growth in green really powering to the downside since 24th April. The move lower in liquidity in red commencing the same time but at an apparent slower pace. But no supportive sign here.
Strong Non Farm payrolls encouraging that end of week risk reduction as higher for longer concerns manifest themselves with the fear around that negative impact on growth. And that we must still have some length left in the markets and given the poor technical price action we inevitably lie vulnerable to further sell pressure.
But as the macro risk hits the exit door, the importance of this Wednesday’s FOMC rates decision garners greater importance as it will no doubt determine how “the money” deploys risk over the coming months. The FT this weekend publishing an article entitled :
Indeed for all the fanfare, the BCOM Commodities Index sat up 3.2% year to date at Friday’s close. Precious still up 11.7% making it the star performer. Its metals subindex now only up 7.3%. Although the agriculturals still down 4.3%.
Since the 4th June the BCOM’s energy sub index has outperformed its metals counterparty.
And a grid of Marex Risk Premia RV positioning estimates in Guy Wolf’s channel illustrative of the fact that energies positioning has been largely static. Very light length reduction. Compare to that to the shifts out of length in copper, zinc and nickel – the latter even seeing a short now build. So here the confirmation that the power in metals moves lower the result of a position unwind. And as to the impact of RV see how ali has seen a market go from short to small long.
But even prior to the Fed’s rates decision we have the small matter of the Shanghai reopen Tuesday following China’s Dragon Boat Festival. The absence of any arbitrage activity (buying LME / selling Shanghai) which had previously been evident in a passive fashion on the initial moves, thereby contributing to the scale of Friday’s plunges.
We therefore attach a grid of how prices have already behaved since their exit at 08:00hrs BST Friday and do so with the view that as Monday afternoon develops do not be surprised to see some sort of mean reversion interest as the market sets itself up for that Shanghai return. Zinc down over 5% in less than 9 hours.
Likewise see how the commodity space which saw those record inflows has actually been underperforming the Dow Jones since peaking on the 29th May.
Plenty of uncertainty remains in this world. Forgetting rates for a moment the geopolitical risks abound with flashpoints in Ukraine, Gaza and the Red Sea not to mention Africa and the South China seas and particularly the Philippine borders. Weather patterns also becoming more difficult to predict. We have a hotter atmosphere. Pres Modi’s weaker 3rd term mandate than perhaps anticipated still comes with an embracement of a new “green era” whilst sustaining growth. And India is not alone. The world needs power. To harness, store and distribute. Unless we all going to give up. India’s plans are for the installation of 500GW of non-fossil energy by 2030.
It might seem belligerent especially given the potential for prices to retrace further but the structural bull narrative remains. Its just timing remains key. And price targets remain tough to call given it is the heavy exchanges that one seeks to confirm tops or bottoms might be in place.
Ali
- The ali market nanolytics profile only really shifted on Friday with the passive order book having seen positive demand readings prior to that and between 30th May and 6th June.
- Friday’s combined negative nanolytics reading (passive order book and transaction aggression combined) was the most bearish since 14th May with fast, medium and long term models all long by Marex estimates.
- Ali’s copper ratio with copper becoming more choppy of late. Although its bounce on Wednesday-Thursday stalling into its 100 day ma.
- But ali’s outperformance to zinc continuing with that switch on a 1:1 basis into $189 at Friday’s close from $484 zinc over on the 20th May and the tightest since the 22nd April.
- CME stocks have risen from 32.8kt on 24th May to 39.4kt last.
- Shanghai weekly have been building again since the 20th May although at 227t just off the recent 232kt registered on the 12th April.
- LME cash to 3s out to $57.39c from $42.14c on the 3rd June. Although it was the July August which really contributed to those moves tightening on the first day of the month only to then give it up once what one would think was averaging related type business had been processed.
- From $2.94b on 3rd June this had eased to $16.98 contango by the end of the week.
- Of more note stocks wise China aluminum ingot social inventory seeing a 1.5% decline to 777.5kt. But the current stock level is still running 40% higher than its same period last year.
- Harbor bearish commentary. They see price between $2200-2500 through 2026. They see 22mt of annual secondary production facilities will have been added by 2026 as consumers call for greener metal.
- China to have added 15mt of that total. And Harbor sees a net increase of 6mt secondary prodn there as those smelters will struggle to obtain enough scrap to feed total capacity.
- To the downside the $2500 strike shows 4.2k lots of open interest in July and 6.4k lots in September. Dec also 6.7k lots.
- Price has settled just above the 38.2% retracement taking the year’s range which comes in at $2552 and bang on its up trender at $2568.
- On weekly has closed back below its 8 week ma at $2603 for first time since the week ending the 23rd February.
- Support into $2500 and that $2508 low mid May.
- $2454 is the 50% retrace taking move from Dec low to May peak.
- Resistance into $2635/50.
Copper
- Outside 2 sessions copper has seen a passive order book offer every session since the 30th May according to the Marex nanolytics data. Length exiting as you can see from the long having cut from its peak on the 22nd May at 53.5% and 124.7k lots to 32.1% and 70.7k lots at Thursday’s close.
- Of more interest to the desk is Marex break down of those position estimates and how the fast time frame money has actually started to go short. The medium and slower term models still long but we compare the current profile to that seen in 1Q21.
- The current correction similar to that seen between 25th Feb 2021 $9617 high to $8570 low on 4th March 2021 before price consolidated to 12th April 2021 before then making another push to new highs.
- Copper rallied even amid the dollar strength and yuan weakness between December and end of April.
- Those still weighing.
- As does the fact Shanghai weekly deliverable stocks continue to increase and now at 337kt up from 26.1kt in December and the highest these have been since they peaked at 380kt in March 2020 but which are therefore peaking much later and at a time when they seasonally draw.
- LME on warrant stocks also up to 118kt from 89.5kt on 10th May.
- But CME stock declines continue and now down to 13.7kt. And that the arb has eased so considerably from its stop out peak albeit still in a comex premium will there be those deliveries against July shorts so heavily talked about – or will those shorts have covered?
- And what makes this more interesting is events in Chile where BHP management and union workers at Spence (250kt prodn 20230) are in mediated wage talks which take on greater significance ahead of Escondida wage negotiations over the coming months. This the largest mine in the world.
- And note how July Sep comex did go bid at points last week.
- LME cash to 3s having seen a bid for the first part of the week and into Thursday’s $112.49c settle before closing week at $124.08c in absence of that China arb bid.
- Last week we finally saw finally both Shanghai bonded inventory and China social inventory decline - Shanghai bonded inventory down to 85kt from the peak of 92.8kt on 27th May.
- $9600s are the big strike to the downside now with July showing 3.1k lots of open interest.
- The key now being where that China arb bid really engages. It having been only passive as yet – and waiting for the price to come to them.
- But whilst still closed before Shanghai shut the arb had improved substantially and was back to levels really not seen since first half of March.
- Also keep an eye out in options space for put granting.
- Weekly price settle down through its 8 week ma at $10,068 for the first time since the week ending the 9th February.
- Support basis into 38.2% retrace at $9519 taking move from $6955 low in July 2022 to the $11,104.50 peak.
- Although daily closed bang on rising up trend from the $8127 year to date low.
- $9739 low from early May with more support into $9600/25.
- Resistance now into $9860 then $10k area.
- When we talk about positioning interesting to see how length in Wisdom Tree copper ETF has cut so substantially. Not such sticky investment.
- Sprott physically backed ETF having commenced trading on Thursday.
Nickel
- Nickel was one market that never really went long. See a breakdown of Marex position estimates and how the slow money in blue remained short throughout the recent covering rally. Medium term models remain tiny long but fast money flipping to short.
- Its passive order book offered every day since Tuesday.
- Its combined negative nanolytic reading on Friday the heaviest since the 5th February.
- Its input prices have remained steady – one of the reasons why prices rallied.
- Slow extension to Indonesian mining permits. Unrest in New Caledonia.
- Nickel sulfate staying in 32-33k range.
- But inventory continues to build on both exchanges continues to build.
- Onshore stainless has been under pressure all month.
- Likewise onshore renewable names and solar equities under pressure which has not been price supportive.
- LME cash to 3s tightened to $229.38c on 6th June before easing to $240.6c on Friday.
- Shanghai top 20 broker positioning report showing the net position short.
- At Friday’s close that 18.4k lots and he largest since early May when this peaked at net short 23.1k lots.
- An options open interest grid.
- We recently had the news that Indonesia’s government had approved a new special economic zone in Morowali, Central Sulawesi for green industry based nickel downstreaming.
- But this weekend moves by President-elect Prabowo Subianto to boost the nations environmental credentials as he looks to lift a moratorium on carbon credit issuance.
- Weekly price settled on its 21 week ma which comes in at $17,993.
- More support into $17,400-600 and those April lows. Then then the $17k area
- Resistance into prev lows and $18,500 area.
Zinc
- Its 5% drop on Friday and Marex nanolytics data showed the heaviest combined supply reading since 10th February 2023 when price was at the outset of building a short.
- This time the market liquidating length, in contrast. Jury out as to whether this is some sort of exhaustive signal to the downside.
- The long having cut from its early May peak of 30.2% and 48.2k lots to 13.6% and 21.8k lots at Thursday’s close.
- Friday’s $174.50 range the widest since 15th April.
- Again see how fast money is already going short. Medium money the big long left.
- Ferrous and steel having weighed recently albeit those recovering into China’s exit.
- LME on warrant stocks back up to 239kt and just off the 19th Feb peak of 240kt.
- Shanghai weekly deliverable having seen only a small draw and back to 127kt from 132kt on 19th April.
- LME cash to 3s easing to $62.9 contango and that the widest weekly settle since 2006.
- It has been onshore port concentrate inventory which has drawn this past week and which sits well below historical averages.
- Prior to their departure Friday the Shanghai arb had already recovered to early April levels.
- And that’s prior to the subsequent 5% price plunge.
- Also whilst the European power prices remained pressured will the rally in US Nat gas provide some support given the recent correlation?
- The July $2750s show 1.1k lots of oi although the bigger strike is the $2700s with 1.9k.
- Zinc remains light in terms of options oi.
- Friday saw price close on its 100 week ma at $2764. Below its 8 week ma up at $2919 for first time since week ending 1st March.
- More support provided by $2732 50% retrace.
- Indeed as we get into $2650/2700 we would be getting back down to the area we broke out from mid April this year.
- Resistance into $2825/50.
Lead
- Marex nanolytics analysis has seen combined negative supply readings daily bar one every session since 30th May. Friday’s the heaviest since 22nd March.
- Length has essentially cut to zero with Marex analysis of the make up of that positioning showing fast money now short the lead market.
- Noticeably during that period whilst still closed physically the Shanghai arbitrage has moved considerably. And to the tightest for months illustrative of that surprising steady onshore pattern.
- And Shanghai top 20 broker positioning report testament to that strength. Net positioning showing long 7.6k lots at Friday’s close matching that seen on 20th July 2023.
- Shanghai weekly deliverable stocks up to 64kt from 55.2kt on 24th May.
- LME on warrant stocks largely flatling although seeing small build into end of week.
- LME cash to 3s settling at $55.2c having come into $53.4c at Thursday’s close from $65.03c at its widest point last Monday 3rd June.
- Price on the July $2200s with 1.4 k lots open. To the downside the $2150s x 1.3k lots of oi.
- Again price has closed below its 8 day ma at $2240 for first tome since end of March.
- Support into $2171 low from week ending 3rd May. Then the 21 weeker and the $2150 area.
- Resistance into $2240/50.
So in summary we have seen some pain to the downside. Markets contain length but above shows we now have fast money shorts across all bar ali.
They key will be first how China reacts upon their return. And it will be natural to expect some mean reversion Monday afternoon.
Then how we see the wider macro behave post FOMC. Risk will need to be deployed.
Ahead lies a crossroad….and sleepy it is unlikely to be..
