This Thursday 27th June 2024 the desk will be hosting a call with Ian Roper from Astris Advisory Services:
Topic: The outlook for Chinese demand in H2 2024
Time: Jun 27, 2024 02:30 PM London
Join Zoom Meeting
https://marex.zoom.us/j/88631711624?pwd=A9B7qjJnmDKwD2oxCrIavZgOzBtVlv.1
Meeting ID: 886 3171 1624
Passcode: 214831
We have chosen this time as the best opportunity for ALL our clients to join (late though it might be for some). We wanted to avoid the US data dump at 13:30hrs BST then China’s evening session open at 14:00hrs BST. We do hope all of you will be able to join us. A quick summary:
Metals price divergence to widen further as fundamentals reassert
The economic split in China between the “old” and “new” economy continues to show increasing divergence, and the upcoming Third Plenum, which is focused more on the structural direction of policy, will likely add to these divisions especially if there is a further uplift to the support for the green energy sector in particular.
In contrast to China, the Indian economy continues to exceed my bullish expectations, and while the election result was a surprise to many, the structural direction of economic development remains in-tact and may even see a further acceleration in the months ahead.
As markets now refocus on fundamentals, I believe the outlook 2H24 remains positive for copper and aluminium prices, while zinc and nickel should remain under pressure.
Good morning,
Declining volumes and contracting ranges in past few sessions illustrative of the lack of wider participation in our space. Recent long liquidation and subsequent fast money short covering off the lows leaving metals much cleaner. The options space and recent vol pressure also a reflection of the growing view among many that the base are going to go through a summer choppy period.
Imminent elections in Europe and the UK and uncertainty remains around how business will react to more populist administrations. Moreover, given the reaction to these what therefore the implications as we get towards November and the US presidential vote?!
Nvidia’s 13% correction over the past 2 session and there remains the potential for some rebalancing around half year end. In our weekly note we mentioned energies outperformance – its BCOM sub index now up 8.4% ytd with its industrial’s metals counterpart only up 5.4%. This on the back of the geopolitical risks in Middle East and growing Ukrainian attacks on Russia’s energy infrastructure. Not to mention the realisation that moves towards a greener future are being diluted. But the point here is that metals potentially could see a rebalancing type bid around the end of month. Wednesday on likely to see the start of those type of flows albeit this our guess rather than any real insight.
A Bloomberg chart of the ratio between the Bloomberg Commodity energies and industrial metals sub indices.
Or a Bloomberg chart of the ratio between the Bloomberg Commodity Index and the Dow Jones. Stock market outperformance since the 29th May.
Friday’s personal income and expenditure data also a key inflationary data input for FED we have noted the recent softening US employment space and question whether that shifts the US rates narrative. Earlier rate cuts than now anticipated? We also have China’s plenum on 3rd July although the silence around that and the property space is deafening. No reaction even to this morning’s headlines:
*CHINA CONSTRUCTION NEWS REPORTS MEETING ON HOMES DELIVERY
*CHINA TO GUIDE BANKS TO SUPPORT PROPERTY FINANCING
*CHINA TO ENHANCE POLICY COORDINATION ON HOMES DELIVERY
So quiet. Listless we are. A trigger required for next move. But we wary how those can appear from nowhere….
Some European industrial stocks under pressure this morning and particularly driven by Airbus following its warnings late yday that it is experiencing a parts shortage – engines, aero structures and cabin interiors. Stretched supply chains impacting the company’s delivery plans. Slowing PMI data of late and here we have an issue with the European industrial base…..Germany especially weak. Investment going into tech, AI and power/energy type sectors.
Price performance at cob 24th June 2024:
Options Summary:
Monday provided another quiet day in base metals with the price action supplying the only real point of interest later in the day, despite a pullback in the USD prices struggled to gather pace to the upside, when they did spike the were quickly sold off.
Uncertainty surrounding the health of the Chinese property market, Kaisa was the next large company up in court yesterday but the liquidation hearing was adjourned until August.
Outside of the property market, China extended an olive branch to German car makers in the hope that this would help prevent proposed EV levies from the EU. This concern was underlined by Premier Li Qiang warning against further decoupling between the Chinese and Western economies, which has been spreading to several sectors from manufacturing to high-tech chips.
Today is Jul expiry for CME Copper options with the 4.5 strike holding the main weight of OI with ~x3500 lots open on that strike.
LME Copper saw smaller clips trading in the front, and a Dec 24 9000/13000. Aluminium had one trade in Dec with the 3000 Call trading x400 lots. The others were quiet.
Aluminium option idea:
Given the flatness of the forward curve, dec25 v dec28 = 45 contango, and the backward sloping implied vol surface, you can get very cheap forward optionality to the topside.
To give some perspective:
Dec25 3000c (ref 2645) is worth 130usd/mt (20.83%)
Dec28 3000c (ref 2690) is worth 255usd/mt (18.6%)
You're picking up 2% in vols and gaining 3 years of time value, for only an extra 125usd.
There are 19usd per vega point in the dec28 call... so if you believe that metal markets will get more volatile into the end of the decade as we move further into the energy transition, then a repricing to 25% IV increases the option to 377usd (a 50% increase in value),
Long dated ali vols are close to the all time lows. We saw how long dated vol buying in copper had a big impact on the surface, moving up from 19 to 27% in dec25 alone this year. There is very little skew in aluminium, given producers have been actively selling calls in cal26 onwards. There will therefore be very good liquidity in this trade, with the potential to get 5-10k lots of liquidity.
Ali
- Outright is this morning seeing a mixture of both consumer and producer type interest.
- Curve is beginning to see some short rolls out of July and August.
- Shanghai aggregate open interest Ali down for its 17th consec session and to 497.1k lots from 686.8k lots on 30th May. Lowest since beginning of March.
- Length so much reduced although nanolytics still showing bearish supply readings albeit those much lighter with fast money shorts now established.
- Shanghai daily on warrant stocks have been declining since 17th June.
- Comex stocks unch but at 37.2kt down from recent peak of 39.4kt on 20th June.
- LME on warrant unch but at 467kt down from 654kt at end of May and the peak of 926kt on 14th May.
- Support into $2450/75.
- Resistance $2525/50.
Copper
- A steadier dollar, having sold off since Friday’s high, along with a choppy yuan has prevented copper from moving this morning.
- China remains largely AWOL which stands outs ahead of next week’s 3rd plenum meet.
- Shanghai aggregate open interest down 2nd day in a row to 522.2k lots and from 633.6k lot peak on 17th May. Lowest since March.
- Length much reduced across the 3 exchanges. Although Marex nanolytics data has shown bearish supply readings 2 sessions in a row.
- Although on a more positive note, we look at the current break down of our positioning estimates and given the fast money short in our space now (that having contributed to the bounces off the lows) we compare the current market set up with that seen in 1Q2021.
- IF that is the case, recent price correction all part of a longer term up trend.
- But LME stocks continue to see what we assume are those much mooted Chinese smelter deliveries (into Asian warehouse locatiions). LME on warrant up to 170kt from 89.5kt on 10th May and matching the peak seen in November.
- Shanghai daily on warrant stocks see a tiny draw but at 255kt only just off the 267kt peak on 14th June.
- Comex stocks unch but no sign of builds there.
- Support into $9550-9600.
- 100 dayer coming in at $9358.
- Resistance into $9875/9925.
Nickel
- We have seen some evidence of a consumer bid emerging into these lows. But turnover is running down 42% on its 20 day average across the whole session. Since 8am BST and the LME open, down 32%.
- Shorts now rebuilding on both exchanges. Although we note Shanghai aggregate open interest down 4.3k lots or 2.2% and its 3rd consec decline.
- On LME and per Marex position estimates it has been the fast money building a short and that is approaching levels from end of March when price based just ahead of $16,500.
- Stocks build on both exchanges today. LME on warrant up another 1.1kt to 87.2kt.
- Shanghai daily on warrant also increase having seen draws between 3rd and 24th June.
- Stainless was initially supportive before selling off after their lunch time break and into the onshore day session close.
- Support into $17k then the $16,540 low from late March.
- Resistance into the 8 day ma at $17,358. Then $17,555 and the last real break down point.
Zinc
- Last two nights has seen an moc offer.
- Price like so many going through this consolidation pattern with the potential for it forming a bull flag.
- Certainly, by Marex estimates, positioning back to flat with some fast money shorts established.
- Shanghai aggregate open interest down 4.3k lots or 2.2% and its 3rd consec decline.
- That story of concentrate tightness onshore remains.
- LME on warrant stocks see a big cancellation in Singapore. Now down from 239kt on 7th June to 213kt last.
- Shanghai daily on warrant stocks also down to 255kt from 269kt on 13th June.
- Ferrous has steadied up with SGX benefitting from this morning’s China property headlines (see opener).
- But not really moving amid recent healthy supply.
- Price now chopping between its 8 and 21 day mas at $2840 and $2893 respectively.
- Support also provided by recent $2825/35 lows. Then $2800.
- Resistance above into $2910/30 = recent highs as well as 38.2% retracement.
Lead
- Amid the recent bout of risk reduction we have commented on the rising importance of that fast money short term positioning.
- According to our position estimates the LME lead market having gotten flat before a fast money short was established. That has been covering.
- Shanghai daily on warrant stocks have built to 53.5kt from 50.9kt yday – those having drawn from the 18th June peak of 71.4kt. So a build after a week of draws.
- LME on warrant also see a Singapore cancellation as did zinc. These down to 192kt from 202kt yesterday and which had built from a low of 145kt on the 5th June.
- Lead having also been under RV pressure. Its switch against zinc out to $703 zinc over from $567.5 on the 7th June.
- Support into $2125/45.
- Resistance $2215/25.
LME Stocks
- Copper deliveries continues. Taiwan and South Korea as those Asian locations get that Chinese smelter material we assume.
- Nickel also sees big build. Highest since Oct 2021.
- Lead sees a bIg draw. It having seen builds between 5th and 19th June. Cxl in Singapore.
- Zinc also seeing a decline. On warrant levels back to 212.7kt from 239kt on the 7th June.
Shanghai On Warrant Stocks
- After recent draws today sees builds on Lead and Nickel.
- The balance sees draws but minimal. Need to see these pick up.
* For indicative purposes only, as at 09:45 UK time. Please contact the desk for live pricing
