Copper has been flowing into warehouses in Asia, fuelling speculation about demand in China, the world’s biggest consumer of industrial metals, and the outlook for prices.
Copper sitting in warehouses licensed by the London Metal Exchange has jumped by 18 per cent this week to the highest level since February, totalling 234,750 tonnes, up from 140,000 tonnes in April.
Many fear the inflow of metal could weigh on copper prices, which recently touched a two-month peak of almost $5,000 a tonne partly on expectations of further stimulus from central banks.
Others say the increase in stocks reflects storage economics and will reverse once premiums for physical copper starting improving.
Here are the main arguments.
Weakness in China
Last month around 50,000 tonnes of copper left Chinese ports, according to data provider Shanghai Metals Market. A lot of the copper comes from the bonded warehouses in Shanghai, where the metal is stored before it enters the country, according to analysts.
It is a sign of weak downstream consumer demand and that copper-consuming industries have not benefited from the government-engineered credit surge that boosted construction activity and prices of steel and iron ore.
Some of the copper that has left China was sent out by Chinese smelters, which produce finished copper from raw copper concentrate, according to Matthew Wonnacott, analyst at consultancy CRU in Hong Kong.
Investors are under siege. A growing proportion of bonds in Europe and Japan offer negative yields. The German and Japanese curves are negative out 15-years, while one cannot find a positive yield among any tenor of Swiss government bonds. Despite a string of robust data, US Treasury coupon yields are at record lows.
The UK referendum hit an already vulnerable banking system in the eurozone. Italian banks are on the front burner, but the temperature is rising in Portugal, and this is not to mention the slow boil at some of the largest European banks, specifically singled out by the IMF as posing the greatest systemic risks.
Politics add an additional wrinkle. Both of the two main parties in the UK are divided. The leader of the UK’s Independent Party resigned. If Labour was not doing a fine job of destroying itself, Cameron, in among his last acts as Prime Minister, will give it a helping hand. He will have parliament vote on the renewal of the UK nuclear deterrent (Trident), and it will further split Labour. Corbyn has been long opposed, while the Labour MPs typically favor. There is an attempt by the Labour MPs to block Corbyn’s name from even appearing on the leadership ballot.
The US political parties hold their conventions over the next few weeks, though it is possible that Trump announces his vice-presidential running mate in the week ahead. Indiana Governor Pence appears to be edging out former Speaker of the House Gingrich. Perhaps to prevent the Republican Party to dominate the news cycles, it would not be surprising if Sanders were to endorse Clinton either in the week ahead of the following week.
Is China’s army of retail investors behind some of the recent surge in silver?
That’s the view of Saxo Bank, which reckons the recent advance of the Devil’s metal mirrors that seen in steel rebar and iron ore earlier this year
Silver has advanced more than 10 per cent over the past week and hit $21 an ounce for the first time since 2014 on Monday. In the year to date it is up more than 40 per cent, outpacing gold, another safe haven asset.
Saxo says the pick up in trading volumes on the Shanghai Futures Exchange over the past week and the decline in open interest suggest Chinese retail investors have “taken over silver for now”.
“As long this continues, we are likely to see bigger daily price swings with the Asian session seeing most of this,” Saxo said in a note to clients.
Commodity trading in China surged earlier this year as retail investors, high net worth individuals and yield hungry wealth mangers piled into the sector, using it as a quick and easy way to place leveraged bets on the outlook for the domestic economy.
Futures exchange CME Group has taken “emergency action” as the UK casts votes in its historic EU referendum.
In a notice late Wednesday, Chicago-based CME said it had raised special price fluctuation limits in currency futures and benchmark interest rate futures
Fluctuation limits serve as circuit breakers in futures markets, temporarily locking trading after extreme price moves. Limits for dollar-sterling futures normally range from 400 ticks to 1,600 ticks, in escalating progression.
The emergency action, in place to Friday, will double limits for currency contracts, bringing the range for the pound from 800 ticks to 3,200 ticks.
“The exchanges determined that there is a strong likelihood that the ‘Brexit’ vote may result in increased price volatility in CME FX and CME and CBOT Interest Rate futures products,” CME said in a notice to traders. “The emergency action is being taken as a precautionary measure and is intended to ensure fair and orderly trading in all these products”.
As CME was taking emergency action, it was also using Brexit vote as a marketing opportunity. In an email blast sent out early Thursday London time, the exchange operator touted its contracts.
Speculative trading in China’s futures market has caused wild swings in prices for some steel products, affecting other countries since higher prices lead to increased production in a country with an overcapacity problem.
The spot market is being roiled by trading of steel-derived commodities such as rebar and hot-rolled coil listed on the Shanghai Futures Exchange as well as iron ore and coal contracts traded on the Dalian Commodity Exchange.
China produced over 800 million tons of crude steel in 2015. This figure accounted for nearly half of global output despite being the country’s first decrease in 34 years. And China’s steel exports in 2015 topped 100 million tons for the first time.
Against such a backdrop, futures trading for iron ore in Dalian jumped to 500 million tons a day in March. In Shanghai, trading of rebar reached about 120 million tons a day in April — larger than Japan’s annual crude steel output.
Economic stimulus by China’s government encouraged the rise of prices this year. While Chinese hedge funds rattle the nonferrous metal market, institutional investors such as investment trusts appear to have increased buying of steel-related futures contracts, said Naomi Suzuki, a senior analyst at Sumitomo Corp. Global Research. The price rally is not driven by real demand.
There were only two significant speculative position adjustments in the latest CFTC reporting week ending May 24. Speculators liquidated 31.4k gross long yen contracts, leaving the bulls with 54.8k contracts. It is the largest weekly adjustment since last September.
Speculators have not been particularly keen to pick a yen top. The gross short position rose by 5.5k contracts to 32.7k, andonly 2k contracts on the month, while the yen has weakened 3.5% in the spot market
Speculators also slashed their gross long Australian dollar position by 20.1k contracts to bring the position to 51.7k contracts.It is the fourth consecutive week that speculators have culled their longs by more than 10k contracts, our threshold for “significant” adjustments. Over the course of the four weeks, the gross long position has been halved.
The bears have not been making much of a stand. The gross short position increased by 4.7k contracts and is up about 7k contracts over the past two reporting periods while the gross longs have been cut by 31k contracts at the same time.
Outside of the Australian dollar and yen, the only other currency futures that saw speculators shift gross positions by more than 5k contracts was the euro. The gross longs were trimmed by 7.8k contracts to 94k, which is the smallest speculative gross long position in seven weeks. It actually peaked in early February a little more than 114k contracts, but it has been steady and was at 113k contracts at the start of the month. Speculators added 7.5k contracts to their gross short euro position, lifting it to 131.9k contracts. It has increased slightly for the second consecutive reporting period, but outside of this month, the gross short position is the smallest since July 2014.
With crude oil piling up around the world the space inside terminals is now a hot commodity.
The market for crude oil storage futures has been expanding since last year’s launch. Instead of giving buyers oil, the futures contracts confer the right to store it — in caverns on the Gulf of Mexico coast.
Open interest, or the number of contracts outstanding, has increased to the equivalent of 23.5m barrels of capacity, more than doubling since the beginning of the year.
Oil companies, refiners and banks have been trading the contracts, said Bo Collins, co-founder of Matrix Markets, which helped develop them. “The only crowd that’s sort of missing from the mix is the HFT [high-frequency trading] crowd,” he said.
The contracts were introduced as a supply glut caused oil stocks around the world to swell, driving up demand for tanks.
Buyers get the right to store high-sulphur “sour” crude at the Louisiana Offshore Oil Port (Loop), which contains one of the biggest terminals in North America.
In the Gulf coast region that includes Loop, crude stocks have risen to records of more than 280m barrels, up 18 per cent from the beginning of the year. Nationwide, oil stocks rose by 1.3m barrels last week to 541.3m, just shy of a 1929 record, the energy department reported on Wednesday.
The US dollar staged an impressive reversal against many of the major foreign currencies on May 3.In the following week, speculators in the currency futures market made significant adjustment in their holdings. We identified a change in the gross position in the currency futures of 10k contracts or more to be significant.
In the week ending May 3, there were two such adjustments. Inthe CFTC reporting period ending May 10, there six of the 16 gross position we track surpassed the 10k contract threshold. Let’s begin by look at the three currency futures in which speculators carry a net short position: the euro, sterling, and the Mexican peso.
Euro bulls and bears made significant adjustments. The bulls took profits on 11.8k contracts to leave a gross long position of 101.3k contracts. The bears continued to cover shorts and took out another 13.5 contracts to leave 123.1k still short. This is the smallest gross short euro position since July 2014. In early December, it stood at 262k contracts. The adjustment saw the net short euro position slip to 21.9k contracts from 23.6k. The net short position has been reduced for eight weeks running.
Similarly in sterling, speculators reduced both gross long and gross short exposure in the Commitment of Traders week ending May 10. The gross short position was pared by 14k contracts to 72.6k. The gross long position was reduced by almost 20%, as 14k contracts were liquidated, leaving 37.6k. The net short position slipped to 34.9 contracts from 40.4k to extend the reduction for the third consecutive week.
Chinese steel futures were on course for their biggest weekly fall since 2009 on Friday, as a selloff in the country’s commodities showed signs of spreading to other global markets for raw materials such as palm oil and base metals.
Weakening fundamentals along with strong measures by Chinese exchanges to stamp out speculative activity have helped reverse momentum in China’s massive commodity futures markets from bullish to bearish in less than a month.
The deepening losses have started to weigh on global markets elsewhere, in a similar manner to the boom and bust cycle in the country’s stock markets last year.
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