Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Copper's rally, fueled by momentum, halts amid weakening fundamentals
Ole Hansen
Head of Commodity Strategy
Key points
- Copper's momentum-driven rally halted by deteriorating short-term fundamentals
- Our long-term price supportive outlook has not changed
- Rising China stockpiles and drop in import premiums point to short-term demand softness
- Hedge funds resilience may determine the size of the correction
Copper trades lower for a third day as the month-long momentum-driven rally shows signs of running out of steam, primarily due to softness in the short-term demand outlook in China, combined with the risk of long liquidation from hedge funds who amassed a major long position within the last couple of months. Overall, we maintain a long-term positive outlook for the metal in anticipation of robust demand from among others towards electric vehicles, grid infrastructure and AI data centres at a time where production from existing miners looks set to fall in the coming years.
Since February, the macro and momentum-focused rally has helped attract a great deal of speculative interest, which helped drive additional gains, culminating on Tuesday when futures prices in New York and London reached fresh two-year highs. However, not least the brief rally above USD 10,000 per tonne on the London Metal Exchange helped attract selling from traders struggling to find justification for the latest move at a time where data from China points to demand softness.
The first month High Grade copper futures contract reached a two-year high earlier in the week before profit-taking emerged to drive it lower, in the process breaking the steep uptrend from late March. Using Fibonacci retracement levels, the first level of support can be found around USD 4.41 per pound followed by USD 4.33.
Signs of softness have started to emerge in China, the world’s top consumer of metals, including copper. So much that Reuters is carrying a story about Chinese copper producers planning to export up to 100,000 metric tonnes of copper. An unusual step, rarely seen from a country that is generally a copper importer, which is seen in order to cool a rally that has led to worries about slowing demand from end users.
The below chart highlights two other indicators that point to current softness in demand. Copper stocks monitored by the Shanghai Futures Exchange have recently surged to 300,000 tonnes, a level last seen four years ago when demand collapsed during Covid. Some of the increase is likely to have been driven by traders, hoarding metals in order to seek a hedge against the possible risk of a weaker yuan, but overall it does not support higher prices in the short term. In addition, the premium importers are prepared to pay over LME copper has recently slumped to zero, a level that according to those with access to the data, has not been seen since the Great Financial Crisis in 2008.
Until we see an improvement in the mentioned data, the potential for a period of consolidation, perhaps even a deeper correction seems increasingly likely.
The depth of the correction currently unfolding will to a large extent depend on whether the market retraces lower to levels that may trigger accelerated long liquidation from funds. During a ten-week period up until 23 April, leveraged speculators from hedge funds to CTAs flipped their position from a 40,000 contract (454k tonnes) net short to a 67,210 contract (762 tonnes) net long, the highest in three years. The bulk of the buying occurred during the past three weeks, during which time the volume-weighted average price (VWAP) was around USD 4.38 per pound, a level which for now is being protected by the above-mentioned support around USD 4.41 per pound.
Commodity articles:
26 April 2024: Commodity weekly: Sticky inflation and adverse weather focus
23 April 2024: What drives the gold and silver correction ?
19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
27 Mar 2024: Crude oil maintains support amidst array of bullish signals
26 Mch 2024: Gold's behaviour points to sustained demand
20 Mch 2024: Attacks on Russian refineries lift risk premium and crude prices
19 Mch 2024: How to add copper exposure to your portfolio
15 Mch 2024: Commodity weekly: Green shoots seen across key sectors
13 Mch 2024: Lack of catalyst pushes crude into tightening range
8 Mch 2024: Commodity weekly: Gold and silver steal the limelight
8 Mch 2024: Investing with options - Gold optionality
6 Mch 2024: How to add gold exposure to your portfolio
6 Mch 2024: Video: What happened to the gold prices?
1 Mch 2024: Grains dip, cocoa soars, gold and oil see rays of strength: February’s commodity mix
Previous "Commitment of Traders" articles
29 April 2024: COT: Gold bulls stand firm despite recent correction
22 April 2024: COT: Declining momentum may signal shift toward consolidation
15 April 2024: COT: Hedge funds propel multiple commodities positions beyond one-year highs
8 April 2024: COT: Speculative interest in metals and energy gain momentum
2 Apr 2024: COT: Gold and crude longs maintained amid strong underlying support
25 Mch 2024: COT: Hedge funds zoom in on crude, copper and silver
18 Mch 2024: COT: Hedge funds buying expands from precious metals to copper and grains
11 Mch 2024: COT: Specs rush back into gold, elevated yen short in focus
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge
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