Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Copper short squeeze fades ahead of key resistance
Ole Hansen
Head of Commodity Strategy
Summary: The industrial metal sector, led by nickel and copper, is currently heading for its best two-week run of gains since December supported by growth optimism in China and the potential threat to supply from additional sanctions against Russia. Global inventories of key industrial metals held in warehouses watched by the major exchanges remain historically low, potentially a bullish price signal once major central banks begin their, for now, delayed rate cut cycle. Following the latest short squeeze copper has returnd to challenge the upper end of a narrowing range.
The industrial metal sector is currently heading for its best two-week run of gains since December with the Bloomberg Industrial Metal index trading up close to 4% since hitting a September 2022 low at the start of the month. Gains during this time have been broad and lead by beaten down nickel, and followed by copper, the king of green metals, while aluminum has struggled despite renewed threats to Russian supply amid the prospect for a major package of curbs - potentially including Russian aluminum sales - to be announced by the US on February 23.
In addition to supply potentially being disrupted due to fresh sanctions, the sector has also benefitted from growing demand optimism, as the US look set to avoid a recession while economic data in Europe show signs of stabilizing, and most importantly additional measures being announced by the Chinese government to support an ailing economy which nevertheless is expected to pick some post Lunar holiday momentum. Supporting the idea about added stimulus rose after Chinese banks cut their 5-year loan prime rate by the most on record in order to cut mortgage costs to boost sentiment among businesses and households.
Global inventories of key industrial metals held in warehouses watched by the major exchanges in London and Shanghai remain historically low, potentially a bullish price signal once major central banks begin their, for now, delayed rate cut cycle. Lower interest rates may boost an overdue recycling phase as it lowers the opportunity cost of holding inventories. In a recent analysis Goldman Sachs calculated that gold and copper would get the largest immediate boost from Fed easing.
In addition, lower US interest rates may support a weakening of the dollar, thereby lowering the cost of dollar-priced commodities in local currencies. Note, some of the strength this week across commodities, including industrial metals, has been driven by the first week of broad dollar weakness since December with the general risk appetite receiving a boost following a bumper result from Nvidia, the AI titan.
Overall, copper remains rangebound with the mentioned China growth concerns being offset by speculation that the Chinese government will have to do more to support an ailing economy, and not least the prospect for a tightening market outlook as the green transformation continues to gather momentum and miners cut their production forecasts as they face harder-to-mine deposits, rising costs, water restrictions and increased scrutiny of new permits.
The bounce this past week has been amplified by short covering from wrong-footed hedge funds who during a two-week period to February 13 – when HG copper fell 5.25% - increased their net short futures position by 39,000 contracts (442k Metric Tonnes) to a four-year high at 42,000 contracts.
Despite concerns about the Chinese property sector, last year's sharp increase in funding rates and more recently a jump in Treasury yields, HG and LME copper futures have traded rangebound since last May, within an increasingly narrowing range, in High Grade currently between $3.61 and $3.91, with the upper level touched earlier today before attracting some profit taking. Copper’s resilience during this period points to an eventual breakout to the upside, initially confirmed by a move above $4, while a break below $3.61 may signal a prolonged period of range bound trading until the expected supply tightness become more visible, especially during the second half of the year.
Commodities articles:
21 Feb 2024: Gold's resillience despite recent futures and ETF selling
20 Feb 2024: WTI crude eyes resistance amid improved signals
16 Feb 2024: Commodity weekly: Grains tumble; Industrial metals eye China boost
15 Feb 2024: US rate cut delay drives gold below $2000
13 Feb 2024: Video: What is driving Cocoa's sweet price
9 Feb 2024: Commodity weekly: Refined product strength lifts crude
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: Grains up on short covering; softs supported by tight supply
24 Jan 2024: Disruption risks drive specs into Brent; distorted EIA report up next
23 Jan 2024: Silver and copper in focus after recent declines
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
Previous "Commitment of Traders" articles
19 Feb 2024: COT: US inflation surprise drives broad selling of metals
5 Feb 2024: COT: Speculators chase false crude break; grain short extends further
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
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