22nd January Macro-Commodity Copper overview
22nd January 2010
Macro-Commodity Overview
Focus on COMEX Copper futures (Mar’10)
The last week has seen the copper futures fall from their recent high prints. This has been the case for most industrial metals as jitters from China weigh on these major commodity markets.
Thoughts from the trading floor
The technical outlook for the market has now become evenly poised. Having broken through the 61.8% retracement level of the 2008/9 bear market, the copper futures stalled shy of the 75% retracement level. The market is now currently sitting just above a major daily trend-line taken from its March lows. This lies at the $325.55 level. A break below here may then signal a good 10-20% correction of prices.
Copper, as with other commodity markets, has a very strong negative correlation with the USD. As the USD seems to have turned in the short-term we would expect the copper to also break lower. Also, industrial metals have been rallying as speculation of a stellar economic recovery in China spurs participants to keep buying industrial metals despite the excess short-term supply in the market. What has also been noticeable is the strong positive correlation between industrial commodities and loan growth in China. This has convinced some participants to believe that the commodities are in a ‘bubble’ state. There is belief that market participants had been gaming ‘cheap money’ to speculate on these commodities. Thus the sell-off in commodities over the last week has coincided with a tightening in lending conditions in China. Last month, the Chinese instructed one of their major state banks to stop issuing new loans. With Chinese GDP and asset price growth now approaching levels where the Chinese government have become concerned over the possibility of a ‘bubble’, rumours have surfaced that the Chinese are on the verge of tightening their lending rates. This has significantly impacted Chinese equity markets, with the Hang Seng now breaking major daily supports. Also, we have started to hear rumours that Australia is considering imposing a tax levy on the profits made by their major commodity exporters. This may also drive bearish sentiment in industrial commodity markets.
Bull View
The bulls will be hoping that this over-optimism (or ‘bubble’) can continue. For this to happen, Chinese markets must remain strong and the USD must continue to weaken. They, therefore, hope that neither the Chinese nor the Fed remove excess liquidity support from the markets. If conditions stay as they are now, the commodity markets may continue spiralling up-wards. They will be keen to hold major daily up-trend support at $325.55
Bear View
The bears will see the current trend of re-emerging strength in the USD as a sign that commodity markets are due for a major correction. They will look to force a break of daily trend support, aiming for at least the retest of October ’09 lows around the $264.00 handle.
Futex View
We continue to back the bubble hypothesis. Globally markets seem to be going through this positive feedback loop created with cheap liquidity. We will look for a break of the daily trend support and back the market to test the $264.00 handle. Should sentiment in equity markets turn strongly bearish, the possibility of a double dip becomes increasingly likely. On the basis of value, we believe commodities have over extended.
Tags: Bubble, China, CME Copper, USD
