Focus on COMEX Copper futures
22nd October 2009
Commodity Overview
Focus on COMEX Copper futures (Dec’09)
Yesterday copper broke out to the up-side of its recent range. The market had spent the last 8 weeks trading between $290.00 and $270.00 on the Dec’09 contract. Continued USD weakness has spurred further risk appetite helping the market break through previous YTD highs at 298.85.
Thoughts from the trading floor
The technical outlook for the market suggests a strong bullish skew. Prices in the market have more than doubled since making the lows in 2008, in line with most commodity markets globally. Since August, the market had settled into a tight range making a double bottom low at $266.00 and a double top around the $299.00 handle. A break out above $299.00 suggests further upside for the market. Significant resistance lies at $323.85 and then $354.98. On the downside, major support lies at $266.00. A break below here would signal further down-side to at least $245.85 and then $213.45.
Copper, as with other commodity markets, has a very strong negative correlation with the USD. As the USD continues to make fresh YTD lows, we would expect the copper to continue its up-trend. This may now accelerate as it has broken through significant resistance levels. 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. This has convinced some participants to believe that the commodities are in a “bubble” state. This may also be seen in commodity markets, credit markets and corporate bond markets. The principle driver of this risk rally has been the carry trade against the USD into high yielding currencies. Also, as most of the high yielders are commodity producers which do well when commodity prices rally, we are seeing a continuous positive feedback loop. This is a hallmark of a market being in a “bubble” state. Until the last 2 weeks the copper market, with its huge excess short-term supply, had resisted this recent leg higher in equities and energy commodities. However recent short-term disruptions in supply due to a strike in a major Chilean copper mine and an Australian copper mine has finally forced the market to surge higher.
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 as we did last year during the commodity bubble. The positive feedback loop in current financial markets seems almost unstoppable at the moment.
Bear view
The bears will see the current trend of USD weakness resulting in higher equity and commodity prices as a new bubble waiting to burst. As with most bubbles it only takes a small shock to break the feedback loop which is supporting the market. Therefore, they will continue to look out for any shocks emanating from China or the Fed.
Futex view
We continue to back the bubble hypothesis. Globally markets seem to be going through this positive feedback loop create with cheap liquidity. It seems difficult at the moment to pick the top of the market, but will look to be aggressive on shorts if we can see the market make a significant break back below $299.00 or external conditions such as a shock in Chinese markets occur.
