Tag Archives: Commodities

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Funds load up bullish bets on copper

Even though most commodity hedge funds lost money in 2012, fresh cash from the hedgies is said to be lining up to make new bullish bet in 2013 under belief that economic growth in China will accelerate.

“Next year, if the global economy improves and somehow we get a fiscal cliff deal and Europe also solves itself, then commodities could be off to the races. But that’s a big if,” said Tyler Stevens, of the U.S.-based Commonfund.

CFTC_Copper

Money managers say that they expect “further build up in Chinese economic recovery” and that would be beneficial to copper.

Last week, new bullish bets were loaded up in the futures markets, the data shows. After a brief flirtation with bearish bets, copper longs outnumber shorts by 2,408 contracts.

Meanwhile, gold is increasingly seen as a bear-bet.

“For more and more managers, gold is probably no longer a ‘no brainer’ trade, so some of them are starting to wonder if they could start implementing some short trades,” said Gabriel Garcin, a portfolio manager at Europanel Research & Alternative Asset Management in Paris.

Koen Straetmans at ING Investment Management says that gold is “vulnerable to all kinds of changes in sentiment”. He is neutral on gold.

Last week, speculators have cut their long positions on gold even more, data shows.

commod-returns

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Commodities look like a crowded trade

Bets in commodity ETFs increased 92% this year with hedge funds holding 51% more cash on bets that a commodity rally is yet to occur, data from EPFR Global, a firm that tracks these flows, shows.

“It comes back to the uncertainty about the economy, and the government policies that are going to be enacted or potentially changing over the next year. That’s why you’re seeing that disparity in the outlooks of many of these forecasting firms,” says Peter Jankovskis of Oakbrook Investments.

“It won’t be a straight line higher, but there’s a pretty good undertow for commodities. Commodities in general will trend higher the next few years, but there’s room for selectivity,” says James Paulsen of Wells Capital Management.

With SEC giving approving the JPMorgan copper ETF, hedge funds just got themselves another instrument to speculate on.

But will these instruments be appealing in a rising interest rate environment?

So far, parking cash in non-income earning things like the metals was profitable because, with a 0% yield, such instruments yield better than the negative real yield on, say, bonds.

However, if and when the bond yields turn higher, the cash holding paper commodities will seek a quick exit out of the crowded door.

In fact, if we are to gage the forward bond-yield trajectory by the long-term moving average on some major banks we could well conclude that the bottom in yields is well behind us.

Of course, time will tell.

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Speculators short copper, bullish on gold, oil

Speculators have tackled bullish bets on gold and oil futures for a third consecutive week while going bearish on copper, data from the Commodity Futures Trading Commission’s Commitments of Traders showed.

The bets speculators make in the futures are a good indicator as to the direction of these commodities in the spot.

As the copper graph above shows, the blue humps (bullish bets) correspond well to the price jumps in the spot while bearish bets (blue dips) correspond with price drops.

With the recent strong activity in the copper that moved from circa $3.55 to $3.64, we have a small divergence as speculators are betting bearish despite the price jump.

Of interest is the action in coffee where, if we are to assume the futures-spot correspondence, speculators seem to betting on more price drops even though coffee looks like it is trying to stabilize in this space.

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Copper ETF shelved again by SEC

U.S. Securities and Exchange Commission (SEC) has delayed its ruling, for the second time, on the copper ETF proposed by JP Morgan.

“The Commission finds it appropriate to designate a longer period within which to issue an order approving or disapproving the proposed rule change so that it has sufficient time to consider the proposed rule change,” says the SEC ruling available here.

The proposed JPMorgan copper ETF will remove from the market 61,800 metric tons which is 30% of the available global copper supplies available for delivery. All other copper supply is tied up in some form of contracts that renders them unavailable for delivery.

As the ETF gows, however, an ever larger chink of the available copper would be gobbled up by the ETF with a possibility of a copper shortage.

“JPM’s offering will therefore result in a substantial artificially-induced rise in near-term copper prices on the LME, which will severely disrupt the world market for the trading of such copper by, among other things, simulating the effects of an artificial squeeze or corner being financed by unsuspecting investors in JPM’s ETF,” wrote Vandenberg & Feliu to the SEC.

The squeeze on copper supply would set in motion a herding effect with speculators, in pursuit of quick profits, piling on the ETF shares. A possible bubble would burst with JPM forced to dump copper on the market.

Unlike precious metals that can be used for jewlery and currency, Vandenberg & Feliu says that copper’s purpose is only fabrication so the very purpose of the ETF is therefore flawed.

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Commodity “demand shock” over says BHP

Australia’s giant miner BHP Billiton says that the decade-long mining boom is over because the commodity “demand shock” from China has fizzled.

“In effect, what this means is that the record prices we experienced over the past decade, driven by the ‘demand shock’, will not be there to support returns over the next 10 years,” BHP Chief Executive Marius Kloppers says.

That Chinese commodity demand is dead, of course, is not the first time that BHP Billiton and its mining oligarch partners, Rio Tinto and Fortescue, have said yet while these miners have been flagging the markets that the future price appreciation of what they are making is pessimistic, speculators, on the other hand, have been tackling on bullish bets on some of these metals.

The most often cited reason to go bullish on, say, gold, is because the Fed and other central banks are going loose on money supply.

Statements by these miners, therefore, have broader implications and pit the commodity fundamentals against speculative bursts fueled by liquidity and the outcome of these divergent views is still unclear especially amidst a widespread belief by many money managers that China will soon reignite its robust growth.

As for BHP, the miner plans to mitigate some of the expected price fallout by cranking up output particularly in the hard-hit iron ore. The idea behind the boost in the iron ore production is to capture even more market share and drive its competitors out of the market while maintaining the profit margin with aggressive cost cutting.

“(The) commodity price boom is over and no one can deny it. We’ve now moved to the next phase of the cycle, which is an absolute focus on capacity and cost structures,” Australia’s resources minister, Martin Ferguson says.

Like the price of copper, BHP stock price is at a major decision point with its shorter term moving average approaching the longer-term downward trend.

Based on these charts, odds are that the rift between the fundamentals and the speculators in the commodities may soon clear up.

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Speculators piling in oil, gold, steady on copper

In the past week, speculators have increased their bullish bets on oil, gold while holding steady on their bullish bets in copper, data from the Commodity Futures Trading Commission’s (CFTC) shows.

Spec money increased their bets on higher oil prices by 5.6% as well as gold by 7.7%. Bullish bets on copper held steady with a net change of only 345 less contracts.

Inflows of bullish bets in these 3 commodities come after the QE announcement by the Fed, although doubts have emerged that a rally in commodities has long legs.

“For [QE] stimulus to have a meaningful, sustained impact on commodities other than gold, stimulus must translate into great economic activity, and that has not happened so far,” says Adrian Day, who manages about $170 million of assets.

Others, most notably in Australia, say that bull run in commodities is over and that prices have peaked.

“The commodity super-cycle is over. In the past 10 years, we’ve seen a spectacular move into commodities. We don’t think we’ll see a repeat of that,” says Jack Ablin, chief investment officer of BMO Private Bank in Chicago.

The super-cycle was predicated on Chinese demand but Chinese manufacturing has contracted for the 11th month in the row and as the contraction prolongs itself the narrative of bullish Chinese effects on commodities is loosing its rationale.

China over the last few years has artificially torqued their economy, which has created demand for industrial commodities and energy. The world is starting to see sobering signs of a hangover from those actions,” says Chad Morganlander, the Florham Park, New Jersey-based fund manager at Stifel Nicolaus.

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QE or China: what drives the metals?

With the announcement of the new QE, certain metals and commodities failed to spike higher in any meaningful, technically bullish way, as did the gold. Bellwether like copper was rather mute, while oil is under bearish winds and some question the technically meaningful move in gold fearing a bull trap.

Is the QE trade already done with? Is China, and not the QE, the real driver of commodities?

Perhaps… and perhaps, writes Myra P. Saefong from MarketWatch:

Still, “from a fundamental perspective, we are seeing continued signs of deterioration in the Chinese economy,” said SIGFIRM’s Sury.

“The Chinese trade balance has been declining, corporate profits have turned negative, property starts have fallen significantly, and industrial output growth is slowing,” he said. “GDP growth continues to slow.”

On a global level, William Gamble, author of “Investing in Emerging Markets: Rules of the Game,” said most of the demand for commodities has come from fast-growing economies in emerging markets, especially China — not from “printing money in developed countries.”

With China headed for a hard landing, “no amount of QE from the Fed, the ECB, [Bank of Japan], Bank of Korea or even from the Standing Committee of the Politburo [of the Communist Party of China] will change that,” said Gamble, who’s also president of Emerging Market Strategies.

But for China, Sury pointed out, recent growth “has come less from exports and more from internal stimulus.”

That offers somewhat of a dilemma for the commodities market.

“This stimulus is not ‘free’ — it has to be paid back, one way or another,” Sury said, and that “can have a negative long-term impact on consumer credit, corporate investment and the balance of payments.”

So while the stimulus will provide a “real boost to demand for commodities … when this stimulus ‘band-aid’ runs out, if the consumer has not experienced organic growth, China may very well continue to experience the effects of the hard landing,” he said.

…

“The stimulus will reduce, but not eliminate China’s present economic deceleration — at the price of constraining future fiscal flexibility,” said Philip Romero, a finance professor at the University of Oregon and former chief economist of California.

He emphasized that his opinion is based on an initial assessment of news reports on the measures. “Many of the details of China’ s plans have not been explicated, so it is difficult to distinguish real demand from hyped demand.”

…

China’s initiatives will “greatly slow the downward trajectory of many industrial commodity prices,” Romero said, but probably won’t be enough to fully counter “continued retrograde forces in developed economies.”

So, “coal prices will continue to fall, unless some development hampers growth in its big substitute, natural gas,” he said.

Implication of this discussion is serveral-fold.

If the run up in commodities was caused by China and not these QEs, than it would be more apparent that what  was happening in China since its 2008 stimulus is just a fiscal/monetary induced speculative bubble that has artificially inflated prices in numerous markets. This would, of course, have a potential to make the Chinese “correction” a rather nasty one.

On the policy front, the removal of QEs as culprits of commodity runs would vindicate the Fed, at least from the many who view the money pumping with wild eyes and use the commodity run up as just another weapon in their repertoire to smear Fed’s reflationary tactics.

Things sure look set to provide either one of these answers, perhaps soon.

 

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Chinese PMI up whopping 0.2 for September

China’s manufacturing  PMI snapshot for September as measured by HSBC clocked 47.8 index points for September for a 0.2 gain over August measure of 47.6, and the media seems content to spin this negligible gain that is in the contractionary territory anyway as a sign of stability.

“China’s manufacturing growth is still slowing, but the pace of slowdown is stabilizing. Manufacturing activities remain lackluster, thanks to weak new business flows and a longer than expected destocking process,” an HSBC economist is quoted as a support for a spin that 0.2 gain is major.

 

More lipstick, than, on this “seventh quarter of slowing growth” is thrown with talk of “hope” and “green shoots”, adjectives that are a sure sign that there is a lot more stench under the hood.

First, anything below 50 on PMI means contraction and, like compound interest, the longer this measure stays in the below-50 territory the more contraction is occurring. As the chart above shows, the HSBC PMI has been negative since July 2011 with an exception of perhaps October of 2011.

China’s industrial output, meanwhile, has been in the negative even longer. With an exception of June 2011, the industrial output (blue bars) have been slipping lower since June 2010, provided that such data, as the recent Fed study on Chinese statistics, is reliable in the first place.

As for the “hope” and “green shoots” the latest PMI shows that its sub index of output dipped to 47.

Another way to gage the gloom is China is by what happens in the metals space as the Shanghai stock index is highly correlated with these metals (see chart here). The XME metals and mining index, for example, has recently popped above the falling long-term 200 DMA and despite the exuberance over the QE3 it is having hard time to muster some escape velocity.

Although too soon to tell which way XME could go, it is worth remembering that lot of price movement in things like copper and other metals is predicated on events in China. Given that the QE3, so far, moved copper from $3.40 to $3.80 the question is where will the push higher in commodities come from if, as some say, copper is to rally beyond that.

One can fuel more suspicion about bullish effects of the QE3 effects with price action in oil…

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Copper, iron ore signaling different things

Iron ore prices have been falling as of late much more so than the price of copper, a metal that the ore is very well correlated with, so a question that pops out of this price divergence is which price move, the ore’s drop or copper’s steadiness, is a correct signal as to what is going on in the global growth space, particularly in China.

“In truth, neither iron ore nor copper is a very pristine mirror on the state of manufacturing activity, either globally or in China itself. Copper is over-financialised. Iron ore is under-financialised,” writes Andy Home, a Reuters columnist.

He also says that the iron ore price is not just linked to China but made there and in many ways, it is not a global price.

But so is with copper in many of the same ways despite being financialized and subject to speculative attributes rather then attributes of the supply and demand: copper’s meteoric price rise in last 5 years has been predicated on growth and export specter in China and now that both are falling why isn’t copper as well.

With storage space controlled by the same big box financial outfits that trade copper on the financial market, physical deliveries of the metal are artificially constrained, costing the users a premium that jacks up the marginal cost of production. Glencore’s relentless pursuit to purchase Xtrata, moreover, is showing that some of these big trading players are also eyeballing to completely vertically integrate and exert dominance over every level of commodity production and delivery.

With the advent of the ETFs and lax regulation that allows speculators in metals to exert physical control over stuff they trade, western economies, indeed global, have been undergoing a massive taxation that amounts to a wealth transfer from producers to the financial sector.

This is also true of oil and if the legislators succumb to the demands of the big box financial houses, virtually any standardized product could come under their controlling spell, have its own ETF, be subject to speculative sentiment… As a digressive exhibit, witness Citigroup Chief Economist Willem Buiter’s musings on how and why water should be subject to financialization.

Anyway, one resultant of the collapsing iron ore price is a slew of project cancellations by the Australian miners. Some $246 billion in investments is being sidelined a bankers become concerned about what is it that they are funding.

In another sign that what happened to iron ore maybe a macroeconomic tipping point is not just the mining investment but also the employment picture in Australia, disproportionately bloated and swelled.

The employment in Australia’s mining sector dropped 4,600, the first quarterly drop since mid-2009, and more lay-offs are expected. With Chinese signaling that they view any massive stimulus a detriment to Chinese economic health, negative datapoints in Australia ought to pop up with more frequency going forward.

Having said all this, will copper go lower to recorrelate with the iron ore or the other way around?

Short-term odds favor the upside in the ore as the strong mining hands step up and scoop up the bargain while central banks inject liquidity boosting copper. The story over the longer-term looks more negative and it is worth remembering these negative headwinds once the long-term arrives.

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More gloom likely looms for China & Australia

Two seemingly unrelated events occurred yesterday. China announced 60 infrastructure projects amounting to a huge 1 trillion yen while Australian dollar staged a picture perfect technical bounce from the 200 day moving average and on Friday closed nicely above its the shorter term 50 day trend.

So how are China and Australia connected to one another?

China is Australia’s biggest minerals customer so a 1 trillion yuan stimulus translates in more need for Australian dollars to pay for more minerals.

Some traders are agnostic on the Australian dollar while others are bullish on the Australian dollar and the discourse of these two views can be seen here (scroll video to 17:10).

Over a period of time, perhaps longer than a day, however, there is not much in the fundamentals of the Chinese-Australian relationship that could be translated into agnostic let alone bullish… and we may soon see that in the charts.

First, Chinese GDP growth has been downshifting for the last half decade and the 2008-10 growth rate increase looks like a blimp in this general downtrend (see graph above). The country is experiencing tremendous productive overcapacity so the 1 trillion yuan stimulus is a drop in the ocean of inventories that China needs to work off.

For years now, Chinese authorities have been smearing lipstick on their ugly numbers so suspicion is held by many that this latest stimulus announcement, being ahead of this weekend’s major economic data release, is another attempt at the make-up vanity. A look at the Chinese electricity production growth, however, can be more telling as to where China is going rather than the lipstick counter we may be presented with this weekend.

Now, if Chinese are not using the electricity to do things to these Australian minerals than it means that China is not and likely will not buy as many minerals.

We can see the relationship between the weak Chinese GDP and the low demand for minerals in the chart below where falling Shanghai index is tracked very well with the falling S&P Metals and Mining Select Industry index ETF, the XME.

XME also had such fitting correlation with the Australian dollar but the fit broke down earlier this year when fixed income people fled Europe and were in need to park their cash in bonds that may look even semi-safe. With many quality sovereign bonds going negative, cash flocked to Australia.

The chart below shows this story where the blue minerals line has trended its own way while the Australian dollar went sideways, kept higher by the influx of the global fixed income cash.

Now that the ECB is saying that it will use unlimited cash, the need to move into Australian debt paper has also reduced the need to hold Australian dollar which means that the Australian currency will resume to behave just like what the country makes – the minerals.

As a result, we have a very ugly technical picture in both China and Australia.

Price pattern of the minerals (XME) has carved out a bearish flag and this price formation is suggestive of two things: Shanghai index may not be done going down, while the Australian dollar, now that there is no need to own its debt, may be set to catch up with this move. The Australian predicament is seen in the chart with the head&shoulder price formation on its currency and the defined neck line, a price pattern suggestive of a break down.

There are also some data headwinds for Australia. On Monday, Australia will release July home loans number and given that the country’s China-induced mining boom has spurred a housing bubble this number could be rather turbulent for the currency and their banks which hold loans on such bubbly house equity.

Additional look on this issue here.