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Amid copper market mayhem, funds head for the exit door: Andy Home

Amid copper market mayhem, funds head for the exit door: Andy Home
By Thomson Reuters 14 days ago 476 Views No comments


By Andy Home

LONDON, March 23 (Reuters) - London copper slumped to a four-year low of $4,371 per tonne last Thursday as industrial activity across Europe and the United States went into lockdown.

Copper and the other base metals pack traded on the London Metal Exchange (LME) have belatedly realized that coronavirus is no longer just a Chinese but a global story.

LME three-month metal bounced on Friday but was back under the cosh first thing Monday morning, trading down to $4,461 before recovering to a current $4,600 in continued whiplash conditions.

Much of the selling pressure is coming out of China. The Shanghai Futures Exchange copper contract went limit-down on Monday, just as it had several days last week. With trading temporarily halted to cool the market, the selling pressure spills over to the London and CME copper markets.

As it does so, it is increasingly hitting a liquidity vacuum.

Even before last week's price plunge, non-Chinese funds were heading for the exit door, closing both long and short positions on the CME copper contract amid slumping open interest.

Nor is the London market immune, with stretched liquidity forcing automated trading systems to shut up shop.

OVER AND OUT

Funds went net short of the CME copper contract in the closing days of January as news of the coronavirus outbreak in the Chinese city of Wuhan first started hitting international headlines.

That net short position peaked at 58,557 contracts in the second week of February, since when it has fallen to 41,343 contracts.

Funds have slashed outright long positions, which is hardly surprising given both the price action and the gathering demand shock to copper.

At 36,208 contracts, money manager long positioning is as low as it's been since the middle of 2016, when copper and other base metals were trading at cyclical lows due to a slowdown in China.

Less expected, however, has been the steady reduction in outright short positions held by fund managers since early February. They currently stand at 77,551 contracts, down from almost 101,000.

The overarching theme appears to be a steady exit of fund money from the market both in the form of distressed long positions and profitable short positions.

It's worth noting that the positioning levels in the weekly Commitments of Traders Report (COTR) are a rear-view window, denoting the state of play at the close of Tuesday, March 17.

Copper has taken another sharp leg lower since then and it's possible funds may have renewed their appetite for betting on lower prices.

However, plunging open interest on the CME copper contract suggests not, but rather a further exodus of managed money, whether short or long.

CME total copper open interest was 215,842 contracts last Tuesday, when the COTR report was compiled. It has since sunk to 194,153 contracts, the lowest since 2016, when base metals were largely off the investment radar.

LIQUIDITY DRAIN

The CME contract has a high concentration of managed money relative to industrial user activity, most often in the guise of automated trading systems.

The London market has a heavier industrial footprint but is not immune to the whims of the money men, particularly when so many industrial users are facing their own operational problems and are out of the market until the storm passes.

Fund money seems to be more aggressively short in London than in New York. LME broker Marex Spectron estimates the collective bear bet on copper was equivalent to 19% of open interest last Thursday, compared with a year-to-date peak of 21.5% on March 3.

But faster-moving players, such as high-frequency traders (HFT), are struggling in the face of heightened volatility and reduced liquidity.

The bid-ask spread for LME three-month copper on the exchange's Select electronic trading platform had been $0.50-1.00 "for ages," according to Malcolm Freeman, head of metals brokerage Kingdom Futures.

The spread has drifted as wide as $3.00-5.00, "which takes the high frequency trading systems out of the market," Freeman wrote in a daily note last Thursday.

As of this morning that bid-ask spread was still as wide, sidelining high-frequency traders who make their money from super-fast, fractional trades, predicated on tight trading spreads.

The absence of HFTs exacerbates already high levels of market volatility, which in turn encourages others to leave.

DASH FOR CASH

The exit of fund money from the copper market is part of the broader dash for cash playing out across financial spectrum.

One of the striking features of last week's market mayhem was how even gold, the ultimate safe-haven metal, was caught up in the selling.

Gold pundits fret that the metal has lost some of its historical luster, but the simple truth is that prices have fallen because fund money has been taken off the table, either to shore up collapsing balance sheets or to meet margin calls in other parts of the financial universe.

Copper is experiencing the same disinvestment rush, but with one key difference.

The Chinese speculative community jumped on the risk-off bandwagon only last week and is now playing catch-up, hampered by the regular limit-down trading suspensions in Shanghai.

Others may have headed for the exit door, but they're still trying to get out.

(Editing by Pravin Char)


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