Chronicle: Hedge is financing the bet on Doctor Copper and his friends: Andy Home

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A worker monitors a process at the Codelco Ventanas copper smelter in Ventanas, Chile January 7, 2015. REUTERS/Rodrigo Garrido/File Photo

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LONDON, July 11 (Reuters) – Hedge funds are putting pressure on Doctor Copper and his metal friends.

The fund manager’s positioning in the CME copper contract is as bearish as it has been since the first quarter of 2020, when industrial metal prices crashed as China, followed by just about everyone world, entered the COVID-19 lockdown.

The price of copper on the London Metal Exchange (LME) is still well above its March 2020 low of $4,371 per tonne. Currently trading at $7,700, it is also well below its March 2022 high of $10,845.

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Passive funds pulled money from the long side of the metals markets and systematic funds built up short positions while continuing downward price momentum across the LME spectrum.

BEARS ON ATTACK

Fund managers were net short of the CME copper contract to the tune of 26,497 contracts at the close of business last Tuesday (July 5), the highest level of bearish conviction since the COVID-19 meltdown of 2020.

The funds reduced pure long positions from an April peak of 76,837 contracts to 39,465 and raised bearish bets by 34,837 contracts to 65,962 over the same period.

Many of these funds are systems-oriented, responding to technical signals and momentum indicators, which means that their positioning often moves in symbiosis with price movements.

With many analysts warning that copper is technically oversold, repositioning is likely on any technical correction or even loss of momentum on the downside.

PERFECT BEAR STORM

However, the overall picture remains bleak.

High energy prices are having a chilling effect on previously robust manufacturing activity in Europe and the United States.

Central banks are raising interest rates to fight inflationary pressures, which is bad news for all risky assets. And the dollar is super strong, which is especially bad news for dollar-denominated metals like copper.

Industrial metals were targeted directly through recession trading, but also indirectly in the form of liquidation of cross-index positions.

The two major commodity indices – the Bloomberg Commodity Index and the S&P GCSI – fell 18.0% and 16.5% from their respective 2022 highs, according to Goldman Sachs.

Heavy passive funds left the sector with fears of a global economic slowdown compounded by high levels of market volatility, resulting in painful trading margins and frayed nerves.

Goldman estimates that assets under management in commodity indices are down 24% year-to-date as extreme trading conditions push more participants out of the market. (“Commodities Oversold on Recession Fears”, July 7, 2022)

METAL EXIT

Copper is still highly sensitive to shifts in macro sentiment, with the “doctor” long seen as a proxy for global growth.

Speculative flows are bearish on all three major trading venues – the LME, CME and Shanghai Futures Exchange – according to LME broker Marex, which believes the scale of collective positioning has already exceeded 2020 levels and is now the higher since 2014-2015.

However, it’s not just copper.

Funds exited all LME metals markets on the same combination of fears of slowing demand and rapidly deteriorating technical pictures.

Copper and nickel were particularly hard hit, with the early 2022 long net investment fund now almost completely eliminated.

Nickel’s disgrace with the fund community is also the result of the LME suspending the market on March 8 and subsequently canceling trades.

It is likely that the LME-specific sell-off will combine with the broader risky recessionary trade in terms of the funds’ nickel stake disappearing.

The long positioning of aluminum and zinc has been reduced a lot, but not to the same extent.

Both metals are characterized by tight physical markets outside of China, resulting from smelter shutdowns in response to high energy prices, particularly in Europe.

But while aluminum prices are “dipping down their cost curve,” to quote Citi analysts, zinc isn’t there yet, making it vulnerable to another fund sell-off, Citi said. the bank. (“Metals in Freefall: What Happens Next?” July 6, 2022).

ALL CHANGES

The fact that analysts have gone from worrying about whether there would be enough supply just a few months ago to digging into their old production cost curves tells you how much has changed over the last quarter. .

Volatility, both in price and expectations, is here to stay as copper and its friends remain reliant on short-term news flow, which is more than usual fast-moving and unpredictable following of what the Kremlin calls its “special military operation” in Ukraine.

Then there is the issue of low inventory coverage in many metals markets, creating a potential micro conflict with bearish funds playing a macro trade.

Add to that weak trading conditions during the calmer seasonal summer months for metals markets and the scene is set for more turbulence.

The opinions expressed here are those of the author, columnist for Reuters.

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Editing by Barbara Lewis

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

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