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COLUMN-Bullish funds' return to copper a taste of things to come? Andy Home
2017年8月9日 / 下午1点39分 / 3 个月前

COLUMN-Bullish funds' return to copper a taste of things to come? Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters)

* Funds and COMEX Copper: tmsnrt.rs/2fshLJH

* Funds and Copper Long Term: tmsnrt.rs/2hIUaFr

By Andy Home

LONDON, Aug 9 (Reuters) - London copper on Wednesday morning touched a high of $6,515 per tonne, a price level last seen in December 2014.

This is an extension of the rally that began so dramatically on July 25, when London Metal Exchange (LME) three-month copper punched through $6,200, the top end of a long-standing trading range.

The news trigger for that technical break was a proposal by Chinese authorities to prohibit imports of lower-grade scrap from the end of next year.

In the intervening couple of weeks analysts have taken a collective hard look at the implications of such a ban and no-one seems to think it’s a game-changer. Supply chains might change but the scrap itself is not going away. If not in China, it will be processed somewhere else.

None of which particularly matters right now because the money men are in the price driving seat.

Money managers have lifted their net long positioning on the LME copper contract by 17,841 contracts since the middle of July to a current 72,563 contracts. That’s equivalent to around 450,000 tonnes of extra buying.

But the real action is happening across the Atlantic on the COMEX copper contract.

Both money manager long positions and open interest are regularly hitting all-time record highs. The two things might of course be related.

CME, which operates the COMEX copper contract, seems to have made some sort of quantum leap in terms of market participation. The question is whether this means copper pricing has too.

Graphic on COMEX copper fund positioning:

tmsnrt.rs/2fshLJH

BULL CHARGE

The managed money net long position on the COMEX copper contract ended last week at 104,268 contracts, a fresh record since the data in their current form started being published in 2006.

That just pipped the previous peak of 101,139 contracts seen in the last week of January.

Now, as then, money is flooding into the copper market in the wake of a broken chart pattern and the ensuing proliferation of technical trading signals.

Back in November 2016 copper on both the LME and COMEX burst out of a near year-long range on the upside. It’s just done it again.

Money men love their charts. Many of them use automated trading systems and robots love their technical indicators.

That July 25 price surge was the equivalent of red flashing lights on funds’ trading desks. They have since rushed back into the COMEX contract.

A couple of months ago, when copper was still pootling around in its range, the number of money managers holding positions was 89 out of a total 295 market participants, according to the CFTC’s Commitments of Traders Report.

They were fairly evenly split in their views with 57 holding long positions and 32 short positions.

As of last Friday there were 120 money managers holding COMEX copper positions. Most of them, 99, were long.

More funds, in short, and greater collective bullish commitment.

Graphic on COMEX copper open interest, price and funds over the long term: tmsnrt.rs/2hIUaFr

FLOCKING TO COMEX

All of this is happening against the backdrop of a COMEX copper contract that is going from strength to strength in terms of participation.

Futures and options volumes last year grew by 27 percent to 21.6 million contracts. They are up another 18 percent this year.

Futures market open interest has risen even faster, by 36 percent in 2016 and an extraordinary 71 percent so far this year.

LME copper volumes, by contrast are down by 12 percent this year. Activity on the Shanghai Futures Exchange’s copper contract has fallen by an even sharper 36 percent.

The world’s copper punters, it seems, are increasingly flocking to the COMEX contract to express their increasingly bullish views.

The scale of their arrival has pushed the contract into entirely new territory.

Open interest currently stands at 328,586 contracts. Prior to last year it had never exceeded 200,000 contracts, coming closest in the middle of 2013 and again in 2015.

An interesting comparison can be made with the bull market of 2010, when the LME copper price was on a charge to the record-breaking $10,000 per tonne level.

COMEX copper open interest hit a then record high of 171,817 contracts. A month later, in December of that year, the money manager net position also recorded what was then record length of 39,105 contracts.

The number of money managers gracing the CFTC’s reports at the time stood at 78, of whom 60 were holding long positions.

How many more might come if copper were to embark on a similar-scale bull rally this time around?

QUANTUM LEAP

Now, the Commitments of Traders Reports can be unreliable indicators with hidden shifting components and entities flitting between participant categories.

But there is an accumulation of evidence, from market open interest to volumes to number of active money managers, that suggests the COMEX copper contract has made some sort of quantum leap over the last year or so.

The step-change came in November and December 2016 with both open interest and money manager long positioning entering uncharted territory. The number of funds holding long positions almost doubled in the space of a month.

The rally that occasioned it was a hotchpotch of news narrative, fundamentals and technicals.

Was it the Trump election surprise and the hoped for infrastructure boost in the United States? Was it a fundamental reassessment of copper’s supply-demand dynamics? Was it one of the most dramatic technical break-outs seen in years?

It was with hindsight a combination of all three with automated trading adding a lot of extra fizz to the price momentum.

And it certainly rekindled the hedge fund community’s interest in a metal that had lost much of its investment sheen over the long bear market of 2012-2015.

There seems to be more of them than ever before. And they seem to have far more collective firepower. It is concentrated for now on the COMEX contract.

That much is clear from the recent market action.

It may be only a taste of things to come if copper’s bull narrative really heats up.

Editing by David Evans

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