Copper flashing red signals on China

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Copper prices are signalling that demand may be weakening in China, the world’s largest consumer, as stocks of the metal flow out of the country to warehouses elsewhere in Asia.

The red metal, which is often seen as a gauge of global economic activity due to its ubiquitous use in wiring, has relinquished its gains for the year, falling 2 per cent. That is in contrast to other metals also heavily tied to Chinese demand such as zinc, tin and nickel, which have all staged rallies.


High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. The drop in price to a 10-week low on Tuesday comes after imports of the metal into China fell in July, and stocks have built up on London Metal Exchange warehouses in South Korea and Singapore.

Global stocks of copper are now at their highest levels since October 2015, according to data from broken Marex Spectron.

That is raising fears that demand in China could be weakening after a government stimulus in the first half of the year saw prices rise to a peak of $5,131 a tonne in March, giving hopes to some of the world’s largest miners. Copper traded at $4,607 a tonne Tuesday.

Most analysts do not expect the copper market to recover until 2018, when supply starts to tighten due to lack of investment in new mines. Credit ratings company S&P Global Ratings said it forecasts a price of $4,600 a tonne for this year as the market remains oversupplied, rising to $4,850 a tonne in 2017.

In the meantime, the copper market could be due for a “sharp slowdown” in the second half of the year, which could send prices even lower, according to Barclays.

The premium, or the price a trader could get for selling physical copper into the market, has been unusually weak since April, according to Dane Davis, a Barclays analyst in New York. That is providing an incentive for traders and smelters to send metal outside the country where they can earn more leaving it in a warehouse.

“Momentum is starting to stall in China and people are starting to off load the metal in other markets,” he said. “There’s strong availability of supply and demand has been tepid and started to cool off in May and June.”

There has also been a build-up of excess metal in China after it imported a record amount in the second half of 2015, according to analysts. Domestic refined production has also increased 7 per cent this year, according to Bank of America Merrill Lynch.

Investors are also betting that copper prices will fall further. Traders on the Shanghai Futures Exchange are holding a net short position of 16,684 contracts, according to exchange data, while on the Comex exchange in New York, speculators swung to a net short position in the week ended Aug. 23.

Speculators in Comex copper futures had previously built a net short position in early June, before a bounce in copper prices led to an unwinding.

“Weakening fundamentals triggered the return of a copper net-short position,” Ole Hansen, head of commodity strategy at Saxo Bank, said. “With funds having only just turned net-short again, there will be plenty of room to increase short positions
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European stocks book a loss as rate-hike signals intensify

European stocks on Monday finished in negative territory, kicking off the week lower as rising expectations the U.S. Federal Reserve will lift interest rates later this year poked the air out of a recent rally.

The Stoxx Europe 600 index SXXP, -0.15%  lost 0.2% to close at 343.20, pulling back after a 1.1% climb last week.

The pan-European benchmark settled 0.5% higher on Friday, after Fed Chairwoman Janet Yellen, at a closely watched speech at Jackson Hole, Wyo., said the U.S. economy is improving, seen as a sign of confidence in economic growth world-wide. However, the central-bank boss also hinted a rate increase is on the cards in coming months, which weighed on U.S. markets on Friday and dragged stocks in most of Asia and Europe lower on Monday.

Read: Here’s what the Fed’s rate should be, using rule footnoted in Yellen speech

“The Fed is about to tighten the screw again on cheap money and one step closer to bringing the monetary policy to its normal path. This is not the kind of news that the equity traders are going to cheer and hence we are seeing this kind of reaction in the market,” said Naeem Aslam, chief market analyst at ThinkMarkets, in a note.

“The most important data which is standing between the Fed and another rate hike is the upcoming U.S. [nonfarm payrolls] number due this week on Friday,” he added.

The nonfarm-payrolls data is one of the most highly anticipated monthly economic reports, as it reveals the health of the U.S. labor market and helps the Fed set its path for monetary policy.

The dollar strengthened against most major currencies after the Yellen’s speech and continued its march higher on Monday. The euro EURUSD, -0.1698%  slipped to $1.1175, down from $1.1197 late Friday in New York.

Movers: Shares of Alstom SA ALO, +2.86%  gained 2.9% after the French infrastructure company late Friday said it signed a €1.8 billion deal to design and build 28 new high-speed trains for U.S. rail operator Amtrak.

Roche Holding AG ROG, +0.46%  rose 0.5% after the Swiss drugmaker said it had received an “emergency use authorization” from the U.S. Food and Drug Administration for its Zika test.

Oil companies were heading lower, tracking a sharp decline in oil prices. Crude oil CLV6, +0.38%  slid 1.7% to $46.85 a barrel as doubts grew that the Organization of the Petroleum Exporting Countries will reach a deal to freeze production next month. Shares of Eni SpA ENI, -1.03%  dropped 1%, Total SA FP, -0.93% TOT, -0.39%  lost 0.9% and Repsol REP, -1.32%  gave up 1.3%.

Other Indexes: Germany’s DAX 30 index DAX, -0.41%  slid 0.4% to 10,544.44, while France’s CAC 40 index PX1, -0.40%  gave up 0.4% to finish at 4,424.25.

Meanwhile, U.K. markets were closed for a local bank holiday.
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QUAL: A Solid Pick For This Uncertain Market Backdrop

Summary

On paper, the US stock markets are doing just fine.
But most investors are nervous, and for good reason.
Consider iShares Edge MSCI USA Quality Factor ETF (QUAL) which gives investors exposure to a number of high-quality stocks.

On paper, the US stock markets are doing just fine. Just a few days ago, the three major US indices, Dow Jones (NYSEARCA:DIA), S&P-500 (NYSEARCA:SPY) and Nasdaq (NASDAQ:QQQ) all closed at their record high on the same day. On a year-to-date basis, the Dow Jones and S&P-500 have gained by roughly 6% each while Nasdaq-100 is up 4.2%. In an environment of low bond yields, the stocks could continue moving higher. Yet most investors I've met are nervous, and for good reason.

The second quarter earnings season has almost come to an end, and most of the major companies have beaten Mr. Market's earnings estimates. In fact, as per FactSet, 95% of the S&P-500 companies have reported results so far and more than 70% of those have ended up beating analysts' mean earnings estimates. But that's because estimates were already down. What's particularly upsetting is that earnings have been declining for the last five consecutive quarters. That's something which hasn't happened since the global financial crisis.

In Q2-2016, actual and estimate results translate into 3.2% decline in earnings for the S&P-500. The poor performance has been driven in large part by the persistent weakness in commodity prices which has hurt companies operating in the energy and materials sectors.

Moreover, it appears that profits will likely continue to head lower. For Q3-2016, 102 companies have released earnings guidance, 70% of which have been negative. Analysts foresee a 2% earnings drop in the third quarter and a 0.4% decline for the full year for the S&P-500. This compares against an earnings decline of 0.8% seen last year. But analysts have been reducing earnings estimates. On December 31, the consensus estimate for the S&P-500 called for an earnings growth of 5.9%, which was considerably better than what we are hearing now. The actual results, therefore, could turn out to be far worse.
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High rollovers signals 'positive bias'

 The rollover of Nifty futures contracts from the August series to the September series was 81 per cent, among the highest in recent times, despite high cost of carry.

The average rollover for Nifty contracts for the previous three months was 67 per cent. The market-wide rollover stood at 81 per cent, in line with previous months.


Rollover is the outstanding contracts in the new series (September in this case) as a percentage of total outstanding contracts. High rollover figure to the next series are considered a bullish sign.

Also, the total open interest at the start of the September series is Rs 1 lakh crore, compared to the previous month’s average of Rs 80,000 crore.

“The long rollover cost was high at up to 75 basis points (bps) compared to 60 bps normally, and despite this Nifty traders rolled over their positions. Open interest, too, at the start of a new series is high. The obvious inference is people are bullish,” said Yogesh Radke, head of quantitative research at Edelweiss Capital.

The Nifty moved in a tight 200-point (2.5 per cent) band between 8,520 and 8,720 in the August series.

Radke said markets have been consolidating following a rally in July and a big impact will only come if they breakout from the range they traded in August.

Experts said market direction will be guided by signals from the US Federal Reserve and the new Reserve Bank of India (RBI) governor.

The Nifty 50 index on Thursday closed at 8,592, down 58 points, or 0.7 per cent, amid weak global markets.
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Market’s Tight Range Signals Sharp Move

Pundits are obsessing over the CBOE Volatility Index, saying its very low levels suggest the stock market is near a top. While the VIX is useful at finding market bottoms, it is not that good at finding tops. The indicator, in fact, has been even lower during rallies in the past and higher when the market actually did find its peaks.

More interesting is that the Standard & Poor’s 500 index is now in its tightest percentage range since September 2014, which was just ahead of a sharp correction to the downside. Granted, the Ebola scare was in the news then — which could have affected trading — but the tight range did indeed portend the explosive move that followed.

While the S&P 500 itself now trades in a tight 2% range since early July, the so-called Bollinger Bands suggest that noose has tightened further (see Chart). These trading bands, named after their discoverer John Bollinger three decades ago, are a mainstay of any technical analysis and charting software package. They draw an envelope above and below trading action based on volatility rather than a fixed value or percentage, allowing them to expand during volatile times and contract when things are quiet.

When the bands are as narrow as they are now — roughly 1.5% — they tell us the market is preparing for a significant move. Bollinger posited that volatility cycles from high to low and back to high again, much like price does. Thus a quiet market will likely give way to something more exciting. Unfortunately, the bands themselves cannot tell us the market’s likely direction. We will need other tools to make that forecast.

Bands this narrow are a rare occurrence. The S&P 500 saw bands this tight in 2006 and 2012 — and did suffer corrections both times. However, the previous occurrences in 1993 and 1995 instead saw steep continuations of the bull market that was already in effect.

Why is the market so tight? There are many theories, from the end of the summer to the unusual political season. Yet the most likely explanation is uncertainty about the Federal Reserve’s timetable to raise short-term interest rates. Opinions on the merits of a rate hike are quite strong on both sides.

From a charting point of view, the reason does not matter. All we need to know is that the market is very quiet right now — almost too quiet — and that cannot last.

To be sure, other indexes such as the Nasdaq 100 and the small-cap Russell 2000 are narrow but not at historical levels. The large-company S&P 100 and the Dow Jones Industrial Average mirror the S&P 500, and that is enough for me to conclude that the market is poised to move.
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