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The London Metal Exchange three-month benchmark copper price contract rose sharply in intraday volatility since the Covid-19 pandemic started in early 2020, after years of narrow daily movement.
Quantitative easing from central banks after the 2008 financial crisis diminished a lot of volatility in the financial markets including commodities, leading traders to reduce positions on the outright flat price of copper and other metals in favor of focusing on spreads between futures contracts.
“The attraction to yield funds, which are basically spread funds, grew and, coupled with quantitative funds and risk premium products, there’s been a compression on both volatility and spreads,” Arion Investment Management portfolio manager Matthew Collis said in the panel session.
“Given February to March last year and the explosion of both volatility and spreads due to liquidity factors, I think that’s sort of coming to an end, with people willing to embrace the need for directional trading,” Collis said.
Volatility in copper future spreads has not suffered, with a backwardation between the LME cash and three-month contracts trading at a six-year high of $65 per tonne on February 26.
“I think the last 5-7 years absolute return products were particularly strong performers and I suspect that directional products will outperform in this type of market environment and people will adjust their trading style to be a bit more directional,” Orion Commodities Management’s Matthew Heap said.
“That’s purely a function of trending markets and bull markets, there’s more meat on the bone to go around for everybody,” he added.