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The base metals complex is at a key juncture as we head into August, with speculative short positions having reached significant levels in certain metals.
The broader macro-economic environment is uncertain, with our macro indices of Growth, Psychology and Liquidity in a recovery mode from the depths of the European panic in June.
Whether these indices will sustain their recent improvement will depend on the ability of the EU leadership to deliver on their statements of intent, alongside further stimulus measures in China to offset the slowdown there.
With a simultaneous slowdown in the major economies of the world, this is the most dangerous growth environment since the financial crisis began in 2008. The prospect of further aggressive monetary policy moves looms large but the drought in the USA and the associated dramatic increase in grain prices may inhibit policy changes.
Marex Spectron’s proprietary speculative positioning models seek to estimate the levels of conviction and bias among a broad selection of speculative strategies. The results show that speculative positions are generally short, although the leading benchmark (LME copper) is one of the least oversold.
There is an unusual divergence between the readings for Shanghai and LME zinc, with Shanghai having liquidated the short position from earlier this year. On the LME, however, zinc remains short.
Placing these readings into a wider context, we can see that there is an unusually wide spread of readings across risk assets globally. This is particularly unusual given the current macroeconomic environment as, normally, during such times, risk assets tend to correlate significantly.
Within the Energy space, speculators are heavily short.
However, within the Equity space, positioning is neutral. Base metals as a group (using LME copper as the benchmark) sit between the two.
This tug of war, in terms of speculative sentiment, will eventually have a winner. The outlook for base metals prices will be driven by that outcome.
Equity markets are anticipating the monetary policy response to the weak demand environment that the Energy complex is reflecting.
In Marex Spectron’s view, the downside risks remain very significant and hopes for quantitative easing (QE) may prove misplaced. Inflationary pressures are far greater than during previous instances of Fed action, and China, in particular, is highly sensitive to food price inflation.
Trade recommendation: buy aluminium against a short in copper.
Guy Wolf is a macro strategist at Marex Spectron. He writes an Expert View column for Metal Bulletin on a monthly basis. editorial@metalbulletin.com