"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, September 16, 2014

Copper Short Squeeze Pulls Metals Higher

If you ever want to know why we commodity traders are occasionally prone to be heard muttering meaningless, seemingly disconnected sentences, rambling incoherent utterances and other assorted bewildering, strange words, it is because life in the commodity futures pits can produce some of the most inexplicable and bizarre moments that the vast majority of sane, otherwise blissfully ignorant folks will never quite comprehend.

Take copper for example. Around 10:00 CDT, the red metal began to lift sharply higher on big volume. Something began to rattle the shorts in the market. Then at the start of the next hour, it really took off. Look at the extent of the price spike. It ran from 3.10 to near 3.21, a HUGE 11 cent per pound jump on no discernible news whatsoever. By the way, for enquiring minds, that is a near $2500.00 move per contract! Do any of you remember that recent COT chart I posted of the copper market noting the hedge funds had begun positioning on the short side of the market in anticipation of slowing global economic growth? Well guess what? They all must have run at the same time!

I am still trying to discover what the catalyst was to shove copper prices this higher in such a short period of time. I did note however that the move higher in the copper also coincided with a strong burst of buying in the crude oil and related energy markets. Also, in trading the soybean market, I also noted a surge of buying interest coming in at the same time. This all occurred against a backdrop of a push higher in the major currencies against the US Dollar.

What this tells me, and I still do not know the reason behind the move, was that this was the same old MACRO TRADE that we have seen in the past wherein INDEX FUNDS come in and buy a basket of commodities, across the board, regardless of fundamentals, because of the lower dollar trade. That will explain some of this but a large part of the move across the sector was also due to hedge fund short covering.

What makes this even more strange is that expectations are that the press release coming from the FOMC tomorrow is expected to provide some more definitive data on any upcoming rate hike. That has been expected to provide another upside boost to the US Dollar. Maybe the market is changing its views on that? Who knows? Whatever the reason the initial burst of buying has seemed to abate somewhat as the panicked shorts in the red metal apparently have been flushed out but now what?

Also, this big buying binge has been accompanied by another surge in the equity markets with the S&P climbing back above 1990.

I can tell you this - anyone who dismisses the Dollar's significance when it comes to asset prices is making a huge mistake. That big macro trade is always ready to come piling on or come piling off.

By the way, at the risk of having some fun with the "Gold is Always Manipulated All the Time" crowd, ( GIAMATT), is a big short squeeze higher considered upside manipulation or it is "Normal"? Those of us who have borne the brunt of the attacks from this group already know the answer to that. I merely point this out to show their complete silence by way of their condoning sharp spikes higher in price while constantly complaining and bemoaning all sharp moves lower in price. "oh Ye Hypocrites - why art thou so silent at such sinister conduct"? Enough fun for now however!

Remember, copper prices have been taking their cue mainly from disappointing Chinese economic data news with traders fearing a slowdown in the expected growth rate would crimp demand for the metal. Combine that with Dollar strength due to expectations, whether perceived rightly or wrongly is immaterial, of higher interest rates here in the US, and commodities have distinctly fallen out of favor with would be buyers, not to mention been the target of aggressive hedge fund related selling. Any sort of news therefore that sends the Dollar lower (such as dovish talk on interest rates ), for whatever reason, can easily spark a big wave of short covering across the commodity complex.

That is exactly what we got across the vast majority of the complex this AM.

Keep in mind that there are many who believe that the economy is in no shape to handle higher interest rates as it is not growing near fast enough nor has enough inherent strength to overcome the drag that would come from higher loan rates.

We'll see whether this is a one-day blip ( although it is terrifying if one is short in some of those markets that experienced a squeeze of this nature) and it all is for naught tomorrow when we get the actual FOMC decision to taper another $10 billion in QE plus news on the interest rate front or it is might be the start of more prolonged move.

I tend to think it is the former and will fade out fairly quickly but with these goofy markets and computers running the show, anything is possible. All one can do is to stay nimble and either learn to get the hell out of the way or trade very small at times. Be careful out there folks! If the FOMC release tomorrow is considered dovish, there could very well be more selling pressure seen in the Dollar, even though the Euro zone is a mess and going nowhere anytime soon. Ditto that for Japan.