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Mechanics Of The Markets
Seems that copper had a bit of a Black Swan event on Comex last week, as the April / May backwardation exploded, with the Spot price soaring 29.5¢ to a new record high close of $4.7430.
A move like that deserves an explanation, and fortunately for us, our friend John Peiser, a Senior Account Executive at StoneX sent a note to clients outlining the chain of events.
Here is what he said: "The procedure for establishing settlement prices for Comex is a two step process. First the mathematical mean of all trades in the active month is found and that will be the settlement price. This is why we often see May posted first then the others follow. Next, the computer searches the spread trades involving the other months during the last 30 minutes and averages them. It does not include any spread trades of less than 10 lots.
"What happened today (Tuesday, April 27th)? May settled at $4.4880 based on trading in the final minute. April settled at $4.7430 which was the May price plus the weighted average of spread trades between April and May in the last 30 minutes. I saw a trade of 39 lots at 37.50 cents come across the tape. Apparently, there was a prior trade at 12.00 cents. The weighted average was 25.50 cents.
"At 1 p.m. EDT there were only 199 lots of April traded and 100% were spreads and not outright buys or sells. This compares with 91,000 May and 69,000 July traded. I am not certain but I think about 60 lots were in the last 30 minutes. The spot month can be a crap shoot and today it was certainly that.
CopperJournal Weekly Metals Report
Top 10 Global Equity Markets, April 30, 2021
"The fact is this: no one had April long positions to sell and ultimately a warrant holder reacted to the lack of offers in April/May by offering at 37.50 cents and it traded. There is currently only one offer for April/May and it is for 40 lots at 37.50 cents showing on Globex. If you have any warrants, you can sell April today and tomorrow and get them to your clearer by Thursday afternoon and satisfy an April short position with a delivery.
"Much of our USA copper market is a pass through of price risk so true hedging means that if you bought 10 April today MOC and paid $4.7430 then you should have selling of 250,000 lbs. going out the door at that price. If not, give me a call."
Thanks John, we could not have said it any better.
While copper saw a new record high on Comex, the rest of the world is anxiously waiting for the LME (London Metals Exchange) price to cross the $10,000 pmt line, and also reach for a new high. As a point of reference, the LME Cash high price occurred on February 14, 2011 at $10,148 pmt, or $4.60 per pound.
As you can see on the statistics page, all base metals rose last week, and are up on a year to date basis, as well as year over year - in big numbers.
While much of the market remains super bullish, it appears there is something of a disconnect occurring in China.
China’s Purchasing Managers Index had manufacturing falling more than expected to 51.1 in April from 51.9 in March, and their Non-Manufacturing Index, which includes services and construction activity fell to 54.9 in April from 56.3 during March.
Further, the Shanghai Composite fell last week, and is off 0.8% on a year to date basis. Also, although the Shanghai Composite is up 21% from the year ago period, which is no small number, this compares with a 48% increase in the S&P 500.
And as you can see in the attached ‘Top Ten’ equity markets of major economies, China’s market has the lowest year over year increase.
Maybe this is telling us something, or maybe it means nothing, but at the risk of repetition, an optimistic outlook is good, but caution and vigilance is better.
John E. Gross, The Copper Journal
Published since 1987