Perma-bears pile on the pain

Have the perma-bears gone too far?

Copper
Source: Bloomberg

I understand that the fundamentals in commodities are at the low of the cycle and the fear around the ‘old’ China hard landing story have hit a high, but has it gone too far?

This morning CME copper is on the verge of having a US$1 handle in front of it, something it has had since May 2009. It’s still a long way off the 2009 low of US$1.25 a pound, but the level of short interest in copper hit a net short of 29,000 shorts for non-commercial as of last Tuesday which will have only increased in the past seven days and that is also at 2009 levels. The perma-bears are flexing their strength. 

On a technical level, copper over the past nine days has an RSI of 5, this is a record low suggesting the selling has gotten to ‘silly’ levels. ‘Old’ China is slowing but it’s not ending; however, the current trade in copper suggests it has. There must be a snap back in the offing over the next few days – be aware of the short squeeze that is brewing.

What’s caught my attention

Brent was once again all over the place in intraday trade. The closing price shows a solid increase over the intraday period, yet that completely disguises the fact it shifted through US$1.96 a barrel range twice in the US session on a Saudi report stating it’s finally ready to work with OPEC, and even non-OPEC nations, to ‘stabilise’ prices through production changes.

The bears see the China demand story coupled with increases to the Fed funds rate as a reason to short oil. Brent shorts from the non-commercial space hit a net short position of 141,000 contracts, the most since October 2014 last Tuesday – clearly the bears are still in control, but some money has been taken off the table.

What is also pilling on the pressure in the oil price this year is seasonally not materialising. With El Niño currently in effect, US demand for heating was -22% below average last week 48% lower than this time last year.

The supply/demand remains inconsistent and even with production moderation from OPEC, lower prices remains more likely than not.

Iron ore continues to inch towards that June decade low of US$44.59 a tonne trading at US$44.74 a tonne in Qingdao yesterday. China perma-bear Andy Xie created a bit of stir yesterday when he stated he sees iron ore in the US$30 handle for all of 2016 as China demand sputters. Not a good sign for Australian terms of trade or material firms.

BHP’s ADR is calling the Big Australia down 1.8% to $19.70, which will be the second closing test of $20 handle. The copper and iron ore story is willing it into the teens.

ASX remains disconnected to the underlying commodities story with five consecutive positive prints. The relationship with the TSX has now completely broken down and the ASX remains the best-performing developed index globally over the past seven days. The flows back into the banks is interesting considering the housing clearance rates in Sydney and Melbourne. How long can the ASX hold onto the gains of the past week?

Ahead of the Australian Open  

Ahead of the open, we are calling the ASX down eight points to 5268 – with perma-bears savaging commodities materials remain the key target. However CBA’s ADR is suggesting it will only shed a handful of cents which will moderate the likely decline.

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