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**DXY = we have observed an about-face in the last 24 hours with a revisit at 105 quickly rejected though market participants are still split for what the future holds. We asked a cross section of the client base for their input earlier today - some replies follow:
--"Buy copper" --"I could easily see the DXY rally further" --"Not much juice left, can squeeze more if you want but keep a tight stop limit" --"All depends on your FED view" --"Bull flag that needs to hold 100" --"Still well above the 24y avg since I graduated from college, mean reversion is in the mix"
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**COPPER = technical levels have not changed. For ten months we have been talking about $8318, 8520 & 8715 resistance vs 8238, 8028 support with the short-lived potential to see a return to a 7 handle. Boring. Yes. Exciting at times? Also, a yes!
--Reality is however, that the narrow sub $1000 trading range (ref LME 3s) makes sense. Until the Chinese have to pay more than they want to, U.S. interest rate policy, the DXY and the revolving loop of uncertainty in the macro is likely to dictate the upper and lower boundaries.
--The micro fundamentals need to tighten up further to outweigh the macro forces (let's use recent developments in cocoa as an example). How many months should it take for the concentrate shortfall to feed through to the cathode balance - two to three months or longer?
--In the last week, we have discussed the merits of buying weakness since the supply-side narrative is markedly different today than what was expected 4 months ago. Should the red metal really be back to where it was when we learned Cobre Panama (~400ktpa) was being shut and Anglo American had notable production problems? Against this, the naysayers or those with doubts are keeping an eye on the shape of the forward curve and inter-month spreads. Wise. Sure, the front of the curve is not in a 'back' yet, but one trade we recommended in November as the Panama situation was unfolding and TCs were falling, was to borrow Jun/Dec which is last at $67/t contango - recall this has come-in from the $140 to 120c region (see chart below).
--More recently, the Chinese took their annual Lunar New Year break just as prices were looking to breakout above $8600/700, but Powell threw cold water on the U.S. interest rate projections & January's U.S. CPI report presented a new wrinkle.
--At the present, we are keeping an eye on Chinese housing completions and the global inventory situation for copper cathode. If and when the red metal can convincingly take out $8520 and 8715, then let's take a look at the copper scrap supply-side potential... Until then, look for a 4:1 upside futures trade, borrowing spreads/fwds or pricing option structures from May expiry out to Dec or even into '25 tenors, if you'd like to. Find us on the desk for ideas - various traded and priced in recent weeks vary from the $7800 put strike out to the $12k call strike!
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**ALI = as M. Lovecchio pointed out yesterday, Norsk Hydro was on the tape talking about what they hedged for ’24 & ’25 and how they see forward demand – essentially telling investors “I have the best house on the worst block”! How we look at the words:
--Throwing a lot of shade on the global aluminum outlook for 1H24
--Have talked down both North America & European demand (which in a sense is talking their book as they sold a good chunk of tonnes forward)
--When asked about the recent bid in European premiums… the CEO said “If we saw strong green shoots or something worth mentioning, I would have said so already”… which you do not hear from CEOs that often
--Also talked down extrusion demand/volumes… which is a negative read into CSTM from our seat
Prior to today's LME price action sandwiched in a narrow $27 trading range, we were seeing interest to sell puts and buy calls in 1H dates - both on 1x1 basis and in ratios - vol trades, hedged where premium value was unlikely the intention. Today, the April bucket was the fan favorite with $2300 and 2350 strikes in the spotlight.
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**IRON ORE = speaking to a client yesterday and he told us: “Look at this cheeky 7Mt of high-grade IO supply cut in 2024 and if no license obtained then they may stop the mine in 2025. The mine produced 21Mt in 2023! Iron ore has been holding up fairly well of late all things considered… Participants model barely any supply growth this year and this 7Mt cuts supply growth in half. It may all be about China pig-iron production which has so far been flat YoY. Post Chinese New Year, let’s see... If the PI output rises at the same pace as last year, then I definitely would not want to be short iron ore!"
--Which led us to ask = is $150 to 160/t the correct upside target?
--Meanwhile, from M. Lovecchio's seat he shared the following summary earlier on the desk:
"BHP has avoided a planned 24-hour strike starting tomorrow (Feb 16th) by iron ore train drivers at their Pilbara operation, as an in-principle agreement was reached. Iron Ore prices have inched higher since last week (from $125 to $129.50)… which I attribute to the Sino project reduction... optimism around China coming back from holiday... and this BHP strike looming.
Some chatter as we approach the Spring is that we will see less sintering restrictions in China (+ve IO demand)… but could also argue we did not see much in terms of restrictions all winter (vs previous years).
Concerns remain - namely - 1) Chinese HRC/rebar margins are still DEEP into the RED (-$50/mt), 2) Chinese port inventories are +10% YTD, 3) Chinese HRC has been moving lower since December, 4) met-coal prices remain elevated (which cut into steel margins)... and 5) a great debate persists re: the Chinese property market - have we seen rock bottom weakness yet?
A bright spot worth highlighting is the 65-62% spread has popped 30% YTD (+ve VALE)… albeit the spread is off the lows, and still narrow vs 62% from historical levels. This suggests the 58% discount is not all that attractive at these levels (-ve FMG AU)? We will see next week if China comes back as buyers, or they hold off a bit further..."
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Finally...
**U.S. INTEREST RATE PROBABILITY = a great table that continues to be on the front burner - as the change in expectations in recent weeks has been material! Less than 4 is finally not a ridiculous number. Does it fall below 3? I have been in the camp for quite some time that 2 or less is possible. I recall graduating from Michigan in 2000 and the interest rate on the low disposable income that I had (which didn’t go towards rent, utilities and food/drinks in NYC) was north of 5% in an ING Orange Savings account! True, a lot has changed since then regarding the Labor Force, Inflation, Supply Chains, Availability of Commodities, the Stock Market and Politics - so... where is the workable sweet spot?
We will be in touch with more inputs. Until then, all the best,
Mike
*Sources on charts, all above = Bloomberg*
