Chinese hedge funds drive copper plunge
By Henry Sanderson and Neil Hume
What caused copper to plunge precipitously on Wednesday?
Market participants say aggressive selling by Chinese hedge funds that are virtually unknown in the west played a powerful part in pushing the metal down more than 7 per cent to its lowest level since 2009.
Dealing during illiquid hours, their aggressive tactics can have speedy ramifications given the increasing presence of high-frequency traders and black-box funds, that sell or buy based on preset instructions and feed off their moves.
“We should not underestimate the power of Chinese fund money to roil the markets,” futures broker INTL FCStone said.
Wednesday’s sell-off started at 1am in the morning UK time, 8pm in the US, as all but the most assiduous metals traders in the west had gone home. Copper traded on the London Metal Exchange’s electronic trading platform “LMEselect” fell more than $400 in an hour to $5,378.25 per tonne.
Traders said the bear assault was “beautifully” timed, with the Chinese funds launching their attack at a moment when the market was on edge because of the collapse in the oil price and physical demand in China weak because of the looming lunar new year holiday.
On top of that, sentiment toward commodities was poor with many large investors selling down index-linked investments. Typically, institutions such as pension funds that buy a basket of commodities have to sell copper every time they want to exit the sector or reduce their exposure. This has been one factor behind the metal’s 12 per cent slide since the start of the year.
The Chinese funds were seemingly also aware of growing open-interest in copper options — including put contracts, which give the buyer the right to sell at a fixed price — and the impact a sell-off would have on the delta-hedging programmes of big investment banks. Option writers hedge their exposure by selling futures contracts at ratios determined by the underlying price. According to LME data, there is currently large open-interest in June $5,500 puts.
“People have to change the way they think about markets. Twenty years ago if copper was down it would be really a reflection of the supply and demand because we didn’t have this speculative or financial activity,” said one senior trader.
Adding to Wednesday’s selling was the news that a copper smelter in Shandong called Yantai Penghui Copper had shut down production, due to cash problems. The smelter was left with a large long position in copper futures they had to sell in the market, according to market participants.
There was also talk that an investment bank had closed an in-house commodities fund and was liquidating positions, some of which may have been in copper.
The Commodities Note is an online commentary on the industry from the Financial Times
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