London 07/01/2016 - The copper market was a victim of the mass sell-off in the Chinese stock market on Thursday, as a wave of selling pressure took the red metal to $4,430 per tonne and the cheapest since May 2009.
The sharp declines was attributed to uncertainty in China, in particular in regards to its stock market and global growth.
In a drastic move to stabilise falling equities, China annouced this afternoon that it would suspend its recently implemented circuit breaker as of tomorrow.
The breaker was triggered today for the second time this week when the Shanghai composite fell under the pivotal seven percent level. Today it closed at 3,125.002, a 7.04-percent loss, after unsettling data and a further weakening in the yuan stoked fears about the health of China's economy.
While the removal of this breaker would allow liquidity to remain in equities, there does lie the potential for even steeper losses in equities when the market reopens tomorrow.
"The new Chinese stock market circuit-breakers are too tight and too close together for volatile Chinese equities, and this exacerbated panic and sell-offs. Had these breakers been in place in summer, they would have been triggered 20 times,” Shaun Port at Nutmeg said.
“China is a complete mess. They wanted people to get involved when it was going up but then trying to stop selling when it goes in away they do not like,” a trader said.
Indeed, the halt in trading was believed to have been behind the sell-off in copper today – close to 27,000 lots of copper had changed hands on Select by 15:00 hours local time.
“The talk from Asia is that as companies are not able to sell shares they have had to sell-hedge something, and have turned to copper instead,” an LME trader said.
“It is definitely a valid argument that people are shorting commodities or looking for other opportunities to go short if they are not allowed to short equities – whether this makes sense or is justified is another question,” Daniel Briesemann at Commerzbank added.
Additionally, the devaluation of the Chinese yuan has played its part in the downturn in sentiment and most market participants are of the opinion that further devaluations are on the cards.
“The currency is under attack again today and the on-shore/off-shore differential in the yuan continues to widen, a signal that the onshore (official) rate is too overvalued. We suspect that the government will have to force a much greater devaluation in the currency to relieve some of the pressure, as very much like the stock market, valuations need to be realigned to more realistic levels,” said INTL FCStone analyst Edward Meir.
How markets react once Asia re-starts tomorrow will be pivotal for how the end of the first trading week of 2016 will close, although participants warned that there is room for further downsides.
“The market started the year hopeful of better things, or at least some stability, but reality has bitten and there is no good news out there,” a trader said.
“It seems that the Chinese are in the market when prices are falling, and they obviously expect prices to fall further – therefore still waiting to go long again. The negative sentiment, the technical picture and current momentum suggest that the price slide will continue in the short-term,” Briesemann said.
“Despite Beijing’s best efforts markets have remained very volatile and the Chinese have been short copper for a while now. We saw it towards the end of last year – any attempt to push higher was hammered and if anything provided an opportunity to re-establish short positions,” said Kash Kamal, an analyst at Sucden.
The copper price is vulnerable and having taken out the lows earlier today the red metal could test under $4,400.
“With the run on equities only gathering pace I think we could see some fresh selling…could soon see $4,400 reached,” said Kamal.
The risk off environment is likely to continue through to the Chinese New Year which takes place on February 8 and could see some modest restocking.
“But even then, many investors will lack the nerve to ride it out and any gains could be short-lived,” said Kamal.
“It takes a brave man to call for higher while cowering behind this confluence of negativity,” Michael Turek at BGC said.
(Editing by Tom Jennemann)