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Singapore 14/07/2016 - The increased involvement of funds is making copper prices harder to forecast and trade - the latest example lies in is the metal's baffling surge on the Shanghai Futures Exchange on Wednesday.
The SHFE September copper contract outperformed the rest of the complex to hit its highest in eight-and-a-half months at 39,200 yuan on Wednesday. It closed at 38,350 yuan, still up 1,290 yuan or 3.5 percent on the previous day.
The range of reasons suggested by market observers for the jump on Wednesday highlights their confusion.
They include improving global risk sentiment on waning Brexit fears, confirmation of a new prime minister in the United Kingdom, expectations of more stimulus measures from global governments and, last but not least, tensions between China and the Philippines over the South China Sea, which could be a boon for copper should war break out.
But sources agreed on one thing - the metal's fundamentals were not in play in Wednesday's rise.
Chinese analysts largely agree that copper supply and demand are weak but the upward trajectory of the SHFE contract since mid-June - other than during the July 4 week - continues to confound them.
A Shanghai-based copper analyst conceded that watching the recent rise in SHFE copper prices felt like "we were slapping our own faces everyday" - his forecast for copper has largely been bearish since China entered its off-peak season in June.
"If the increase was in zinc and nickel, which have much better fundamentals, that would be understandable. But it made no sense for copper to surge by that much," another Shanghai-based trader added
Speculative fund interest is likely to be responsible for the surge in prices and trading volumes across most of the SHFE metals contracts on Wednesday, sources concluded.
SHFE contracts attracted fund attention as early as April this year, starting with aluminium - they bet on the metal's improving fundamentals given tightening domestic supply.
Open interest and trading volumes in SHFE nickel spiked in May when funds previously not interested in the complex came into the market. And early in June, analysts warned that SHFE zinc was showing signs of overheating after fund interest lifted it to a 13-month high.
"There is definitely a bubble forming for SHFE zinc. But when it will burst and when these funds will exit is uncertain," one analyst said at the time. SHFE September zinc has since climbed to a 14-month high on Wednesday.
While analysts agree that copper's fundamentals remain weak, some have changed tack and now say that there could be further upside in the near term given bullish market sentiment. But only time will tell if the latest predictions are in line with what the funds have in mind too.
(Editing by Mark Shaw)