London 27/02/2016 - Key notes:
- Speculators were quiet over the reporting period (February 14-21), the latest CFTC statistics show.
- Since risk-off may emerge in the weeks ahead, we expect relatively more spec buying interest in platinum than in palladium.
- A key downside risk to our bullish view on speculative sentiment toward the PGMs is a possible deterioration in autocatalyst demand due to China.
Platinum spec positioning
The net long fun position (NLFP) in platinum was little changed over February 14-21. It now stands at 39,642 contracts, down a net six contracts from the previous week but still up 14,228 contracts or 56% in the year to date.
Open interest edged 1% higher over the reporting period while Nymex platinum prices ended flat (+0.2%). This does not offer us a clear market set-up.
Taking a closer look, speculators deleveraged slightly over the reporting period, with longs liquidating 243 contracts and shorts closing out 237 contracts.
The year-to-date rally in platinum prices has been essentially driven by short covering. But with the gross short leg (red line) at an extremely low level, we expect shorts to re-engage tactically. Should the gross long leg remain (black line) stable due to a lack of conviction to boost exposure on fears of a slowdown in Chinese auto sales, the increase in the gross short leg could put prices under strong selling pressure.
But our macro view is for stronger risk aversion in the remainder of the first quarter of the year, which could trigger fresh buying should market participants wish to protect their risky portfolios by lifting their exposure in risk-unfriendly positions such as platinum.
Looking ahead, we will therefore stick with our view that spec positioning will improve in the coming days/weeks via a deterioration in global risk appetite.
Palladium spec positioning
The NLFP in palladium was little changed over February 14-21. As of February 21, it stood at 16,691 contracts, down 24 contracts from the previous week but still up 2,505 contracts or 18% in the year to date.
Open interest was fairly unchanged over the reporting period while palladium edged down 0.1%, which is a neutral market configuration.
The marginal drop in the NLFP over the reporting period reflects light deleveraging: longs liquidated 137 contracts while shorts covered 113 contracts.
As we noted previously, speculative positioning in palladium seems to be overstretched on the long side, judging by historical metrics. A deterioration in speculative positioning may emerge at some point after speculators lifted massively their net long positions by 6,442 contracts or 83% in 2016.
We see two negative factors that could trigger a reversal of sentiment in palladium. First, similarly to platinum, speculators might turn bearish on palladium should Chinese auto sales data prompt them to rethink autocatalyst demand for 2017. Second, the extreme low level of the VIX suggests too much complacency across US equities, which could end badly, prompting fresh risk-off that should be negative for palladium.
Looking ahead, we think speculative positioning may deteriorate in the weeks ahead once risk aversion resumes. But because palladium is a precious metal, the fluctuations in gold prices may influence speculator behaviour in palladium. So our constructive view on gold for the first quarter leads us not be aggressively bearish on palladium.
(Editing by Mark Shaw)