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Copper rebounds on Monday, but will margin hikes on LME trigger liquidation selling

02/05/06

Following Friday’s weakness which saw the metals end up on a nervous note, copper regained its composure on Monday during US trading. This was partially to do with the onset of further dollar weakness that saw the dollar index move down to 85.50, to levels not seen since May 2005. However all eyes will now be on the impact the LCH.Clearnet margin hikes have on the LME metals. With copper margins jumping from $6,700/mt to $14,575/mt, there may well be a period of repositioning as the trade and funds reorgainise their trading books and trading systems adjust to take into account the margin changes. Although this may well lead to an initial move to the upside as shorts cover, the greater danger in the longer run is that it will deter some of the heavier fund involvement or lead to funds reducing their exposure. As this type of business has largely been responsible for the run higher, it suggests there is potential for a lot of unwinding.

The fact the margin news emerged late on Friday with the bank holiday on Monday should enable the news to be absorbed by the market before LME trading starts up again on Tuesday. Initially copper prices on Comex jumped from $3.22/lb to $3.31/lb, but prices then drifted during the morning, before climbing into the close, but the strength in copper on Monday seems to be on the back of further strength in gold and silver and is less likely to have taken into account the implications of the rise in margins on the LME. With much of Asia shut this week, the markets are likely to be thinner than usual, all of which suggest volatility could increase markedly. In addition, the fact that margins are rising suggests that the powers-that-be are also taking proactive steps to try to dampen some of the speculation, which in the end is likely to see prices undergo some correction, the only question is whether this happens immediately or in the days or weeks ahead.

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