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Copper Shorts Feeling the Pressure

By:Thomas Westwater

Copper market insights from the Commitments of Traders report

  • Copper prices end August on a bright note despite losses.
  • Short traders might get squeezed out of the trade in September.
  • Trading depends on stimulus measures out of Beijing and the Fed's path.

Copper prices (/HGZ3) are poised to register a nearly 5% loss for August, despite showing some resilience in the final weeks of the month. This represents the largest monthly decline for the red metal in percentage terms since May, effectively reversing most of the gains made in the prior two months.

So, what sparked the rise in copper as we transitioned into September, and can we anticipate a similar trend in the coming month? To provide an answer, we must examine the current state of the global economy, specifically focusing on China - the world's largest consumer of copper.

China takes action

The economic challenges facing China have been a significant talking point this summer, with its struggling real estate sector pulling the economy down. This has prompted a series of responses from Beijing, including measures specifically designed to bolster the domestic housing market. Most recently, the People's Bank of China (PBOC) has lowered the down payment required for mortgages.

While these actions alone may not be sufficient to rejuvenate China's once thriving economy, they do indicate a willingness to provide economic support. Coupled with market expectations that the U.S. central bank will soon halt its rate hikes, this paints a more optimistic picture for the global economy, which in turn, is supportive of copper prices.

Copper shorts capitulating

Copper traders seem to be well-informed about the prevailing narrative. A close examination of copper trades via the Commodity Futures Trading Commission’s Commitments of Traders report (COT) reveals a significant shift in sentiment among speculators.

These speculators, identified as non-commercial traders within the COT report, reduced their short contracts by 4,579 for the week ending Aug. 22. This reduction followed the largest short position held by these traders since March 2020. When prices increase it can force traders to close their short positions, which requires them to buy back those contracts. This creates a well-known phenomenon known as a short squeeze.

Copper cot chart

There are several factors that can influence the pressure shorts will face over the coming weeks, which can dictate how much pressure shorts face. Economic data prints will be the primary driver, with Chinese trade data for August due on September 6.

A purchasing managers’ index (PMI) from Caixin for the same period will precede that on September 4. In the meantime, any additional actions out of Beijing to stimulate economic growth may put more weight on traders to cut their short bets. Copper traders will also have the U.S. jobs report kicking off the month on Sept. 1, a major factor that can swing Fed rate hike bets. Traders may also want to keep an eye on the dollar, which has showed signs of topping.

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater 

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