Base Metals
April 18, 2024
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–Copper is at a new high this morning, with HGK4 currently printing over 4.42. In mid-Feb it was around 3.75, so it’s an explosive 18% increase in two months. ZH has an article on the surge in tin prices, noting that it’s something of an AI adjunct: ” ‘Every data byte and every electron travels through hundreds of solder joints that connect it all together,’ [said] Jeremy Pearce, head of market intelligence and communications at the International Tin Assn.” Sort of odd in the context of USD strength. I’ve read several articles recently about electricity generation plays; wouldn’t it be funny if basic commodities are the easiest and surest way to bet on cutting edge technology?
–However, that doesn’t seem to be the case for grains, for now anyway. I think I first posted a chart of corn priced in gold in 2020. That year was the absolute low, but now corn/gold is approaching that historic level. Recall it was April 2020, almost exactly four years ago, that WTI futures prices went negative. Currently CLM4 near $82/bbl.
–In any case, there are a lot of wildly shifting prices out there, and likely some spread opportunities for those with deep pockets that can live through squeezes. I guess a core theme would be the idea that commodity prices aren’t encouraging for the inflation outlook, and several Fed officials including Powell have pushed back timing for easing.
–Yields fell yesterday and implied vol compressed in rate futures. Tens ended down 7.6 bps at 4.581%. Stellar 20 year auction helped support futures. Note that deferred SOFR prices tested Tuesday’s lows, but ended up closing above Tuesday’s highs. As an example, SFRZ7 equaled Tuesday’s low at 9489, but made a higher high at 9600.5 and settled 9599.5 (+7.5). This contract currently represents the apex of the SOFR curve, at a yield of 4%. Of particular interest is SFRZ5 which settled 9574.5, up 8 on the day. This contract had been the weakest on Tuesday due to huge buying of the Z4/Z5 calendar spread, which surged to -57.5. It was beaten back down into submission yesterday, settling at -64.0. The decline in red contracts (second year out) makes sense given renewed concern about inflation and a Fed that may just sit on the rate-cut sidelines, but USD strength is tightening conditions in EM countries, and likely accentuating the risk of financial accidents.
