Last week it was copper. This week it has been zinc to feel the speculative heat emanating from China. On the London Metal Exchange (LME) benchmark three-month metal has whipsawed through a $200 per tonne range, hitting a near six-year high of $2,684.50 on Tuesday before falling back to the $2,500 level this morning.
The timing of the action suggests little if any relationship with the "Trump" factor that helped send copper up after the surprise election of Donald Trump as US president. On the day after the election zinc barely moved even as copper was going into bullish hyper drive.
Rather, the zinc market volatility has reflected the same hidden speculative and mechanical drivers that were in play in the copper market explosion. A surge in mass speculative trading in Shanghai, programmed trading in London and the defensive actions of short position-holders in the LME options market have all played their part.
The Shanghai Futures Exchange (ShFE) zinc contract only really burst into life on Thursday November 10, when zinc got churned in the broader cross-commodities sell-off on Chinese exchanges. But on Monday this week both price and volume surged higher. Activity on the most traded zinc contract in Shanghai totalled 1.172 million lots, equivalent to almost 3 million tonnes, even allowing for the ShFE's practice of counting both sides of a trade in its volume figures.
It was the heaviest volume trading day since last November, when retail investors were launching concerted bear attacks across the exchange-traded metallic spectrum in China. Tuesday was almost as frenetic with another 1.170 million contracts changing hands as the Shanghai zinc price hit a multi-year high of 22,100 yuan per tonne.
The timing of this bull charge is significant. Last week the Chinese authorities raised margin calls and trading fees across a range of over-heating commodity contracts, particularly those in the ferrous space such as coking coal, iron ore and steel. Chased out of those markets, the crowd seems to have simply switched targets, a group attack on zinc triggering a massive short-covering reaction.
Price and volumes have both abated after the Shanghai exchange stepped in on Tuesday to double intraday trading fees on its zinc contract. It's an effective weapon against the crowd traders who tend to hold positions only for a short period of time to avoid end-of-day margining. The Shanghai zinc frenzy spilled over into the London market in the first two days of this week.
The two markets are increasingly connected despite their differing user profiles. The LME's electronic trading system has for some time now seen volumes steadily increasing in the time-window overlapping the Shanghai trading day. And in London, to quote LME broker Marex Spectron's Tuesday report, the zinc price explosion "caught many unawares as it seemed copper was the only game in town but we have seen complacent shorts get flushed out yet again as traders' margins blow out."
The move up through big-number levels such as $2,500 generated waves of programmed trading, which is driven by technical signals such as historic resistance levels, moving average combinations and rate of change calculations. Marex noted flurries "of buy-side stop (loss order)s that yet again generated out-sized slippage as the algos took over." Also short were LME option market-makers, particularly of large clusters of open interest on key December calls.
The LME price for December zinc rose from $2,465 per tonne at Friday's close to $2,605.50 at Tuesday's close, pulling into play strikes such as $2,500, which has 6,160 lots or 154,000 tonnes of call open interest. Call options confer the right to buy at pre-determined levels, which is great for the buyer in a rising market. However, from the seller's perspective, a sharp move such as seen earlier this week means a frantic dash to cover exposure by buying the underlying futures contract.
Such sellers can be short both the "delta", the futures tonnage equivalent of the options exposure, and the "gamma", which is the rate of change in that "delta". The net result is a second wave of reactionary program-driven buying overlaying and accelerating the effects of the algorithms used by the systematic fund players.
Both, by the way, can just as quickly go into reverse sell-mode on any price pull-back, exacerbating the "Chinese chop" generated by the ebb and flow of speculative interest in Shanghai. Hence the whip-saw activity over the course of this week with prices first jumping and then imploding in the space of just four days. Forgotten in all this deafening market noise is zinc's underlying bullish narrative of a tightening physical mined supply.
But quite evidently fundamentals don't move as fast as funds in determining intraday and intraweek price gyrations. And even the program fund traders seem to be struggling to cope with the volatility generated by the Chinese retail crowd. It's worth emphasising that industrial metal markets have no history of retail investor participation in the West.
Trading on the LME has traditionally been the preserve of professional players, whether industrial or investment. There are exchange-traded base metal funds aimed at the man on the street but they have never matched the popularity of those linked to the price of traditional investor favourites such as gold and silver.
The Chinese crowd, by contrast, seems to have no such cultural inhibitions on what it is prepared to trade. That much is evident by the quick rotation from one commodity sector to another with the only real determinant the relative cost of trading. Nor does the Chinese crowd worry too much about whether it's buying or selling. This time last year it was selling metals such as zinc. This year, the crowd's in bullish mode. Rather, it follows itself, floods of money pouring into whichever contract is moving fastest in the hope of riding the resulting momentum to make a fast buck.
The Chinese contribution to last week's dramatic copper price gyrations was partly overlooked by the Western media's focus on ramifications of the US presidential election and Donald Trump's still vaguely-defined infrastructure plans. This week's zinc action, however, should serve as a reminder that the Chinese trading storm can wash over any commodity at any time.