Following a week of copper markets in turmoil, it seems LME has steadied. Whilst that is good news in itself, the Shanghai market is continuing to decline. At the beginning of February the Shanghai copper market was around USD50/t ahead of the LME, now (only 6 weeks later), we find the Shanghai market trailing by USD486/t. This difference highlights the lack of demand in Asian financial markets which is closely aligned to the physical market and is the greatest difference available on my records that go back to August 2009. The second biggest difference was in September 2012. (USD201/t).
**** Explaining Arbitrage ****
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For instance, an arbitrage is present when there is the opportunity to instantaneously buy low and sell high.
In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may refer to expected profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (such as fluctuation of prices decreasing profit margins), some major (such as devaluation of a currency or derivative). In academic use, an arbitrage involves taking advantage of differences in price of a single asset or identical cash-flows; in common use, it is also used to refer to differences between similar assets (relative value or convergence trades), as in merger arbitrage.
People who engage in arbitrage are called arbitrageurs —such as a bank or brokerage firm. The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives, commodities and currencies.
**** Ignore copper meltdown at your peril: SocGen bear Edwards ****
By: Matt Clinch (Assistant Producer, CNBC.com)
Investors who believe copper’s recent price decline is limited to China are on the “path to ruin”, warned Albert Edwards, Societe Generale’s uber-bearish strategist. “The creaks and groans in the copper price reflect the sound of the tunnel supports giving way,” he wrote in his latest research note on Thursday. Edwards went on to warn that central bank liquidity won’t come to the rescue of any foolhardy equity bulls.
“Decoupling” – the term used by traders to describe how developed economies are insulated from shocks in emerging markets and commodities – ranks as the “most dangerous single word in finance”, according to Edwards. The slump in metal prices is not just due to some temporary local difficulties in China and these lower commodity prices will not boost consumer purchasing power in developed markets, he added. ”Do not rely on decoupling. Do not rely on central bank liquidity. Do not reply on hope. Hope is a false friend in these markets,” Edwards said.
Prices of copper – the industrial metal used to make everything from cars to houses – have declined this week to a near-four-year low. The slide began as reports detailed how the bulk of China’s copper imports are used as collateral, coming at a time when China’s government looks increasingly likely to allow more defaults. A loan default would therefore liquidate the copper stash, flooding the market with more of the metal, and prices have been sent lower in anticipation. Weak trade figures also weighed on the metal which is often seen as a gauge for the health of the global economy – hence its nickname “Dr Copper”. For investors it has become increasingly difficult to separate how much copper imports are due to “real” industrial demand or how much is due to financing activities.