How to trade a virus in commodity markets

TD’s commodities strategy team focus on the impact on Chinese commodity demand resulting from the Wuhan coronavirus outbreak in this note. They say that according to their real-time commodity demand indicator there are reasons to believe that the market has already priced in the observed impact on commodity demand, and in fact, the slump in copper prices exceeds what would typically be warranted given the observed impact. Indeed, TD Securities says the mosaic of evidence continues to point towards a balance of risks which is asymmetrically tilted towards the upside for copper prices. They cite the differences in positioning between the TD China Smart Money funds — whose first day trading following the Lunar New Year saw SHFE copper trade in limit-down — but where investors have continued to modestly add to their copper length. This warrants attention, says TD, because those Chinese funds may have an informational advantage, given that they have “boots on the ground” and skin in the game, and maybe fading the fear factor. This is in stark contrast with comex positioning, which has reflected a sharp decline in positioning over the past two weeks — which lends strength to TD’s view that the commodity sell-off could be overwhelmingly attributed to the massive selling program initiated by CTAs, which had an outsized impact on prices given the lack of liquidity.