Commodities weekly: Liquidity stress and deleveraging weigh on sentiment

Macro backdrop: labour weakness and risk-off psychology

On the macroeconomic front, US data over the past week leaned increasingly toward weakness, particularly within the labour market. While some service-sector indicators remained resilient, a series of disappointing jobs reports and a rise in layoff announcements unsettled investors and the result was a renewed bout of risk-off positioning across financial market.

Equity markets reflected this shift. Nasdaq suffered a near 5% decline, with weakness concentrated in parts of the market that had previously been treated as safe growth havens. A notable rotation continued out of SaaS-focused software and services stocks and into semiconductor and hardware names, reinforcing the sense that investors were reassessing the impact of AI investments on valuation risk and earnings durability.

At the same time, cryptocurrencies experienced an accelerated sell-off, with Bitcoin tumbling around 22% over the period. Beyond the direct losses, the crypto slump raised concerns about contagion into other markets, particularly where leverage and derivative exposure overlap with more traditional assets.

Plumbing before fundamentals

While fundamentals still matter, the defining feature of the past week was stress in market plumbing. Elevated volatility triggered higher margin requirements, thinner liquidity, and a rapid increase in non-discretionary selling. In such an environment, assets are often sold not because their outlook has changed materially, but because they are liquid, crowded, or both.

The precious-metals complex provided a textbook example. Extreme price swings prompted accelerated deleveraging across futures, ETFs, and related derivative structures. Heavy liquidations in tokenised silver products fed directly into selling pressure in COMEX futures and physically backed ETFs, exacerbating downside momentum.

Options markets also played a role. The earlier surge in retail call buying had left option sellers with significant long-delta exposure. When prices reversed sharply and volatility spiked, the need to adjust hedges amplified selling pressure, turning what might have been a correction into a cascade.

Industrial metals: copper’s rally challenged by softening micro fundamentals

Industrial metals traded softer with the BCOM Industrial Metal Index down around 5.5% amid broad-based weakness. Copper remained in focus, given its central role in the energy transition and ongoing concerns about the medium-term supply outlook. Prices fell around 6%, with the High Grade futures contract slipping back below USD 6 per pound after having been one of the most in-demand commodities earlier in the year. While risk-off sentiment and deleveraging were key drivers, copper’s retreat was also reinforced by a softening in micro fundamentals.

Visible inventories have been rising across exchanges, easing concerns about immediate supply tightness. In London, the spot market remains in contango, signalling reduced urgency to secure nearby material. At the same time, Yangshan premiums in China have weakened ahead of the Lunar New Year holiday starting on 15 February, reflecting softer near-term demand.

Taken together, these signals suggest that copper’s strong rally had run ahead of short-term fundamentals, leaving it vulnerable once liquidity conditions deteriorated. The episode serves as a reminder that crowded trades, even when supported by constructive longer-term narratives, can unwind quickly when positioning becomes stretched.

Platinum followed a similar path, suffering a roughly 37% peak-to-trough slump amid inferior liquidity and concentrated positioning, again highlighting how market depth can dominate price behaviour during stress events.

Crude rangebound while natural gas concludes a historic roller coaster ride

Energy markets, with natural gas the notable exception, proved relatively resilient. Brent crude continues to trade near the upper end of a broad USD 60–70 range, with the ebb and flow of geopolitical risk premiums acting as the primary short-term driver. Developments in the Middle East and ongoing US–Iran tensions remain central to price formation, but the market has so far been reluctant to price in a sustained supply disruption.

This range-bound behaviour reflects a balance between geopolitical uncertainty and global demand growth on one hand, and a still well-supplied market on the other, despite sanctions against Russian exports and early signs that US production growth may be starting to taper off. Until there is clearer evidence of either a meaningful supply shock or a decisive change in supply and demand expectations, oil prices are likely to remain volatile but largely directionless within established boundaries.

The front-month Henry Hub natural gas future concluded a two-week rollercoaster, with prices surging to near USD 8 per MMBtu ahead of the recent winter storm, only to collapse back towards USD 3 per MMBtu as the front-month contract rolled from February into the early spring March contract. The short-lived cold snap drove the largest weekly withdrawal on record from underground storage to meet surging demand, compounded by a weather-related drop in production.

Agriculture: Trump's remarks lift soybeans; coffee slumps

Grains were a notable outlier in an otherwise defensive week, with soybeans the only commodity posting a meaningful gain. Prices briefly reached a two-month high before paring advances amid ample global supplies. The initial rally was triggered by remarks from President Trump suggesting China would buy more US soybeans in the coming months. However, from a purely economic perspective, supplies from Brazil – the world’s top producer and exporter – remain significantly cheaper during the country’s peak export season, potentially limiting the scope for sustained Chinese demand for US-origin beans.

Arabica coffee, a top-five performer last year, slumped close to 12% over the six-day period covered in this update, hitting a six-month low near USD 3 per pound. Brazil’s 2026 coffee production is seen at a record 66 million bags, according to the country’s national supply agency Conab. Prices have fallen nearly 25% since reaching a record high last October and, much like cocoa – which traded above USD 10,000 per tonne a year ago before collapsing to near USD 4,100 – elevated prices last year encouraged producers to expand acreage and renovate older crops.

What to watch

Looking ahead, several factors will determine whether the recent correction stabilises or deepens. Key US macro releases, particularly labour and inflation data, will shape risk sentiment. In commodities, signs that volatility is subsiding and liquidity conditions are improving would help restore more orderly price discovery. From a metals demand perspective, both industrial and precious, China’s upcoming Lunar New Year holiday – which sees key exchanges closed for more than a week – may weigh on prices as traders and speculators reduce exposure ahead of an expected seasonal pickup in early March.