December futures give up last week's gains as SCFIS gains lose momentum

After a slow start to the week, the far-month contracts spiked up on Wednesday, with the August contract surging 10% from previous day's close, while December and February saw modest gains of around 1%. By the end of week, the market had largely calmed down and daily turnover slumped by 40%, dipping below $1 billion, while open interest fell by 3.8k lots (-6%).

Last week's 9.7% SCFIS Shanghai - N.Europe increase gave the futures market valuable momentum and pushed the December contract up by almost 200 points. The far-month contracts gained on Wednesday, with the August contract surging 10% from previous day's close, while December and February saw modest gains of around 1%. But by the end of the week that momentum had already largely dissipated as turnover slumped by 40% on Friday, dipping below $1 billion, while open interest fell by 3.8k lots (-6%).

What little positive momentum was still left in the market has disappeared entirely today as the December contract closed 2.66% down. Unlike in previous weeks, this was actually a strong performance at least in relative terms: February futures are down 16%, followed by June, August and April at 12.61%, 10.56% and 10.29% respectively.

The 16% drop in the February contract was backed by new shorts coming into the market, reflecting an increasing conviction among market participants that the November GRI is losing steam already, making a successful December push by liners ever more unlikely.

Throughout the session, shorts dominated, gradually building positions. By the last 30 minutes of the afternoon session, bullish traders appeared to lose patience and began exiting the market, accelerating the price drop.

Longer-dated contracts only caught the market's attention when traders returned in the afternoon following their lunch break, with prices suddenly starting to slide as shorts came into the market aggressively and built up momentum.

Today's SCFIS release is unlikely to improve market sentiment: at +3.2%, the Shanghai - N.Europe sub-index grew significantly less than over the last two weeks (+9.7%, +11.8%), while the trans-Pacific sub-index dropped almost 20% to just 1961.49 points. With little need for capacity on this route, we can expect more of it to shift towards the China-Europe route

In contrast to the SCFIS slowdown, the SCFI index is already moving in the opposite direction: on Friday, the latest European route reading came in at $2481/TEU, down $31 from the previous week, while the West Coast route was down $360.

While hopes for a (partial) ceasefire in the Middle East have been disappointed several times in the past, at the current elevated rates there is more downside risk at this point and should the SCFIS follow the SCFI down in the coming weeks we could see a continuation of today's downwards trend.

For more futures market news, you can follow my colleague Matt Huang, our Head of Research, on LinkedIn to receive daily market updates or email me if you would like to have a chat or exchange views.

Our partners at Linerlytica recently launched a regular in-depth INE EC market update with plenty of additional detail and insights into what's happening on the China-North Europe route.

Best regards,

Vincenz