The big question the market is currently asking is how long Chinese factories will be closed due to the current travel restrictions and extended holiday period. These uncertainties have seen the 2020 outlook for copper suffer a dramatic turnaround. From focusing on a global recovery, not least in China and tight supply the market is now more worried about lack of demand.
These developments have led to copper once again becoming a favored short from macro funds seeking a hedge against a global slowdown led by China. Overall the net position held by hedge funds have been hovering close to neutral during the past few months. So while crude oil’s sharp sell-off has been driven by long liquidation as the focus turned from supply disruptions to demand woes, copper has seen a lot of fresh short selling.
A development that will support a relatively strong recovery – from short covering – once the virus focus fade. While stocks are showing signs of stabilizing copper has only managed to recover one-tenth of the recent sell-off. We have to conclude that more weakness across markets are more likely than not and with that the stock markets first attempt to recover may end up being premature.
From a technical perspective a break above $2.615/lb could signal some additional short covering towards $2.70/lb while further weakness could drive the price closer to key support just below $2.50/lb, an area from where the market bounced on two previous occasions in 2017 and 2019.