Head of Commodity Strategy
Summary: HG copper has now rallied by close to 20% since the March collapse. In the process it has reached key resistance at $2.50/lb. A break may attract fresh buying, not least from hedge funds who have only just managed to reduce their exposure from short to neutral
What is our trading focus?
COPPERUSJUL20 - HG Copper
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HG Copper continues to challenge key resistance around the $2.50/lb. The general risk-on currently sending most asset classes higher and gold and Japanese yen lower, has together with the steady revival of copper-intensive activity in China and the weaker dollar been supporting the rally.
Hedge funds according to my weekly COT update have only just returned to a neutral position and they are likely to start rebuilding a long position on a break above the mentioned level. A level which coincides with a 20% recovery and with a break attracting media comments about copper having returned to a bull market.
From the peak of despair in mid-March exchange-monitored copper inventories have declined by 165,000 tons or 26%. While COMEX in New York and LME in London both have seen rising inventories, the reduction has all come from China where stocks monitored by the Shanghai Futures Exchange have dropped by 235,000 tons or 62%.
Economic data from China has improved but we remain skeptical that the reduction has only been driven by industrial demand. Recent reports from China have shown renewed demand from commodity traders hoarding tangible assets such as metals. Whether the hoarding is driven by speculation about a weaker currency or other economic developments remains unclear. It does however create the impression of increased demand with stocks being moved to unmonitored warehouses.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
