Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Yuan strength drives copper to a two-year high
Ole Hansen
Head of Commodity Strategy
Summary: Copper has following a short-lived correction resumed its ascent and today reached the highest level in more than two years. The rally has despite softening fundamentals, been supported by a stronger Yuan and supply disruptions at mining operations in Chile. The longer-term outlook remains supportive as the green electrification agenda gathers momentum.
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HG Copper - COPPERUSDEC20
COPA:xlon - WisdomTree Copper ETC (UCITS eligible)
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Copper has following a short-lived correction resumed its ascent and today reached the highest level in more than two years. While precious metals led by gold continue to look for drivers to ignite some fresh life into a stalled rally, HG copper has swiftly returned to break above the September high at $3.1210/lb.
Recent and current developments supporting copper:
- Strong Chinese demand and global monetary stimulus
- Lundin Mining suspending operations at mine in Chile due to strike actions
- The Yuan rally which has taken it to the highest since July 2018 against the dollar
- Stimulus negotiations in Washington
Longer-term developments:
- A Covid-19 vaccine fuelling a Western demand recovery
- A sizable deficit next year as the green electrification agenda gathers momentum
- A weaker dollar and rising demand for reflation hedges.
The latest leg in copper’s rally has been driven by a surge in China’s yuan to the highest since July 2018. As the metal rally buyers in the worlds largest commodity consuming nation can afford to pay a higher price. A rising interest rate differential between the dollar and yuan together with China’s continued recovery from their Q1 virus outbreak may continue to support this trend beyond the U.S. election in two weeks time.
It is however interesting to note that the latest rally has occurred despite rising fundamental headwinds. Inventories at exchange-monitored warehouses, especially those controlled by the London Metal Exchange, has recovered to 183,000 tons from a recent fifteen-year low at just 73,500 tons. This development has seen the spot versus the 3-month spread on LME rise to the biggest contango since June, a sign that the market remains well supplied.
Speculators meanwhile returned as buyers of HG copper following what turned out to be a shallow 9% correction in early October. In the week to October 13, the net-long jumped by 15% to 80.5k lots, not far from the late September peak at 87.3k lots which was the highest since early 2018.
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