Head of Commodity Strategy
Summary: While global stocks are trying to recover we maintain a close focus on copper and other pro-cyclical commodities. This in order to gauge the short to medium term economic impact of the current virus outbreak.
Despite seeing a continued rise in the number of coronavirus cases in China and abroad global stocks, led by the U.S. have once again managed to shrug off the apparent risk to global growth and demand. While Commodities meanwhile tell a different story and the question remains which one is right. China, representing a major share of global growth is currently being challenged with the travel ban, extended holiday and factory closures all pointing towards a period of weakness.
Once the virus outbreak is brought under control the Chinese government will undoubtedly step up its efforts to boost the economy through increased spending on infrastructure and major projects. Until then several commodities deriving a big chunk of their demand from China are likely to be watched closely in order to gauge the short to medium term impact on the global economy.
Apart from crude oil and iron ore, copper is one of the key commodities to watch. The table below from Bloomberg highlights why that is. China accounts for close to 50% of global copper usage and since the virus began receiving increased attention the price has slumped by 10% thereby triggering the worst stretch of declines in decades.
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.
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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.
