Has copper turned into a surprise circuit slugger?
Copper, along with other risk assets, bounced from the lows in October, when the S&P 500 got down to 3600. Since then most assets have rallied -- including gold, silver and bonds. But something happened at the start of this year, when the London Metal Exchange's three-month copper prices shot from $8,200 per ton to squeeze higher above $9,000 a ton, taking it all the way to $9,300 ton. The charts suggest some traders were caught on the wrong foot and were forced to cover. Judging by the move across the board in risk assets -- especially in Chinese indexes and the emerging markets -- the talk of the town is of a Chinese recovery, and we know Dr. Copper is one of the best entities to play that theme.
Let's see what's happening with the red metal and what it means for investors.
Speculative funds and managers have accumulated long positions on the CME Group copper contract, increasing positions by 32% to 65,703 contracts, according to a recent traders' report. The resulting price surge has forced shorts to cut outright short positions, from 40,807 contracts down to 36,907. According to Citigroup research, the same phenomenon occurred in the London Metal Exchange, with some $3 billion worth of short potions that may have gotten hurt, too.
As the year started, most sell-side analysts' notes have pretty much penciled in a recession this year, possibly around the second half. The recession is not up for debate, but the extent and duration of it is. Of course, looking at the markets from a macro perspective, if there is indeed a recession, a cyclical commodity like copper is sure to get hit. Hence, the short positioning. But we also know that if the position is too one-sided on any single view, prices tend to move in the opposite direction catching everyone out. Think 2022 here.
China had remained closed for almost two years, so any signs of a reopening is bound to be positive for the world's second largest economy. The reopening is not debatable, but the extent and duration of it is. But the market is effectively getting ahead of itself, as it is too scared to miss the bottom and chasing all things "China related." The China reopening will not be in a straight line as China still has a lot of domestic issues to resolve and their focus is more on the domestic consumer than on infrastructure growth. Since December China has announced some infrastructure projects to help its ailing property sector that was almost close to collapsing last Fall. Providing loans to developers and boosting infrastructure is surely the best way to offset its massive GDP decline. But the bigger question remains, is China changing its stimulus policy or is this just to stem the decline?
As asset allocators come back to the market and see most research notes talk about "value" in China, this seems to be adding to the momentum higher. But, remember, just because an asset is cheap does not necessarily make it right to buy -- timing is everything as know from 2022. The People's Bank of China has been very active in the first few weeks injecting liquidity to boost markets into their new year holiday. In a quiet tape, this can have an outsized impact. Liquidity is a very important factor that can distort fundamentals for some time. Investors should refrain from fitting a narrative to a price move, instead focus on picking a narrative and being positioned for that price move.