Copper: BUY case brewing
Copper price action has been strong in recent weeks. In particular, the price has rallied 24% since its early August lows, and is now testing a key resistance level (its late June lows, see fig 1). That move higher has been especially impressive, given growing concerns over the Chinese economy. Indeed, while copper has rallied, Chinese equities have sold off (e.g. CSI 300 down 9% since the July highs), while 1 & 2 year Chinese bond yields have moved sharply lower.
The key question therefore is: Will the uptrend continue? Or was recent strength merely a bounce within an ongoing bear market?
From a macro perspective, the debate is finely balanced. The bull argument, though, is that: In the absence of a US/global recession*, plenty of ‘bad news’ about China is now in the price, while the Fed and other global central banks are embarking on a new cycle of rate cuts. At some stage, markets will start to price the impact of that policy loosening, if they haven’t already. Indeed, as well as the recent rally in copper, other cyclically sensitive asset prices have begun to move higher. That includes recent strength in oil (e.g. with Brent crude up 8% in the past two weeks). It also includes rotation within the equity market (e.g. with US small caps starting to outperform large cap tech).
From a positioning, technical & sentiment perspective, the ‘copper BUY case’ is brewing. In particular, net LONG speculative positions in copper have significantly unwound (see fig 1a). That highlights some fuel for a rally in copper (albeit it’s possible that positioning first turns bearish/‘net SHORT’). Elsewhere medium term technical models are mid-range, having recently been close to BUY (see fig 1c). In that sense, technical and macro factors are starting to align.
*Please see recent Longview research for detailed analysis of US recession risk.
Fig 1: Copper candlestick futures, shown with 50 & 200 day moving averages
Fig 1a: Copper net speculative positioning vs. copper price (US$/lb)
Fig 1c: Copper market timing model vs. copper price (US$/lb)
