Chinese Copper Conundrum
Analyst Andreas Steno has been eyeing China's massive copper reserves for months. The key question: Why is China hoarding so much copper on its exchanges? Theories range from strategic reserve building to a plummeting demand in China's economy. Either way, the situation looks bleak.
Charts reveal that Chinese copper stock levels are sky-high, pointing to one of two scenarios: either China is inexplicably keeping copper on exchanges, or the country’s copper consumption is nosediving. The latter seems more likely, with no signs of a rebound in Chinese construction activities, which historically consume up to 30% of China's copper.
Commodities: Rolling Melt-Ups and Liquidity Games
According to Steno, the metals market has seen rolling melt-ups in commodities like uranium and cocoa, driven by excess liquidity. Despite the Federal Reserve’s Quantitative Tightening (QT) efforts, liquidity remains robust, thanks to various financial maneuvers. This trend is mirrored in the UK, where QT efforts are countered by the Bank of England's (BoE) liquidity measures.
While liquidity trends look bullish from July onward, weak credit card data in the US and UK raises red flags about end-user demand. With job reports indicating rising unemployment and softer consumption, the labor market could further weaken, challenging the optimistic liquidity outlook.
Commodities and Metals: Cluster Risks in July
Steno remains bearish on copper and silver, while bullish on natural gas due to its more favorable cycle and supply narrative. The bullish copper narrative, driven by expectations of Chinese demand, appears increasingly oversubscribed. If China was truly building strategic reserves, the copper should be leaving exchanges, but it isn’t.
As we approach July, Steno predicts a significant impact on copper prices, potentially moving into extreme contango between July and September deliveries. This misalignment could trigger a severe correction in copper prices, spelling disaster for those holding long positions.
FX and Rates: Strategic Bets
In the FX market, Steno advises caution against the USD, particularly in regions with limited rate hike flexibility, such as China and Japan. The EUR seems promising, driven by cyclical improvements in Europe. Mexico also stands out as a strong trade balance play amid shifting US-China trade dynamics.
Despite ongoing speculation for lower interest rates in the US, evidence suggests current rates aren’t overly restrictive. Economies like Sweden and Canada show potential for rebounds with stable rates, indicating that a rate stability spark could ignite broader economic recovery.
Equities: Preparing for a Rally
Equity markets have softened recently, with outflows from materials and industrials. Steno remains short on utilities, expecting a market rally fueled by positive liquidity conditions in July. However, for this to happen, the Federal Reserve needs to maintain an easing bias in the upcoming June meeting.
The Bottom Line
July could be a game-changer for the metals market. With liquidity trends looking positive but underlying demand shaky, investors should brace for potential volatility. Stay informed and cautious as we navigate this unpredictable landscape.
For more detailed insights, read the full analysis by Andreas Steno on Steno Research.