Copper continues to make new highs and is now at its strongest level since February 19, driven by vigorous demand from China.
Like iron ore, demand is strong, whilst mine closures caused by Covid-19 have restricted supply. This means previous predictions of a surplus are likely to be erased, creating an unexpected V-shaped recovery. In response, Goldman Sachs has raised price estimates after demand from construction and infrastructure exceeded even its most optimistic projections (Source Bloomberg).
A week ago, questions were being asked about how the rest of the world will follow China as it emerges cautiously from respective pandemic peaks. Little has changed: civil unrest is still rife, Brazil remains the COVID-19 epicenter, whilst neighbouring countries continue to try to stop civilian movement and the spread of the disease. However, the drop in Chinese steel exports with a jump in imports in May has highlighted that world’s largest country by population, is committed to its economic expansion progamme.
Expectations outside the commodity sector remain high too. An outsider looking in without knowledge of recent events would probably be looking at the S&P 500 and wondering if the world is going mad. Stock markets fell out of bed, the world has seen an economic contraction, yet everything remains the same value.
Is this possible without seeing some form of market counter-move in the future?
For copper, whose price is back to its five-year mean value, it could be that it is targeting its three year mean (USD 6,150/ton) or higher, driven by the Chinese demand. What it is saying is that – rightly or wrongly – economic contraction is not going to last, suggesting the doom and gloom merchants predicting 7 years for employment recovery could be about 6 years off target.
However, it also highlights just how overvalued the U.S. stock market is compared to its historical mean values. The US has yet to emerge from the pandemic and people are already wondering – could the U.S. economy catching a cold be worse for global economic recovery then the Pandemic it is currently suffering?
World markets are rallying on Chinese stimulus and optimism that the west will see the same degree of economic recovery. If not, then the trader’s expression ‘buy the rumour’ will go from fable to folklore. (FIS)