From the end of November to the beginning of December, the volatility of global financial markets has been magnified again, which is mainly caused by two factors: first, the tightening of the monetary policy of the Federal Reserve, the rise of the risk-free interest rate of the US dollar and the re-pricing of equity assets such as US stocks; Second, a new variant of NCP, “Omicron”, spread rapidly around the world for a short period of time, resulting in a decline in market risk preference and the expectation of global supply chain disruption and demand cooling down again. From the copper market, there is no similar pattern of supply and demand fundamentals in history: The global low copper inventory pattern is continuing, but the downstream demand remains weak, the spot market has no market price; STAGFLATION stimulates investment demand for copper and dampens consumer demand; monetary tightening dampens investment but not consumer demand; the epidemic dampens capital spending and copper supply recovers slowly.

Looking ahead, Omicron poses another crisis to the global supply chain, increasing pressure on global industrial and consumer prices, and accelerating the pace of monetary tightening by the Federal Reserve, which will eventually lead to a continued cooling of investment demand for copper. And consumer demand, high raw material prices and end-product prices lead to copper consumer demand is also facing downward pressure. Even if the supply of copper is tight, high copper prices or it is difficult to resist the “Price of non-market”pressure. Although omicron has emerged in many parts of the world, the market has expressed the view that it could slow the pace of monetary tightening at the Federal Reserve, as the outbreak would increase downward pressure on the economy. However, from a medium-term perspective, I believe that Omicron may exacerbate the global supply chain crisis, making supply constraints difficult to alleviate for a longer period of time, and high inflation will continue, this would lead to faster monetary tightening by central banks such as the Federal Reserve. Why not think that central banks such as the Fed are easing again? The author believes that the current global economic recovery is basically over and the epidemic has reduced the potential growth rate of the global economy. It will take technological revolution and innovation to return to the growth platform before the epidemic in the future, but these two driving forces are lacking at present, but the market expects the new energy revolution to face the short-term restriction of the energy crisis, and the future development path is still uncertain.

On November 30th Powell, the chairman of the Federal Reserve, and Yellen, the treasury secretary, appeared before the US Senate Banking Committee for a quarterly hearing. On the one hand, Powell said there was an increased risk of further increases in inflation, the threat of persistently high inflation is also on the rise, with price increases linked to supply chain disruptions caused by the new pneumonia outbreak, “We have ignored the severity of the supply side problem on inflation and it is time to drop the word ‘temporary’on inflation.”. On the other hand, Powell also expressed surprise at the sideways adjustment in the U.S. labor force participation rate, which may be largely related to the epidemic, that it will take longer to restore the labor force participation rate, and that the risk of rising inflation is the risk of restoring full employment, that means Powell thinks the risk of rising inflation could hamper a return to full employment. Affirming the continuing strength of the U.S. economy and continued improvement in the labor market, Powell pledged that the Federal Reserve is “Committed to achieving price stability objectives”and will use tools to support the economy and the labor market, and “Prevent higher inflation from becoming entrenched”. This means that the Fed is increasingly inclined to curb inflation, which needs to be brought down first to achieve full employment.

In addition, Powell noted that the omicron variant is a risk that can not be assessed and has not yet been included in the Fed’s projections, and that more information about the variant will be available in the next five to 10 days, we’ll have more details in a month. This means that if the omicron mutational virus exacerbates the global supply chain crisis, it could cause the Fed to factor the inflation impact of Omicron into its monetary valuation system, the need for the Fed to raise interest rates ahead of schedule has risen further. As for the copper market, I believe that the recent drop in copper prices is more a reflection of investment demand due to the Federal Reserve’s tightening of currency cooling expectations, weak consumer demand for copper, and the availability of copper for circulation is also not much, double Weak Supply and demand pattern is still continuing, copper prices are currently falling slowly. The caveat is that as dollar real interest rates continue to rise and rise above zero, there will be a large outflow of copper held by speculators, which could alter the supply structure and put further pressure on prices. The data showed a rapid flattening of the treasury yield curve, both representing faster gains at the short end of the yield curve than at the far end, indicating a sharp increase in interest rate expectations. The 10-year TIPS yield, which reflects the dollar’s real interest rate, remained low at-1.01% as of December 2, and the Fed’s monetary tightening has not yet triggered a threshold for real interest rates in the dollar. With the Fed raising interest rates ahead of schedule, the upside potential for real dollar interest rates far outweighs the downside risk.

China’s official manufacturing PMI rose 0.9 percentage points to 50.1 percent from the previous month, according to National Bureau of Statistics of the People’s Republic of China data on Nov. 30. But looking back at 2015 so far, the manufacturing PMI was relatively weak in November, just above its level in the same period in 2015 when China’s economy was undervalued. November was a busy Christmas season for overseas consumption, and exports led to a seasonal pick-up in the manufacturing PMI, but this year domestic demand has been weak, while external demand has led to a weak pick-up in the manufacturing PMI. There were several reasons for the rebound in the manufacturing PMI in November. First, supply constraints eased, reflected in the relaxation of dual control of energy consumption and power rationing measures. The production index rose sharply by 3.6 percentage points in November from the previous month, but still below 2019 and 2020 levels. The energy-intensive sector was 47.4 per cent in November, up just 0.2 percentage points from the previous month. The PMI for high-tech manufacturing, equipment manufacturing and consumer goods industries was 53.2% , 51.7% and 51.4% , respectively.

Second, demand appears seasonal pick-up, mainly overseas Christmas brought by strong export demand. The new orders index edged up 0.6 percent in November from a month earlier, while new export orders rose 1.9 percent. Over the past five years, the index of new export orders rose month-on-month in every November, and in four years the index of new orders rose month-on-month. However, domestic demand remained insufficient, with the proportion of enterprises in the manufacturing sector that reflected insufficient market demand rising 4 percentage points from the previous month to 37.6 percent, while in the non-manufacturing sector, the proportion of non-manufacturing companies reflecting insufficient demand remained at a high level of 46.2 per cent, up 1 percentage point from the previous month. Third, industrial prices fall in the case of the downstream staged replenishment. In November, raw material and finished goods inventories rose 1.6 percent and 0.7 percent, to 47.9 percent and 47.7 percent, respectively, from the previous month. However, the rebound in the finished goods index was faster than the increase in the raw materials index, which means that the enterprises’finished goods inventory may be partly due to the accumulation of stocks in the market, rather than a demand-driven replenishment.

Is the rebound in the manufacturing PMI sustainable? The author believes that the strength of the rebound is weak and the sustainability is insufficient, due to the following reasons: first, the rebound in overseas orders is seasonal, and after Christmas and the outbreak of the “Omicron”mutation virus, exports may face delays, the rebound in external demand is not sustainable. Second, the high level of raw materials continues to squeeze industrial profits, while the Cheung Kong Graduate School of Business’s BCI sales outlook is lower than in October, implying a poor outlook for end consumption; Third, the sub-index Employment Index and the index of production and operation activities are expected to remain low. Real estate financing improved, but effective to boost sales, on the one hand, real estate financing environment has improved, residential mortgage lending rates have warmed up. Data monitored by the Shell Institute showed that the mainstream first home mortgage rate in the 100 cities was 5.69 per cent in November, down 4 basis points from October, and the second home mortgage rate was 5.96 per cent, down 3 basis points from October. The average lending cycle in November was 68 days, five days shorter than the previous month. In proportion, about 30 per cent of the 100 cities cut their mortgage rates in November, a wider cut than last month. It mainly covers the Yangtze River Delta Economic Zone, Guangdong-hong Kong-macao Bay area, such as the Yangtze River Delta Economic Zone Jiaxing, Yancheng, Huzhou, Nantong, Jinhua, Shaoxing, Guangdong-hong Kong-macao Bay Area Huizhou, Dongguan, Foshan, Zhongshan and so on.

On the other hand, recently, many people heard the news of mortgage easing, but the new construction and sales area of real estate boost remains to be seen. On the one hand, there is a large backlog of loans; on the other hand, the landing of the policy will take some time. The backlog in the housing market, according to October mortgage data, is not expected to ease until at least the first quarter of 2022. At present, the real estate industry is not facing a simple capital problem, take the land, sales, customers, loans and even homogenized product competition are under pressure. The reason for the rebound in prices of real estate-related building materials, such as screw threads and glass, has much to do with market expectations. In fact, the improvement in demand for building materials may come more from infrastructure investment, the future real estate maintains the low speed moderate growth is the relatively stable development path. However, the strength of infrastructure investment is limited, because the former local government debt rate has been close to the warning line range, in order to control debt risk, special debt is difficult to maintain early high growth. And because of the lag of land income, local land income is expected to decline next year. But the land income is the special debt repayment important fund source, the land income decline restricts the special debt scale expansion.

Copper “Weak supply and demand”pattern is continuing, supply is still tight, from the copper spot price difference and the spot price premium, is still at a high level. The data showed that as of December 2, the basis difference between the Yangtze River market and the spot market was 1,390 Yuan/ton and 1,250 Yuan/ton, respectively, with the average spot premium of 600 Yuan/ton and 430 Yuan/ton, respectively. Why has copper supply been slow to recover? On the one hand, the epidemic may affect China’s imports of copper concentrates, anode copper and refined copper. On the other hand, the rough copper processing fees have dropped slightly, which means that the slack in the supply of scrap copper has decreased, and the lower reaches of the copper price warmer in the case of a staged replenishment. Copper consumption is uneven, but overall is relatively mild. In terms of copper rods, China’s copper rod production fell to about 1.7 million tons in October, down 12.3 percent from a year earlier. In addition, copper rod processing fees remained generally stable in November, with a slight pick-up again in early December, the seasonal slack season becomes more pronounced in December. As of December 2,8mm copper rod processing fees were down 10 Yuan/ton from the end of November to 590-790 Yuan/ton, according to data from the Asia Metal Net survey. However, due to high copper prices, copper rod scrap consumption is relatively good, lithium battery copper foil consumption continues to be strong. According to SMM, the operating rate of copper foil enterprises in 2021 was 85.46% in October, down 1.31 percentage points from the previous month. The decline in copper foil production in November was mainly due to the impact of the limited film, which is expected to pick up in November.

Market Research, taken together, we now face a macro environment more complex than any time in history: first, the global economic growth slowdown and high inflation coexist, unlike the stagflation caused by the man-made Energy Crisis of the 1970s, the current high inflation is mainly due to the supply chain problems caused by the external shock of the new Crown Epidemic; Second, the Energy Crisis and energy co-exist, however, in the process of energy transformation, the instability of new energy sources has led to an increase in the consumption of traditional energy sources. Third, global monetary policy has been tightened due to high inflation, but downward pressure on the economy has returned, the risk of stagflation leading to a new recession is rising. High inflation in the supply chain, while driving up the price of raw materials, is also inhibiting the expansion of demand. Even monetary easing will not stimulate demand in the future, further monetary easing would lead to higher inflation, which in turn would restrain consumption growth. Although the most likely scenario is a third, a growing number of vaccine manufacturers are reporting that existing vaccines do not work well against omicron, according to available data, this means that, while the impact of omicron on the number of new infections and severe mortality rates is not yet clear, it could lead to the tightening of the embargo measures by states and to increased distortions in supply chains and labour markets, in turn, the economy from the current “Stagflation”direction to “Recession.”.

For the copper market, I believe that the recent decline in copper prices is more a reflection of investment demand due to the Federal Reserve tightening currency cooling expectations. Copper supply is tight, but consumption is also restrained by high prices, high copper prices in the future or difficult to resist “Price-free”pressure. The caveat is that as dollar real interest rates continue to rise and rise above zero, there will be a large outflow of copper held by speculators, which could alter the supply structure and put further pressure on prices.

 Source: POSǒNG  Boseong Futures, by Cheng Xiaoyong

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