Copper is a lead indicator for any economic recovery. This base metal is used in everything from homes to factories and electronic gadgets to power generation and transmission and for various other purposes. In times of uncertainty and despondency, it is closely tracked, especially by financial markets.
During the past quarter (Oct-Dec 2019), despite all the gloom around global growth, copper prices have been rising.
Source: LME, Telequote, Ventura Securities Ltd
Before we list out the factors responsible, we should clarify that since China consumes half the world’s copper, any discussion around the fortunes of this metal will tend to pay significant attention to the state of the Chinese economy and its demand for copper.
Factor 1: China’s Purchasing Managers' Index (PMI) is in the positive zone- The Purchasing Managers' Index (PMI) reflects the direction of economic trends in the manufacturing and service sectors of an economy. It indicates if markets are expanding (if the index is above 50), staying the same (if the index is at 50) or contracting (if the index is below 50). Currently at 51.80, the index suggests bullish manufacturing trends in the country and this translates into greater demand for copper.
Source: Trading Economics, Ventura Securities Ltd
Factor 2: Weak Dollar Index trend - The US Dollar Index compares the value of the US Dollar against six strong currencies - namely the Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona and Swiss Franc. It is important for traders, both as a market in its own right and as an indicator of the relative strength of the US Dollar around the world. This index can be used in technical analysis to confirm trends related to Commodities, Currency Pairs and Stocks and Indices.
The Dollar index shares an inverse relationship with commodities, especially base metals like copper.
The technical trend for the Dollar Index, which currently stands at 97, shows that it has broken the channel line and can be expected to weaken further to 95 levels in days ahead.
A weakening Dollar index indicates that commodities like copper are likely to gain in strength.
Source: Telequote, Ventura Securities Ltd
Factor 3: The US-China trade war is likely to end on a positive note for China.
Donald Trump has said he will sign the first phase of a long-awaited trade deal with China on 15 January, in a move that de-escalates the tariff war between the world’s two biggest economies. Further, on 31 Dec 2019, he tweeted that “high-level representatives of China” would attend an official ceremony at the White House, adding he would also be travelling to Beijing for talks on the second phase of the deal. Under the deal, which was announced on 13 December, new tariffs on $160bn (£121bn) worth of Chinese imports, of items such as smartphones and toys,etc., will be suspended. In return, China will agree to buy more US farming products and make fresh commitments to improve intellectual property protections.
With China in a favourable position, the demand for Copper in the country is expected to rise.
Factor 4: Copper imports into China are high and LME inventory is declining. China’s imports rose 12.1% in November 2019 to 483,000 tonnes compared to 431,000 tonnes in October 2019. This is close to 6% higher than the same month last year. China’s rise in imports comes on the back of an unexpected improvement in factory activity last month and is likely to drive the price of copper upwards.
Factor 5: Lower copper inventory in LME and Chinese warehouses - Copper stocks in warehouses in China have been declining since June 2019 and were at 245,500 tonnes at the end of November 2019, the lowest level since at least June 2013, according to Definitive Eikon data. At the same time, copper inventory in LME warehouses also declined. Over the past four months, this figure fell 59%from 337,675 tonnes to 13,8400 tonnes approximately.
Source: LME, Telequote, Ventura Securities Ltd
Factor 6: Copper price on MCX & COMEX FUTURES technically signal a BUY
Technically, MCX copper prices have broken the key trend line resistance on 6th Jan 2019 and we expect the next immediate resistance level to come at 462. Breaking above that level, the price can be expected to head towards 495 to 500 levels over the next one to two months.
Source: MCX, Ticker Plant, Ventura Securities ltd
Comex View:
Technically, COMEX Copper prices look positive too and have formed an Inverted Head & Shoulder pattern. According to the pattern, the price has broken the key neckline resistance level of 2.72 on the weekly charts and we expect it to head towards the target price of 2.95first, above which it can head towards 3.15 to 3.20 levels over the next one month to two-month period.
Source: Teleqoute, Ventura Securities Ltd
Disclaimer:
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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