Copper

The CCP is poised to roll out a re-boot of China’s economy that will focus on its comparative advantage in the processing of base metals – particularly copper – and the export of metals-intensive products like EVs. The re-boot will emphasize deeper policy coordination to revive construction, manufacturing, exports and renewed efforts to attract and retain FDI. This will be bullish for commodities – particularly conventional energy and metals – as funding flows to SOEs.

Tight monetary policy will suppress copper capex. Loose fiscal policy, which is lavishing stimulus on energy and defense firms, will stoke copper demand. Constrained copper supply and turbo-charged demand will feed into headline inflation. If the CCP adopts large-scale monetary stimulus to break its liquidity trap, inflation pressures will rise. This global policy mix will bolster oil and gas demand well beyond the 2050 target for net-zero emissions, given the long lead times to bring new copper supply online. We remain long the XOP and XME ETFs, and the COMT ETF to retain exposure to tightening supplies and rising demand for copper and oil.

Stay defensive in the second quarter. We can see a narrow window for risky assets to outperform but we recommend investors stay wary amid high rates, supply risks, extreme uncertainty, peak polarization, and structurally rising geopolitical risk.

The development of trading blocs and the rise of economic warfare will lead to the inefficient allocation of resources. Higher fiscal outlays and tight commodity supplies will feed into energy prices driving headline inflation. It also will drive demand for inventories as hedges against supply volatility globally higher. We remain long equity exposure via ETFs to oil and gas producers, and metals miners. We also retain our exposure to commodities via the COMT ETF.

The Chilean economy is entering a recession. Inflation will drop rapidly and the central bank will cut rates meaningfully in H2 2023. We continue to recommend a structural overweight across Chilean risk assets on the basis of falling inflation and local yields, record cheap valuations, and dissipated political volatility.

The tempo of China’s and the US’s military operations is picking up sharply. The risk of a sudden, perhaps unintended, escalation of military conflict, therefore, is rising in the South China Sea. So is the risk of another shooting war in the Middle East. Against this backdrop, China’s reopening, marginally stronger GDP growth, and massive fiscal stimulus to support renewables and defense is being rolled out. In states with high debt-to-GDP ratios like the EU and US, the risk of fiscal dominance is rising, and with it higher inflation. We remain long the XOP oil and gas ETF; the XME metals and mining ETF, and long the commodity COMT ETF to hedge this risk.

Copper prices are vulnerable to the downside in the coming months on a narrowing global supply-demand deficit. We expect that copper prices will plummet by 15-20% from the current level. However, the lingering structural supply deficit will put a floor under copper prices after this correction.

CCP policy stimulus will boost growth in China this year. Copper prices breached $4.00/lb on COMEX this week, as expected. We continue to forecast $4.50/lb this year, with upside price risk dominating. Iron ore also will rise, but economic and regulatory policy uncertainty clouds the outlook. We remain long the COMT and XME ETFs. We are getting tactically long BRL/USD and AUS/USD on the back of our metals view, which is constrained by China’s reversion to absolute autocracy and ability to reverse policy suddenly and unpredictably.