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Copper Traders Are Net Long. That’s a Good Sign for the Red Metal.

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This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron's.

Keep an Eye on Dr. Copper

Chart in Focus
McClellan Financial Publications
June 8: “Doctor Copper” has long been held in high repute as an economic expert. This week we compare the Institute for Supply Management’s index (PMI), which offers a glimpse into manufacturing activity in the U.S., with copper futures from the weekly Commitment of Traders (COT) Report, published every Friday by the CFTC. Commercial traders use the subject commodity in their trade or business. Right now this group of traders is net long to a pretty large degree, which means that they think copper prices are low and worth locking in.

When the commercial traders are net short copper futures in a big way, that is a pretty good topping sign for PMI. As the economy weakens, those traders move from net short as a group to net long, and the PMI follows that path lower. The nice thing about this relationship is that the COT Report data come out weekly, whereas the monthly PMI data are released with a lag. So we can get a clue about what the PMI data are going to look like...

The implication of the big net long position that the commercial traders are holding now in copper futures is that we ought to see a price rebound for copper, part of a rebound for the economy, and that should eventually show up in the monthly PMI numbers...

Seeing the smart-money traders skewed pretty far to the net long side is a message that copper prices should be bottoming. Copper prices aren’t required to start upward now just because we notice this condition, but it has proven itself over time as something that matters.

Tom McClellan

China Recovery Falls Short

Quick Takes
Yardeni Research
June 8: The Chinese government started to lift its pandemic lockdown restrictions in early December. The resulting economic rebound has been weaker than widely expected. Indeed, China’s imports have been flat at a record high since mid-2021 and have remained so through May of this year.

Furthermore, inflation has been nonexistent, as the Chinese CPI rose just 0.1% year over year in April and the country’s PPI fell 3.6% year over year that month.

China’s economy rebounded in Q1 but lost momentum at the beginning of Q2. The economy has been weighed down by weakening exports, a sluggish housing market, and high unemployment.

On June 6, Chinese authorities asked the nation’s biggest banks to lower their deposit rates. Today, China’s biggest state-backed banks said they’ve done so, lowering rates on demand deposits by five basis points and on three-year and five-year time deposits by 15 basis points (hundredths of a percentage point). This is the second cut in a year, with the previous action taken in September.

Recent days’ prices of copper and Brent crude oil (both sensitive indicators of China’s economy) suggest that the government’s latest attempts to stimulate the Chinese economy won’t do much. Chinese stock prices have been sliding in recent weeks, as well.

Ed Yardeni

More Bank Regs Are Coming

Secular Outlook
June 6: With less scope to deploy traditional fiscal policy [in coming years], governments may turn more to regulatory interventions. That will create winners and losers across affected sectors, while presenting opportunities for active asset managers.

In light of the collapse of Credit Suisse, as well as the failures and cumbersome resolutions of Silicon Valley Bank, Signature Bank, and First Republic Bank, we believe that renewed calls to rethink and redesign the financial architecture within which banks operate will finally gain traction. This will imply, at least in the U.S., tighter regulation that requires banks to have more capital and hold more liquidity. Banks’ liquidity-intermediation capacity will likely shrink further, and some traditional activities will likely go into private markets and nonbank lending.

Richard Clarida, Andrew Balls, Daniel J. Ivascyn

Glass Is Half-Full in Europe

The View
TS Lombard
June 5: Volatile short-term macro confuses the long-term EA [Euro Area] outlook

  • The EA is losing competitiveness and its industrial base is under threat
  • China turns from key export market into industrial rival (cars, chemicals)
  • Higher energy costs, dependency on key raw materials and a complex system of subsidies put the EA at a disadvantage vs. China and the U.S.
  • Thus, the old EA export-led growth model is dead, but this is good news
  • The shift in the EA policy mix since Covid is profoundly positive
  • Public investment and a tight job market strengthen domestic demand
  • Crucially, many factors hint at a potential productivity revival (even in Italy)
  • Market narratives about EA long-term growth seem overly pessimistic
  • Beyond a cyclical slowdown, the glass is half full for the EA economy and assets

Davide Oneglia

Whew! Love Is Still in the Air

Below is an excerpt from Signet Jewelers ’ (ticker: SIG) first-quarter conference call. Signet beat Q1 estimates but lowered guidance for fiscal 2024.

June 8: We have identified and tracked a proprietary list of 45 milestones that trace a couple’s journey through four major relationship stages: meeting, exclusivity, committed, and engagement. Our data has shown that once couples experience at least 27 of these milestones, it becomes highly likely that they will move to engagement. For example, couples traveling together is one of the top milestones later in the couple’s journey to engagement. We see evidence of this milestone currently across our data sources, including online search activity. Searches for couples vacation on TikTok are currently twice what they were in Q4. Google searches for travel or vacation together are up more than 30%

The key point is that we’re seeing the engagement milestones occurring as expected, which reinforces our confidence that engagements will begin to recover as we approach the end of the year.

Virginia C. Drosos, CEO

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