Copper analysis and China reopening basket: Bull market takes off
10:01, 11 January 2023
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The Chinese economic reopening has been one of the most significant factors affecting global markets in the past two months, spurring a rally in Chinese growth-sensitive assets such as copper, the Hang Seng 50 index (HK50), the Korean won, and the Australian dollar (AUD/USD).
A basket that tracks the Chinese economy's reopening has already increased by about 22% since early November, substantially outperforming the global stock market benchmark (MSCI ACWI index). Copper has now retraced more than half of the 2022 bear market, confirming a potential reversal of the major bearish trend.
Tracking the Chinese recovery trade: 4 assets to watch
China's policy shift in Covid management in early November was a watershed moment for the assets most directly linked to Chinese economic prospects.
The China reopening basket, which is equally weighted with copper, Korean won, Australian dollar, and the Hang Seng index, has outperformed the global stock market (MSCI ACWI index) significantly over the past eleven weeks.
Since November 1st, the China reopening portfolio has increased by 22.3%, while the MSCI All-Country World Index has increased by only 6.8%. Due to the fact that the overall volatility of the China reopening basket has been lower (19.2% versus 21.8%), the Sharpe ratio has been even more positive (9.61 vs 1.89), indicating a stronger risk-adjusted performance.
The Hang Seng index, which has risen by 45% since November, has contributed the most to the portfolio's weighted return of 11%, followed by copper, which has contributed 5.3%.
What is your sentiment on Copper?
Copper technical analysis: 50% Fibo retracement breakout
The $4.10/pound price resistance level for copper, which represents the 50% Fibonacci retracement of the 2022 low-to-high range, has been recently breached.
This might be a significant confirmation of the trend reversal, with the price action presently lingering near a crucial support-resistance zone in 2022. The key moving average (50DMA and 200DMA) dynamics are poised to form a golden cross, supporting the brown metal's bullish technical picture.
On the RSI front, though, overbought circumstances are beginning to develop, which may call for some caution in this case.
Overall, if the reopening momentum in China continues and incoming global macro data continues to support the view that a recession in 2023 will be avoided, copper prices will likely continue to rise, with a first target of 4.30 (61.8% Fibonacci) and a second target of 4.62 (78.6%). On the downside, 3.94 (December 2022 highs) serves as the nearest support, followed by 3.85 (38.2% Fibo) and 3.72. (end-December 2022 lows).