LONDON (Reuters) - Funds are betting on copper as a likely winner from the U.S. election.
It helps that copper has staged a remarkable recovery from its COVID-19 lows in March, the London Metal Exchange (LME) price bouncing back from $4,371 a tonne to $6,810. Black-box funds love a trending market and copper has been just that.
China has fuelled the supercharged rally. The country’s manufacturing engine seems to be purring and record imports of refined copper are sucking surplus metal from the rest of the world.
The United States will determine what happens next. Fund positioning in copper suggests a big bet on Joe Biden and his promise of a “green”, copper-intensive infrastructure stimulus programme.
STAYING LONG AND STRONG
Money managers were net long of the CME copper contract to the tune of 88,257 contracts as of Oct. 27, according to the latest Commitments of Traders Report, the last one to be published ahead of the U.S. election.
The number of outright long positions was marginally down from the previous week’s three-year high, but the dip probably reflected no more than light profit-taking after copper briefly punched through the $7,000 barrier on the LME on Oct. 21.
Fund managers’ collective bet on higher copper prices remains strong relative to anything seen since early 2018.
Short positions, by contrast, remain extremely low at only 25,027 contracts, with no signs of pre-election nerves.
Copper is part of what is being called the “reflation trade”, predicated on a Democrat win and follow-through stimulus package.
The trade encompasses other investment sectors such as emerging market (EM) equities and treasuries.
“It is our contention that it is no coincidence that copper prices and positioning have moved in unison with EM equities and (to a slightly lesser degree) U.S. 5-year breakevens (both proxies for the global reflation trade),” Citi analysts wrote. (“Metals Weekly,” Nov. 1, 2020)
Doctor Copper is now part of a bigger cross-asset fund play, hooked in by the black-box algorithms that populate the CME contract.
There is, of course, the not so little question of who wins the U.S. election and how long it takes to find out.
Copper has been let down before.
Donald Trump’s surprise victory four years ago galvanised the copper market, with money managers turning net short to aggressively net long in the following two months.
Then, as now, all the talk was of a coming reflation package, founded on a touted $1 trillion of infrastructure spending on transport, 5G networks and rural broadband.
The infrastructure splurge never materialised and funds quickly lost heart with copper. The net long position collapsed from a February 2017 peak of 101,139 contracts to only 29,787 contracts in May.
It’s a warning that outcomes can be far from certain when it comes to U.S. elections and even more so when it comes to delivering election promises.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by David Goodman
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