A sneak peek into the weekly report from the ever fabulous Dhaval Joshi, Chief European Strategist, BCA Research.
But first, thanks to our friends at Metal Bulletin for the following interview!
- Dr. Copper is still doing an excellent job pinpointing the global growth cycle. But the copper price has been unusually bad at predicting the stock market.
- Speculative position: simultaneously buy deep out-of-the-money 1-year options, calls on copper, puts on the DAX. One of these options could expire worthless, but the other could multiply several times over.
- Neutralise any big euro area periphery versus core equity position. The valuation discount is no longer sufficient compensation for the extra risk.
- The Netherlands stock market (AEX) offers an attractive structural valuation to risk trade-off.
- Buy the aggregate euro area bond as a core long-term investment. In a low interest rate and disinflationary world, a 3.5% yield and half the volatility of a comparable U.S. T-bond is an attractive combination.
They say that copper has a PhD in Economics – for the metal’s uncanny ability to pinpoint turning points in the economic cycle. The rationale is simple. In the modern global economy, copper is everywhere. The average house contains 70 kg of copper pipes; the average car contains 35 kg of copper wiring. Furthermore, copper is used extensively in power generation, power transmission, industrial machinery, and of course electronic goods – as well as to make the important alloys brass (with zinc) and bronze (with tin). Given this ubiquitous use, many people understandably consider the price of copper as the ultimate real-time indicator of world demand.
But is it still right to trust Dr. Copper? Several analysts have warned of potential misdiagnoses. Clearly, the price of copper is a function of its supply (including inventories) as well as its demand. And the analysts claim that some unique dynamics of copper’s supply and demand might be to blame for the recent softness in its price.
Indeed, earlier this year even the International Copper Study Group (ICSG) claimed that “anecdotal evidence suggests that unreported inventories held in bonded warehouses in China increased significantly during 2012”.* The point is that the subsequent unwinding of these large hidden Chinese supplies might be weighing down on prices through 2013 even with robust demand. Other analysts point out that as plastic PEX pipes replace traditional copper plumbing in homes there will be an inevitable structural drag on copper demand.
*From the ICSG Press Release issued on March 21, 2013
Interested in reading the full report? Click here to take a short trial to our research.