Macroeconomic data & events on 4 – 8 October 2021
3 October 2021

Economy, Eur-Usd, Copper

Today I will make an overview analysing the current (macro) economic situation and the markets. I start with this morning's German Factory Orders data: -7.7%. The data measures the change in the total value of new purchase orders placed with manufacturers for both durable and non-durable goods. It is a leading indicator of production. Eur-Usd, -70 pips at 11 am in London, shows the market’s reaction.

I do not think I am wrong if I write the words "Game Over" in the Europe-US game. The two economies are now travelling on two tracks that are no longer parallel. Europe is a long way from seeing an economic recovery while in the US, if analysts' forecasts on Friday's jobs data are fulfilled, Powell will announce the start of tapering at the next Fed meeting.

The recovery in the US has already begun; time to vaccinate the missing portion of the population to achieve herd immunity and it will be back in full swing. The only unknown is inflation, which could lead to a sharp drop in the data that really worries me: consumption.

On this subject, the clients of the investment company I collaborate with are divided. There are those who think, as I do, that we are only at the beginning, and those who believe that inflation is due to a lack of supply and will therefore be temporary (in line with what Powell has said). I believe that this wait-and-see attitude could create problems for the US.

Eur-Usd is heading towards my first target and that I had indicated in an analysis of the first of February (you can read it here) in the 1.13000/1.13500 area. It will only be a matter of time before the currency pair reaches it.

The only currency that has held its own against the US dollar in recent weeks has been the Yuan. Below is the Usd-Cnh chart.

The chart shows how the currency pair has moved sideways over the past four months. This means that, just like the greenback, the Yuan has strengthened against all the other major currencies, showing a healthy Chinese economy (even though the latest data has not been brilliant) and which for the moment is not affected by the Evergrande issue (it almost seems to scare the rest of the world more than China).

I now come to copper which, together with its non-ferrous metal brothers, is a thermometer of the health of the world economy. I do so by showing you a graph, that of stocks on the London Metal Exchange (LME).

I show you this graph as it is not real data. I know that many people take it for granted but it only reflects one side of the coin. The other side of the coin is data that almost nobody knows about, the Cancelled Warrants.

Cancelled Warrants (CWs) are important because they represent the change in stockpiles of metal that may no longer be available in LME warehouses, and which are booked for removal or onward shipment. This information is an indicator of physical demand for the metal. An increase in CWs suggests stronger market demand.

Inventories are a significant barometer for investors, there is an inverse relationship between inventories and prices, as the movement of inventories influences the future direction of prices. A sharp drop in inventories, for example, implies that demand is increasing as a result of a drop in supply.

Today, 6 October 2021, copper inventories have fallen by 9,625 tonnes to 202,500 tonnes. There have been 10,000 new Cancelled Warrants, which together with the previous ones brings the total to 111,775 tonnes. So, the real figure for LME copper stocks is 90,725 tonnes. Below you can see this translated into a graph.

In red is the chart of the price of copper, in orange is the LME stocks, in green is the real stocks (the chart is not updated, missing the 10.000 CWs of today to remove) and in violet is the CWs.

So, watch out for copper because a drop in stocks of 20,000 or 30,000 official tonnes (not CWs) on the right day would be enough to set off a bullish bomb. And that would imply the same movement in COMEX copper.

China's auctioning of over 400,000 tonnes of copper in June has ended its effect. The 3-month cash as price differential, in contango until a few days ago, now shows a slight backwardation.

What is happening to copper is common to many commodities. There was an unprecedented downturn in 2020, caused by the coronavirus outbreak and lockdowns, which set the stage for a boom in 2021/22. The result was a sharp drop in global production which, once economic activity resumed, was no longer able to meet demand.

Today I will make an overview analysing the current (macro) economic situation and the markets. I will talk about Eur-Usd, Chinese Yuan, copper.

David is a trader with over 25 years of experience (two years as a fund manager) in currencies and commodities. He collaborates with a major European commodity investment company, and he is the author of several successful books about trading and financial markets.

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