JPMorgan says influential hedging driving metals, not Chinese demand

According to him, China has been affecting global commodities mostly on the metals complex rather than on the oil complex.

“China is not the major driver of oil in the industry. However, in metals, China has been - for a very long time - the largest marginal driver of copper and it continues to be. However, sometime around December of last year, probably related to the US elections, you saw a breakaway in metals demand – metals demand was no longer being driven primarily by Chinese credit flows or Chinese demand but was being driven by this view of inflation hedging. That concern started to emerge from the market. Much of the price movement that you have seen in commodities particularly in metals over the last six-seven months has clearly not been driven by anything that is happening in China because if that was the case then metal prices should have nosedived instead it has been driven by inflation hedging and there it is a different call,” he explained.

He believes there is a divergence now in the commodities field particularly in metals where Chinese demand has become far less influential as a driver and influential hedging has taken over as the bigger driver of metals.

“I would wait and see how global inflation plays up, particularly US inflation plays up and how that affects inflation regime, going forward,” he said.

According to him, smart money is preferring developed markets over emerging markets for some time. “That has been the basis – not just smart money but even passive money in the last six-seven months. The manner in which different countries have reacted to the pandemic is one that has been differentiating. Before the delta variant happened, if you look at the vaccination, it was not a central part of any of the EM countries’ pandemic strategies. It was only of the DM countries, which thought that vaccination was the principal way to counter the pandemic. Instead, Asian emerging markets tended to rely much more on lockdowns as a way of handling pandemic. What the second wave of COVID-19 has shown is that lockdowns per se is not a solution to your problems, you have to get vaccination as part of your strategy. Asia is the place where we are worried and we are worried because Asia tends to use lockdowns,” he explained.