A-shares -- a Leading Indicator for Copper?

1. It is postulated that Shanghai A-shares are now the leading indicator for the world economy. Or at least the world seems to think and react that way. This is because the world believes that China is the growth engine that will power us all out of recession. Any hiccup in China seems to be felt around the world in most major asset classes – especially in commodities and stocks.

2. It is also postulated that industrial metals have taken on a very financial assets-like nature (especially as of late) due to excess Chinese liquidity turning many there into speculators in the booming metals market. correlation between the two assets are at the highest point in a while.






3. If you believe that copper and A-shares have the same underlying drivers (speculative fervor of the chinese public and accommodative financial policy), then it’s worth a look at current price action where the A-shares have been sharply down. Call me crazy but it seems to me like copper has the tendency to trail the A-shares on big moves.

4. So, given the recent big fall in A-shares give us a tradeable signal? Obviously, it all comes down to getting the direction of risk right. If the A-shares go on a sustained drop then I would think every risky asset in the world would follow. BUT if you have a mandate to trade copper the A-shares could provide a useful turning signal.

DISCLAIMER: I obviously do not spell out all the details of my research and will intentionally leave out some crucial stuff. Also, it is quite possible that I might already have established a position in any trade idea I discuss here.

Is There a Play Here? - LME Copper Curve

What's up with the LME copper in backwardation?



When the copper inventory is going up?



LME warrant cancellations are going nowhere:




Comex copper curve looks way different:


Time to short the timespread in LME copper? My guess is the backwardation might be caused by long only money and trend followers jumping in?

Copper - time to short?

An article on Bloomberg today - a ML metals analyst Michael Widmer commented that copper price might have overextended itself given its recent rally despite sharp rise in inventory.

I have done some work on metals inventory vs price and found that there isn't much one can infer one way or another. On a daily basis it does not seem to matter at all. On a longer horizon it works OK but then how practical is it to hold a metal position for a whole month based on last month's inventory data (this is analyzing data on monthly frequency and constructing trades that way). No clear relationship among inventory, warrant cancellations and price that I could decipher. As you see in below chart that on monthly basis inventory and price movement seem to be quite negatively correlated, but as you can see in the period 2005-2006 it is hardly a sure thing.

HOWEVER, this just might be enough argument to push me into going short copper - finally.