THE COMMODITIES BINOCULARS :- EVERYONES LOOKING AT CHINA

China Reopening

E1vis.Eth

1/17/20230 min read

The Chinese economy's reopening has led to a rebound in the price of some commodities, specifically copper and other base metals. This is due to the fact that China is the world's largest consumer of many industrial metals and a rebound in their economy will likely lead to an increase in demand for these types of commodities.

However, it is important to consider historical data on the Chinese economy's correlation to commodity asset classes before drawing any conclusions about which specific commodities are likely to see the biggest price increases.

When looking at a 10-year horizon of pricing data, it is interesting to note that silver is the best performing commodity when China bounces. This suggests that precious metals may also be in for a positive ride as a consequence of the Chinese reopening. Furthermore, zinc, copper, and aluminum are at the top of the leaderboard for this 10-year correlation data, while gas, oil, and other energy commodities are towards the bottom. This suggests that base metals are more closely tied to the Chinese economy's industrial production and will benefit more from the rebound of the Chinese economy.

However, when looking at recent correlation patterns ( 1 Year Beta ), the picture is slightly different ( see above ).The data suggests that crude and gasoline may rise as a consequence of the Chinese reopening. This is likely due to the fact that China is a major consumer of oil and gas, and an increase in their economic activity will likely lead to an increase in demand for these types of commodities.

In addition, it is important to note that the Chinese reopening and their trade deal with Russia may have an impact on the supply of oil. It is considered unlikely for Opec+ to cut the supply during the Chinese reopening, as Russia's main customers are China and India. This means that cutting the supply would essentially cut their biggest client in the commodity space, which Russia cannot afford to do.

Given these factors, it is safer to invest in base metals such as copper rather than energy in the wake of the Chinese reopening. The historical data and recent correlation patterns suggest that base metals are more closely tied to the Chinese economy's industrial production and will benefit more from the rebound of the Chinese economy. Additionally, the correlation between industrial basements relative to the Chinese PMI is very strong over time, and there is typically a time lag between the rebound and the PMI that one should expect into the spring and the subsequent move in industrial metals.

In conclusion, while the Chinese economy's reopening has led to a rebound in the price of some commodities, it is important to consider the historical data and recent correlation patterns before making any investment decisions. It's important to do your own research and analysis of the market trends and economic indicators to make the best investment decisions.