Negotiations on the U.S. debt ceiling reached a stalemate at the beginning of last week, and the market's risk aversion sentiment was strong. The US dollar index rose to 104, and risky assets such as copper continued to be under pressure. At the end of the week, the U.S. debt ceiling issue made substantial progress, and the debt ceiling may be extended to 2024. Therefore, the risk aversion sentiment in the market subsided, the US dollar index fell, and risky assets such as copper rebounded.
The US economic data is strong, and the annualised US GDP in the first quarter of 2023 was revised up to 1.3% from the initial value of 1%. In addition, the number of initial jobless claims recorded 229,000 last week, which was lower than the expected 249,000. The labour market remains tight and economic data is strong. Therefore, the market's bet on a 25-basis-point rate hike in June is close to 50%. In the eurozone, the manufacturing industry continued to shrink, and the manufacturing purchasing managers’ index continued to fall.
Germany's GDP shrank 0.3% in the first quarter and has shrunk for two consecutive quarters. The eurozone is likely to fall into a deeper economic recession and continue to suppress the release of manufacturing demand. The domestic consumption is unlikely to provide support for copper prices.
Fundamentally, copper scrap flowing into the smelting industry decreased sharply due to narrower price spread between copper cathode and copper scrap, but the falling disruption to overseas ore supply will secure copper cathode production in the future. Recently, due to the continuous narrowing of the import losses, a large amount of imported copper has flowed into the market.
In terms of consumption, the operating rate of copper cathode rods rebounded, mainly due to the reduced impact of secondary copper rods, but the increase in orders was limited compared with the previous week. In addition, both domestic and bonded zone inventories declined last week. This indicates that consumption is still resilient when copper prices fall. Substantial progress has been made on the US debt ceiling issue, which has eased the risk aversion sentiment in the market. The prices of risky assets such as copper have been boosted.
However, it is necessary to pay attention to the Fed’s interest rate hike in June. Expectations of further interest rate hike increased. If the US economy remains strong, the possibility of raising interest rates in June will increase, which will stimulate the dollar index to strengthen and thus weigh on copper prices. Domestic economy showed a weak recovery, and the overall macro sentiment was bearish. Fundamentally, overseas inventories increased, and domestic destocking was less than expected. The support for copper prices is weak.
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