I. Some empirical facts about the historical trend of copper oil

Review the trend of copper and oil over the past 30 years. The following objective facts can be summarized:

1) Before 2000, the trend of copper oil was not highly correlated. Just around 0.24. After 2000, the trend of copper oil was highly correlated (in 2000-2021, the correlation coefficient between oil and copper was 0.85).

2) Copper, peaked ten times in the past 30 years (1989-2020). The peak is usually seen every three years.

3) After 2000, copper was all ahead of oil when it peaked. Copper peaked five times after 2000, namely September 2000, May 2006, April 2008, February 2011, and December 2017, then oil peaked. The short lead time is 2 months, while the long lead time is 9 months.

If you believe that the high correlation between copper and oil trends over the past 20 years and the experience of copper prices leading oil prices will continue, then the key to determining when copper and oil peaked (only analyzing trends, not involving magnitude) is analyzing whether copper has peaked. We need to look for important macro signals that copper has peaked. Such signals may come from both the economic and financial levels.

2. Copper: Which financial indicators are more relevant to its trend?

We found that what is more in sync with the copper price trend is the year-on-year growth rate of the two Chinese and European economies in broad terms (considering exchange rate fluctuations, the correlation coefficient for 2006-2020 was 0.48).

The correlation between M2 and copper trends in the US is low (the correlation coefficient for 2006-2020 was -0.07). After adding the M2 data from the US, there was a slight decrease in the correlation coefficient between China, the US, and Europe in the general year-on-year period with copper price trends.

But that doesn't mean that the US money supply has no effect on copper prices. Excluding exchange rate fluctuations between China, Japan, and Europe (relative to the US dollar), the highest correlation coefficient with copper is only 0.18 (compared to China's M2) for any combination of Chinese, US, Japanese, and European currencies.

This means that although we found that the best correlation coefficient with copper is the China-Europe broad currency ratio (converted to US dollars, considering exchange rate fluctuations). But behind this, there are contributions from two forces. The first is the speed of China and Europe's own broad monetary expansion. The second is changes in the exchange rate between the RMB and the Euro.

3. Copper: Which economies are more relevant to its trends?

Highly synchronized with the copper price trend is the year-on-year average of the industrial production index between China and the US (the correlation coefficient reached 0.7 in 2006-2020). Judging from the five times copper has peaked since 2000, the indicator also peaked at the same time before and after the last three times.

4. Copper: What do you think of it now?

Macro level: From a financial perspective, the rise in European broad currency is not over yet. At the same time, domestic credit demand is strong, and M2 is flat in the short term. Combined with the RMB exchange rate and the euro exchange rate, there is a low base in the first half of the year. The broad currencies of China and Europe are still likely to rise compared to the first half of the year.

From an economic perspective, China's industrial production may slowly decline. However, US industrial production, driven by the two major forces of inventory replenishment and real estate, may drive US industrial production back sharply to the high point of the 2016-2017 economic cycle.

Overall, the average growth rate of industrial production in China and the US will continue to rise this year. From a financial and economic perspective, there is still an upward risk of copper prices in the first half of the year.

Microscopic level: Judging from data such as total holdings, non-commercial net positions, non-commercial longs, and non-commercial bears, the current position of copper prices has entered a period of divergence. The bulls lack confidence, but the bears are also extremely cautious. Short-term polarization fluctuations.

5. If copper does not peak, what does it mean for PPI? What does this mean for equity bonds?

Looking at trends over the past 20 years, oil prices and PPI indices basically peaked at the same time after the copper price peaked for 3-5 months. Currently, there is still a risk of a second surge, which means that the PPI index is not over yet — that is, PPI is positive month-on-month or will continue for at least 3-5 months.

What does it mean for the bond market? If PPI remains positive month-on-month in the third quarter and cannot be stabilized year over year, it will become a major expected difference in the bond market. Interest rate pricing is anchored in the industry's nominal growth rate, and the inflation factor for the nominal industrial growth rate is mainly PPI's year-on-year ratio, so industrial inflation PPI will further boost interest rates.

What does it mean for stocks? The longer the PPI is positive month-on-month, the further the depth and duration of the pro-cyclical transaction will be extended.

Risk warning: The US vaccine is not effective in controlling the outbreak.