Copper prices bounced back from five-month lows on Monday, as the market shifted its focus to the potential for demand after a sell-off triggered by funds and traders reversing bets on higher prices.
Benchmark copper on the London Metal Exchange (LME) traded 0.7% up at $9,829 per metric ton in official rings, having earlier slipped to the lowest level since May 2 at $9,741.
Traders expect further buying on Tuesday when China returns from the Dragon Boat Festival holiday.
The sell-off had started on Friday after U.S. data showed strong jobs growth in May, suggesting that the U.S. Federal Reserve might not cut interest rates as soon as previously expected. This prompted the U.S. dollar to bounce, making dollar-priced metals more expensive for holders of other currencies, a relationship used by funds to generate buy and sell signals from numerical models.
Julius Baer analyst Carsten Menke said such an “outsized reaction” can only happen in the futures markets if traders square their positions based on some sort of automated trading. He noted that the fundamental backdrop looks sound, but it remains to be seen whether the global manufacturing recovery expected based on PMIs actually materializes.
Surveys of purchasing managers in top consumer China show factory activity picking up, particularly at smaller companies. However, worries about Chinese demand remain due to rising inventories in warehouses monitored by the Shanghai Futures Exchange, which have reached four-year highs of 336,964 tons, compared with about 30,000 tons in January.
Traders are also awaiting loans and social financing data from China for clues on the country’s demand prospects.