Last year, financial markets were dancing to the tune of a trade-deal between US and China. As chances of a deal neared by early 2020, bulls’ long positions in copper reached to the largest in 18 months; LME Index rose to 8 months’ high. But, did trade-deal work?

Interestingly, US trade deficits widened 56 per cent since January, 2020 and Chinese trade surplus grew 11 per cent YoY this year. However, these grew insignificant as the world moved grappled with Covid-19 pandemic.

The “Blue Wave” (or a convincing win for the Democrats) is the latest narrative. Most analysts expect a new round of US stimulus and thereby dollar weakness to lift metal prices in 2021. Goldman expects copper to reach $7,500 and aluminium to $2050 by middle of next year. Markets have replaced trade-deal with US stimulus as its light-house, but with bigger stakes. Copper’s speculative long positions are at 34 months’ high; LME Index is at 27 months’ high.

While Biden’s victory and Democratic control on Senate are the most favourite outcome for markets, Trump’s victory and loss of Senate to Democrats could come as a shock. Markets might jump in joy in the former case but fall quickly in case of the latter.

After US elections are over, markets would need something else to feed on. It could be a harsh winter in US and Europe as Covid-19 cases rise to new record. A large part of Europe is under partial or complete lockdown. This will have negative effect on growth. In these times the world would need China to keep shouldering the global recovery. But will China be able to?

China generally front-loads its stimulus; it did the same this year as well, data show. It comes as no surprise that copper imports rose by 41 per cent this year. Moreover, domestic output rose by 11 per cent while demand in could possibly end up flat in 2020.

Conclusion

The outcome of US elections could possibly provide a knee-jerk reaction for markets. Irrespective, focus could start to move elsewhere e.g. Covid or growth outlook in 2021. This makes one feel that bulls might take a few steps back. Recent synchronised sell-off across markets i.e. equities, gold, oil, US Treasury bonds might possibly be signalling it.

The author is the Director of Regsus Consulting. Views are personal.

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