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Copper canyon

What is China up to? Earlier this year, they were bidding up for raw materials. Now it seems they have switched off buying orders and have even turned sellers in some cases – like copper. China is by far the biggest importer and consumer of copper, so rumours the state reserve board is prepared to sell up to 250,000 tonnes of the metal to bring the price back should not be ignored. But it does not mean the rally in commodity prices is over.

The speed at which some form of equilibrium has been restored to financial markets is most encouraging. Much is down to central banks pumping in money but it all has to be paid for. Whether this will be through resurgence in inflation or a prolonged period of sub-trend economic growth is unclear.

Since the equity market bottomed in March, gilt indices have fallen. With some issues, yields have risen from close to 2 per cent to 3 per cent or even higher. Corporate bonds, on the other hand, have been in demand and yields have come down, admittedly from scary levels that suggested a failure rate that was never that likely. What this tells us is an appetite for risk has returned and those safe haven sectors – like sovereign debt – are returning to more normal ratings.

Markets overshoot in both directions. With financial Armageddon over the horizon and return on cash paltry, gilts looked the only place to be. But with most issues standing over par, guaranteeing a capital loss, sticking with them was bound to be risky if sentiment improved – which it has.

This correction may have further to go – a lot further if the final outcome is higher inflation. Which brings us back to oscillating prices of commodities. The bounce earlier this year was down to the end of de-stocking. China seems to be trying to demonstrate conditions have not returned to those prevailing before the crunch. The next few months could be tough. The health of the global economy will drive markets but in the shorter term a resurgence of buying interest has encouraged businesses to tap investors for cash. Companies will be strengthened but investor liquidity is being drained. My money is still on a retrenchment in share prices this summer.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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