[Why&Next] Copper Surpasses $8,500, 'Risk Asset' Australian Dollar Strengthens... Expectations for a Soft Landing

Rising Risk Asset Prices on US Rate Cut Expectations
Copper, a Leading Economic Indicator, Surpasses $8,500
Australian Dollar Also Rises Amid Commodity Market Link
Investment Funds Flow into Bitcoin and Junk Bonds
Uncertainty Remains for Next Year... Some Analysts Say 'Too Optimistic'

As expectations grow for a rate cut by the U.S. Federal Reserve (Fed), prices of risk assets such as copper, the Australian dollar, and the Korean won are rising together. With forecasts spreading that the U.S. economy could enter a 'Goldilocks' phase (growth amid stable inflation), demand for risk assets appears to be gradually recovering. However, there are also analyses that the market is overly optimistic due to persistent uncertainties surrounding the timing of U.S. rate cuts, China's economic recovery, and geopolitical risks in regions like the Middle East.

'Economic Compass' Copper Prices Rise... A Signal of Economic Recovery?

According to the commodity market on the 5th, copper prices, considered a leading economic indicator, recently surpassed $8,500 per ton, continuing their upward trend. The London Metal Exchange (LME) copper spot price closed at $8,538.52 on the 1st, the highest level since August. Copper is widely used in infrastructure, electrical wiring, and home appliances, so its price typically moves ahead of the economy. For this reason, it has earned nicknames such as 'Dr. Copper' and 'economic compass.'

Copper prices once soared above $9,000 per ton earlier this year on expectations of China's economic activity resuming after COVID-19 lockdowns, but then sharply dropped to the $7,000 range due to prolonged U.S. tightening expectations and concerns over China's economic slowdown. Since last month, prices have been rising again, showing an upward trend. This is attributed to growing hopes for a soft landing of the U.S. economy, sustained copper demand from China, and supply concerns caused by issues like the potential closure of the Panama copper mine.

Hwang Byung-jin, a researcher at NH Investment & Securities, explained, "Copper prices, which began rebounding in November, have surpassed $8,500 again in about three months," adding, "This reflects expectations that the Fed's tightening will end and that the Shanghai Futures Exchange's historically low inventory levels will ease the widespread global concerns about copper supply surplus." He further noted, "The tight physical supply-demand situation in China is expected to support strong copper prices at least until the first quarter of next year, and possibly through the first half."

Clear Uptrend in Risk Assets 'Australian Dollar and Korean Won'

The Australian dollar, which represents global funds' preference for risk assets, has also been on the rise recently. According to the foreign exchange market, the Australian dollar has increased by 4.10% against the U.S. dollar from the 1st of last month until the afternoon of the previous day. Considering it had fallen 6.92% against the dollar until the end of October this year, the recent upward trend is significant. The AUD-USD exchange rate was 0.6676 dollars the previous day, rising since October 26 (0.6293 dollars). As Australia is a major commodity exporter, the Australian dollar closely correlates with commodity market trends and typically strengthens during global economic recoveries.

Similarly, the Korean won, also considered a risk asset, is showing strength. In the Seoul foreign exchange market, the KRW-USD exchange rate has been fluctuating around 1,300 won recently. Compared to the closing rate of 1,357.3 won on the 1st of last month, this is more than a 50 won decrease. This likely reflects expectations of improved Korean exports. The Organisation for Economic Co-operation and Development (OECD) raised Korea's economic growth forecast for next year from 2.1% to 2.3%, citing potential improvements in U.S. and Chinese economies that could boost Korean exports. As risk asset preference strengthens, the KOSPI also reclaimed the 2,500 level.

Park Sang-hyun, a researcher at Hi Investment & Securities, explained, "The Australian dollar, which has a close correlation with commodity market trends, has continued its upward trend since early November," adding, "This is a signal showing global funds' preference for risk assets." He analyzed, "The most important reason for the resolution of the widespread simultaneous decline in various risk asset price indicators was the strong expectation that the Fed's rate hikes would end."

'Rate Cut + Soft Landing' Expectations... Bitcoin Hits New High

Jerome Powell, Chair of the U.S. Federal Reserve, warned on the 1st (local time) during a conversation with Helen Gail, president of Spelman College in Atlanta, Georgia, that "it is still too early to conclude whether a sufficiently tight policy stance has been achieved," but the market still highly anticipates a rate cut next year. Furthermore, expectations for a soft landing of the U.S. economy are strengthening. Lee Chang-yong, Governor of the Bank of Korea, said at a press conference after the monetary policy meeting on the 30th of last month, "Views on the U.S. economy have been changing, but recently the market sees it as achieving a soft landing," adding, "I think the U.S. economy is doing so well that it is almost worrisome how well it is performing alone."

As a result, investors are observed moving funds massively not only into stocks but also into high-yield, high-risk products such as corporate bonds and junk bonds. According to market data firm EPFR, $17 billion flowed into the global corporate bond market and $11.9 billion into ETFs investing in U.S. junk bonds last month. This indicates strong investment enthusiasm in the market. Bitcoin, considered a representative risk asset, also surpassed $40,000 the previous day, setting a new yearly high.

Early Toast by Investors? ... Risks from High Interest Rates and China's Economy Pile Up

Among experts, there are also analyses that market expectations regarding next year's economy are excessive. Although U.S. economic indicators still show favorable signs, many believe that consumption will slow due to the impact of high interest rates next year, leading to economic deterioration. Unlike risk assets such as Bitcoin, international oil prices recently fell to the $70 per barrel range due to concerns over weak demand caused by economic slowdown. As a result, some on Wall Street voice that investors in the U.S. stock market and risk assets like Bitcoin are making incorrect judgments.

Especially China, which has a significant impact on the global economy, faces difficulties in accelerating economic recovery despite continuous stimulus measures by authorities, due to massive local government debt and U.S. restrictions on advanced technology. Lee Da-eun, a researcher at Daishin Securities, analyzed next year's economic outlook, saying, "Looking at major countries, U.S. consumption and structural investment are expected to gradually slow, while structural growth momentum in China and the Eurozone will continue to decline," adding, "Credit risk from high interest rates, China's real estate slump, and commodity price volatility are major downside risk factors."